ìThe government has succeeded in making Britain the most entrepreneurial economy in Europe. And today we want to go further. To make sure our growing smaller businesses have access to credit we will expand the British Business Bank, act to encourage peer-peer lending.î George Osborne; Autumn Statement.
The Chancellor of the Exchequer, in his Autumn Statement, has announced amendments to taxing regulations offering bad debt relief to lenders with a view to promoting the growth of peer-peer and other alternative lending platforms.
This comes as part of a move to address a lack of competition within the lending/banking industry in general.
Peer-peer (P2P) platforms allow for borrowers to connect with appropriate lenders (and vice versa), offering competitive rates and low borrowing charges when compared to those offered by most banks – lenders can expect to receive returns of up to 15% via P2P platforms.
The downside of P2P platforms is increased risk since, unlike conventional bank loans, P2P schemes are not covered by the Financial Services Compensation Schemes (though most P2P website will offer alternative forms of risk cover).
The new regulations, which come into play in April 2016, will allow lenders to offset losses incurred from bad debts against other P2P income, reducing the overall risk and increasing the desirability of P2P lending generally.
Currently, investors are liable to pay tax on all gross interest earned from loans, even if some is lost due to bad debt or platform fees. However the new regulations mean that lenders will only be taxed on the net interest earned, minimising the negative effects of a bad debt, and thus reducing the risk associated with P2P schemes in general.
This makes peer-peer lending far more viable, allowing individual lenders to meaningfully compete with banks in a change that Funding Circle co-founder James Meekings claims is better for everyone involved. He claims that with these new changes lenders ìcould earn up to 25% moreÖper yearî, the upshot of this being more investors opting to lend through P2P platforms, thus increasing the availability of loans for individuals and small businesses without having to go through large banks.
Indeed the folks over at Funding Circle, as well as at Zopa (another P2P firm) have been campaigning for similar changes for a while now, and the move is being seen as generally positive by most of the bodies and individuals affected. Giles Andrews, co-founder of Zopa is happy to see changes to what he described as ìan out-dated tax law that disadvantages alternative financial models like peer-peer lendingî.
He praised the ìprogressive reform from the Treasury that reflects the growing importance of the UKís alternative financial services sectorî; reform that serves to unshackle borrowers from big banks, empowering individuals in the financial sector. These changes reflect a generally positive, forward looking trend in the development of the UK economy that George Osborne has promised to promote in his Autumn Statement.
The general drive to increase competition in the banking sector is reinforced by an investigation by the Competition and Markets Authority (CMA), marking a positive change generally, putting more power and choice in the hands of individuals. As Osborne said in his Autumn Statement:
ìThe CMA announcement of a market investigation into banking builds on a wide-reaching programme of government reforms to address competition issues and make the UK the leading global hub for financial-technology companiesî
We will have to wait and see over the coming years how much of a positive impact Osborneís proposed changes will have, but for the time being it certainly looks like a promising turn, strengthening the position and reputation of the UK economy within the EU and indeed the global political-economic sphere.
As Osborne emphatically announced early on in his Statement: ìMr Speaker, our long term economic plan is workingî