The government has announced some significant changes to peer-to-peer lending in the Autumn Statement. This was contained within the small print of the Autumn Statement document:
This Autumn Statement announces support for Peer to Peer (P2P) and crowdfunding platforms through a package of measures to remove barriers to their growth from regulation and tax rules. These include a new bad debt relief for lending through P2P platforms; a consultation on whether to extend ISA eligibility to lenders using crowdfunded, debt-based securities and an intention to review financial regulation which currently stands in the way of institutional lending through P2P platforms.
The changes have been broken down into three areas. The two that directly affect lenders will be the bad debt relief, which mean lenders will pay tax after bad debt not before, and the withholding of tax on income.
2.183 Removing regulatory barriers for peer-to-peer (P2P) lending – The government announces its intention to review financial regulation which currently stands in the way of institutional lending through P2P platforms.
2.184 Bad debt relief on investments made through the peer-to-peer lending industry – The government will introduce a new relief to allow individuals lending through P2P platforms to offset any losses from loans which go bad against other P2P income. It will be effective from April 2016 and, through Self Assessment, will allow individuals to make a claim for relief on losses incurred from April 2015. (19)
2.185 Withholding regime applied across peer-to-peer lending platforms – The government will consult on the introduction of a withholding regime for Income Tax to apply across all P2P lending platforms from April 2017. This will help many individuals to resolve their tax liability without them having to file for Self Assessment. (53)
There have already been some reactions to the announcement within the peer-to-peer sector. Ian Gurney, founder of P2P money stated:
This is good news for the peer-to-peer sector as it allows lenders to complete fairly with other financial institutions who pay tax after bad debt. It also means that tax-payers are spared having to fill in a tax return solely for declaring their untaxed income from peer-to-peer lending.
James Meekings, co-founder of Funding Circle, also responded:
“This change in the tax system will make lending to small businesses via our marketplace much fairer for individual investors, putting them in an equal position to larger lenders such as banks. It’s something we have campaigned for since we launched four years ago, so we’re delighted with today’s news. More than 35,000 people currently lend through Funding Circle and the average investor could earn up to 25% more overnight per year as a result of this change. This could potentially be significantly higher depending on an individual's investment strategy. It will have a hugely positive impact on the peer-to-peer lending industry and is a win-win-win for investors, borrowers and the economy at large."
Giles Andews, CEO and co-founder of Zopa, stated:
“It’s great to see the Chancellor tackling an out-dated tax law that disadvantages alternative financial models like peer-to-peer lending (P2P). Overturning this tax law means thousands of consumers will keep more of their returns from lending as they will now be able to offset any losses against their P2P interest when calculating tax due on that interest. Zopa and the P2PFA have campaigned hard on this issue and we very much welcome the change. This is a progressive reform from the Treasury that reflects the growing importance of the UK’s alternative financial services sector.”
The growth of the UK market over the past 12 months has been fascinating to watch.
At Lend Academy my focus has been primarily covering the US P2P lending market but this year, with our first LendIt Europe conference (taking place November 17 in London), I have taken a much greater interest in the UK market.
When I look at the UK I see a vibrant P2P lending industry that is poised for explosive growth in the next couple of years. There are six key trends that I see driving this growth.
The inclusion of P2P lending in ISAs
The tax treatment of P2P lending has been a challenge for investors in both the UK and the US. In the United States we have Individual Retirement Accounts (IRAs) and that is the way many investors choose to invest. The inclusion of P2P lending in ISAs is going to open the floodgates for individual investors in the UK. Suddenly, savers will have a high yield alternative for their ISA money and many will choose to invest in the P2P lending platforms. This should mean a huge influx of retail investor money.
