For all the resilience the UK economy has shown, there is no doubt that this year's ISA season is set against a backdrop of uncertainty. Whatever the pros and cons, Brexit, and a lack of clarity on what our future economic relationship with the EU will look like, has left us at a crossroads.
Brexit - What does it mean for Peer To Peer Lending?
Clearly there is one story which is dominating the headlines at the moment: Brexit. At this particular juncture, with the withdrawal agreement due to be debated in Parliament next week, there is a heightened sense of uncertainty. As such, we thought it would be appropriate to communicate our thoughts on this seismic political event.
We hope and expect politicians on both sides of the Channel to ensure our withdrawal is an orderly, sensible one that enables us to reap the benefits and opportunities of being outside the EU. Unfortunately, amid the current drama at Westminster, common sense appears to be in short supply, so there are no such guarantees – much to the frustration of companies across the UK.
From a Lending Works perspective, the key thing to clarify is that we do not have as much skin in the game as many other businesses. We trade exclusively within the bounds of the UK, and our customers – both lenders and borrowers – are all UK residents. As such, there is no risk of disruption to our platform from a regulatory, trading, planning or business model viewpoint. Of course, we don’t operate in a vacuum though, and peer-to-peer lending in general is prone to the effects of market forces.
Impact on interest rates
A disorderly Brexit is likely to have an effect on interest rates, although it isn’t actually clear in which direction (even the Governor himself appears unsure!). It’s worth noting the rates of return our lenders receive – and indeed the interest rates on the loans we disburse – are not directly affected by movements in Bank of England base rates, nor pegged against them in any way. Instead, our rates establish a natural equilibrium of their own dependent on the demand for loans and the supply of lender capital. That said, these levels of demand and supply are affected by market stimuli, and invariably we have seen an indirect correlation between base rates and lender returns at Lending Works.
For example, following the base rate cut in August 2016, we saw a decline in headline lender rates. Conversely, however, you will have noticed that these rates of return have increased over the past year as the Bank has begun to hike base rates. On this basis, we would expect a similar relationship to prevail after March 2019, should the Monetary Policy Committee decide to take any action. The good news, however, is that the rate of return you receive as a lender is fixed at the point you make your investment, so, whichever direction rates move (if at all), your expected return will not change for any of your existing loans.
The effects of a downturn
One of the primary concerns among lenders is that, should there be an adverse effect on the economy as a result of Brexit, there is likely to be a rise in the number of people who are unable to pay off their loans with Lending Works, and that, ultimately, the risk of capital loss increases. Rising bad debt levels are an inevitable consequence of a recession across the board, and it is therefore a valid concern.
However, Lending Works has prepared for all stages of the economic cycle, and, having opened our doors for business not long after the previous recession, we have operated with all eventualities in mind since day one; when building our credit models and credit decision engines, we even use data from 2009 loans to calibrate our models to what could happen in a downturn.
While we would expect a modest increase in bad debts if and when the next recession occurs, we do assess this scenario via our credit risk management function to ensure it is accounted for. Our strict underwriting criteria for loan applicants, with particular focus on affordability, factors in a change of economic circumstances, and only sensible borrowers are therefore approved.
Obviously we are not in a position to make any sweeping guarantees, and capital is always at risk when invested with P2P, but we do hope the above clarifications allay any concerns you, our valued customers, may have. We care very much about ensuring our customers have peace of mind, but it should also be pointed out that we have a unique relationship with our lenders in that our success is perfectly aligned with theirs. As such, it is very much in our interests to take excellent care of your hard-earned money.
Yet we also do not wish to harp too much on negative sentiment either. On the contrary, it is still our expectation that Brexit will go ahead in a sensible manner, and that – external economic threats notwithstanding – greater certainty should provide a tremendous boost to the economy. There is much talk of a tide of investment waiting to be unleashed by businesses from Land’s End to John O’ Groats, so we’re actually very optimistic about the UK’s economic prospects in the event of a smooth Brexit.
Furthermore, from a peer-to-peer lending (P2P) standpoint, Brexit is likely to bring about plenty of new opportunities too. Big changes, generally speaking, do not suit big business. But agile, innovative P2P firms such as ours are well placed to respond quickly and effectively, and we therefore approach the various range of possible outcomes with a high degree of confidence that we can strengthen our position within the mainstream of UK financial services.
Package that with some exciting new plans we have in place, and it’s fair to say that we have lots to look forward to in 2019. More importantly, our customers have every reason to feel positive too.
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