The Emergency Budget
This week saw the first Budget in the UK since the Conservative Party achieved a surprise win in the General Election in May. As the previous coalition government had already made promising steps towards the implementation of legislation which will improve access to finance for the Small and Medium Enterprises (SMEs) of the UK, at GLI Finance we were interested to hear what further measures would be set out.
Ahead of the General Election, GLI Finance published its Alternative Finance Manifesto, outlining the five fundamental themes that the next government would need to address to ensure that the growing alternative finance and FinTech sector in the country has the appropriate framework within which to operate. They were:
- An empowered and well-funded British Business Bank capable of implementing the mandatory referral scheme,
- Marketing to raise awareness of alternative finance,
- Support for the running of an education programme,
- The expedited introduction of the peer-to-peer ISA, and
- Continued tax relief and arrangements for alternative finance businesses.
Chancellor George Osborne’s first budget for the new government included detailed action plans for three of our five priorities; the peer-to-peer ISA, the mandatory referral scheme and the continued support of EIS and VCT initiatives – which showed that post-election the Chancellor had not forgotten about some of the big promises he made ahead and his commitment to rebuilding the economy.
Innovative Finance ISA
The most prominent budget announcement for the alternative finance industry was the introduction of the Innovative Finance ISA, which will allow savers in the UK to invest in peer-to-peer loans, while protecting the interest repaid by borrowers from tax. Two platforms of the GLI Finance family, Proplend and FundingKnight, will be eligible for the Innovative Finance ISA, along with many other P2P lenders.
Key questions when investing in P2P
Peer-to-peer investments have become an increasingly popular choice as traditional savings products offer minimal returns, while net returns for peer-to-peer loans have reached between five and ten per cent. However, investors need to remain careful as peer-to-peer remains untested in a rising interest rate environment. There are also some key questions that investors should to ask themselves before putting money into peer-to-peer loans; Can I trust you with my money? How airbrushed is your track record on default? Are you just preparing for IPO? Is your business model too good to be true? In summary, there is a lot of homework involved for investors looking intothe sector.
The bank referral scheme
As a global leader in the alternative SME finance space, we were particularly pleased to see in the Budget that the government will introduce final legislation implementing major reforms to the SME lending market: a requirement for UK high street banks to share credit information on their SME customers with other finance providers through designated Credit Reference Agencies (CRAs), and legislation that will require major banks to offer SMEs that they have turned down for financing the opportunity to be referred to designated finance platforms that can match them with alternative lenders.
GLI Finance has been campaigning for the introduction of a mechanism that requires high street banks to refer SMEs rejected for funding to alternative finance providers since 2013. SMEs are the backbone of the UK economy, accounting for almost half of private sector employment in the UK, and an astounding number of them have been, and continue to be, rejected for finance by the big banks – in effect stifling economic growth.
More to do
Having this referral mechanism in place is a good first step, but the significant lack of awareness of alternative finance solutions which prevails among SMEs in the UK could render this legislation useless, which is why we called on the government in our Alternative Finance Manifesto to fund an awareness and education campaign to ensure that SMEs are made aware of the range of different forms of alternative finance – from bonds and trade finance, to loans and invoice finance – and where to go to find more information on the options available. The vast majority of SMEs are currently unaware that many of the products alternative finance providers offer may be much better suited to their needs than the one-size-fits-doesn’t-fit-all approach they can expect from the high street banks.
In the manifesto, we also pointed out that SMEs aren’t the only ones who would benefit from information on the alternative finance sector. Professional financial advisers are critical influencers who need to fully understand the solutions alternative finance providers deliver to SMEs to ensure that they are able to give informed and appropriate advice.
EIS and VCT
Our final thanks to the Chancellor are for his recognition that the success of the alternative finance industry clearly doesn’t just depend on the introduction of the mandatory referral scheme and the Innovative Finance ISA. As a knowledge-intensive industry, alternative finance and FinTech companies are heavily dependent on private investors, such as venture capital, and the government announced changes to venture capital schemes in the Budget. Specifically, Chancellor Osborne announced that the government will introduce a cap on the total investment a business may receive through the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT) of £20 million for knowledge-intensive companies, and £12 million for other qualifying companies.
The ball has not been dropped, but…
While I am delighted that the government hasn’t dropped the ball on the progress made during the previous government, especially by delivering the mandatory referral scheme and the Innovative Finance ISA, I think there is still a lot of work to be done to level the playing field and give the alternative finance sector a fair chance of competing with the oligopoly of big banks which has dominated the financial sector for centuries. Maybe we will even be able to drop the ‘alternative’ moniker and finally get the recognition the sector deserves as a complementary force in the market.
Geoff Miller is Chief Executive Officer, GLI Finance. He spent twenty years in the UK financial services industry, as an analyst and as a fund manager, focused within the Non-Bank Financials sector. As an analyst he led the number one-rated UK small and mid-cap Financials team, and as a fund manager ran the largest listed Financials fund in London. He moved offshore in 2007, working in Moscow and Singapore before moving to Guernsey. Reflecting the strategic involvement of GLI within the development of each of its origination platforms and their position in every case as the principal capital provider, Geoff sits on the Boards of each of the platform companies and in the case of GLI BMS Holdings Limited, most of its subsidiary entities. In addition to GLI-related appointments, he also serves as Chairman of Globalworth Real Estate Investments Ltd, a Guernsey-registered real estate business investing in Romania, and its subsidiary management company, and of a Luxembourg-based asset manager International Finance Development Company S.A., Holding.