Arrival of Institutional investors
The individual investor has been the driving force so far behind the growth of P2P lending in the UK. But that is changing. This year marks the beginning of a transition where the institutional investors are recognizing the potential of this asset class. We had the launch earlier this year of Eaglewood Europe’s P2P Global Investments fund (symbol: P2P), a publicly traded closed end fund that is deploying £200 million primarily across UK and US platforms. There was a large investment by London-based alternative asset manager Arrowgrass in Zopa and some hedge funds are now getting involved. Some may bemoan the fact that we are losing the P2P aspect but I think this is a natural evolution of this asset class. Platforms are still committed to the retail investor and institutional investors allow the platforms to scale and reach profitability more quickly.
Participation of the High Street banks
Earlier this year Funding Circle announced a partnership with Santander UK where the large bank will refer SME borrowers to Funding Circle. Since then there has been talk of making this mandatory for large banks that turn down SMEs for a loan. Whether or not this new regulation is enacted I expect to see more deals like the Funding Circle/Santander deal that will drive more borrowers to the P2P lending platforms.
I have to give credit to the UK P2P lending industry for being proactive in their approach to regulation. Through the P2P Finance Association the industry has actively lobbied the UK government to enact sensible regulations of P2P lending. In April this year the FCA regulations began and all platforms must now adhere to a set of rules including minimum capital requirements, backup loan servicing and other measures designed to protect investors. Another little discussed reform is the relaxation of pension rules that gives the over-55 crowd access to their entire pension pots in retirement. Both these changes are positive moves for the industry.
Support from the British Business Bank
I think it is difficult to overstate how important the support of the British Business Bank has been for the growth of the P2P lending industry in the UK. In late 2012 the government announced it would invest £20 million in Funding Circle loans, taking a small percentage of every loan. At that stage Funding Circle was barely two years old and suddenly it had the direct support of the UK government. Earlier this year this program was expanded with another £40 million committed to Funding Circle loans. Other platforms such as Zopa, Ratesetter and MarketInvoice are also benefitting from this direct investment. By doing this, the government is not only deploying capital to these platforms but is providing the entire industry with increased credibility and awareness.
Higher yield options
The UK P2P lending industry has been dominated by the “big three” (Ratesetter, Zopa and Funding Circle) for some time. These companies all have a deep track record of positive returns to investors but the yields have been relatively low in the mid-single digits. In many ways this has been good for the industry, as the leading companies have implemented strict underwriting to protect investor money. Today, there are new higher yield options emerging with MarketInvoice offering double digit returns, Assetz Capital and LendInvest both offering high single digit returns (backed by collateral) and several newer platforms also claiming higher returns. While these higher yields often come with higher risk the fact is that investors now have a range of potential yield options.
Zopa, the originator of peer-to-peer lending, has announced that it has lent a quarter of a billion pounds in the last 12 months. Peer-to-peer lending is experiencing tripple digit growth and figures such as these only continue to highlight the success of the sector.
Here is the full press release from Zopa:
Peer-to-peer lending platform Zopa, has today announced it has lent a quarter of a billion pounds (£250m) in 12 months to UK borrowers. This also includes a record month of lending at Zopa as the platform lent £27m in October alone.
In reaching this milestone, Zopa has now lent a total of £657m with 38% (£250m) of this total being lent in the last 12 months.
Giles Andrews, Zopa’s CEO and co-founder said, “We are delighted to have lent a quarter of a billion pounds in 12 months. To put that into perspective Zopa has lent more in the last year than we had lent in seven years of lending from 2005-2012. The growth we’re experiencing is testament to our multi-award winning customer service and providing outstanding value to consumers as 97% of our customers would recommend us. The industry growth we’re seeing really goes to show that P2P lending is fast becoming a mainstream activity. Our mission is to always provide great value to our customers by making money simple and fair.”
With the inclusion of peer-to-peer lending in ISAs on the horizon, Zopa expects peer-to-peer lending to enter the mainstream in Q2 of 2015 as consumers look for better value from alternative providers by cutting out the banks.
RateSetter, who recently won the Alternative Finance Provider of the year in the AltFi awards, have rebranded themselves. They last were last rebranded back in 2012. While the new logo looks clear and integrates a percentage sign, the website has attracted varying comments on the P2P Independent Forum. There is also a poll for users to vote if they like the changes.
Old logos show below: