When it comes to investing, there are numerous questions that need to be asked, and lots of things which need to be properly understood before committing your hard-earned money
P2P lending: Promising signs for 2017
Before the referendum on Britain’s membership of the European Union in June, we wrote that our preference would be for the vote to go in favour of Remain. Of course, things went very differently on the day, and the fallout from the vote has largely dominated the headlines since. This unprecedented event is likely to continue to do so for the foreseeable future too, with ripple effects across the political and economic landscapes that no one can accurately predict at this time.
Yet while we as a company – and indeed the wider sector – were in favour of Remain, it was always our belief that the outcome would not have a profound impact on peer-to-peer lending either way, and that Brexit could indeed bring certain advantages.
Assessing the latest indicators
Our lenders showed their confidence in a post-Brexit Lending Works in a recent survey we conducted, and there has been no significant shift in terms of the default rates within our platform since June 23 either.
True, lender returns have declined somewhat since the Bank of England slashed base rates to 0.25 per cent in August. Yet as we have explained previously, our lender returns are not intrinsically linked to Bank of England rates, and this has been more down to a mismatch between supply of lender capital and demand for loans from borrowers, with an increasingly competitive marketplace affecting the latter. Importantly, as an agile platform who are on the verge of launching a series of exciting new partnerships, we expect to see a sharp increase in prime borrowers coming to our platform in the New Year.
A positive wider outlook
Of course, it’s all very well for us to give our views. But it is when they align with those of external experts that they gather greater credibility, and we noted with interest that respected ratings agency Fitch is forecasting that UK consumer lending will remain stable in 2017 in spite of the ramifications of Brexit.
Against the backdrop of their other predictions for 2017, such as pressure on corporate investment, real wage falls as a result of sterling’s depreciation, falling consumer confidence, weaker growth and increasing unemployment (albeit modest), it represents a notable stamp of approval. Fitch cited year-on-year growth in the P2P sector, and how this trend could be reversed should a considerable relaxation in loan underwriting standards occur. This is something that we as a platform are particularly mindful of, and it is important that platforms are conscious of the effect any economic turmoil could have on incomes of loan applicants, and hence their subsequent ability to afford the repayments on their loans.
Continued competitive, steady returns
Moneywise conducted some research last week regarding the average rates of interest being offered by cash ISAs in the UK, and the findings made for interesting reading. Average returns on easy-access ISAs are now down to 0.73 per cent. Given that this figure stood at 1.09 per cent a year ago, it represents a decline of 0.36 percentage points – significantly higher than the base rate cut in August of 0.25 percentage points. If predictions of inflation reaching 2.7 per cent in 2017 are to come to fruition, it paints a pretty grim picture for savers, whose money will be set to lose value within such accounts.
Peer-to-peer lending has a different risk profile compared with saving into a cash ISA, and it’s important to be fully informed of the risks involved. However, in terms of fixed rate, inflation-beating returns, the outlook for those who lend via P2P platforms is a very positive one – particularly on the back of the recent Oxera report, which laid to rest some popular misconceptions regarding industry practices and regulation.
The future is ISA
But it is the launch of the new Innovative Finance ISA which is set to be the main event of 2017, with lenders able to shield returns on peer-to-peer loans from tax within an ISA wrapper. With both FCA authorisation and ISA manager approval now in hand, Lending Works is thrilled at the prospect of delivering this new product to our lenders in the new year.
All in all, these are very exciting times indeed for our industry, and while the ISA will likely underpin much of our growth in 2017, there are many other elements combining to put the wind in the sails of peer-to-peer lending. External economic headwinds are not to be ignored or disregarded. But, after an impressive 2016, the foundations are undoubtedly in place for the P2P lending sector to take things to a new level in 2017.
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.
The Lifetime ISA (LISA), announced in 2016, would prove to be one of George Osborne’s last flagship gestures to UK savers and investors as Chancellor, eventually launching against a backdrop of anti-climax a year later in April 2017.
As the tax year end approaches, the financial services industry readies itself for a flurry of activity. That's in large part because, with just a couple of months to go, the so-called 'ISA season' is upon us.
Over the last decade, there can be little dispute that the reputation of mainstream banks – and particularly the so-called ‘Big Four’ (HSBC, Barclays, Lloyds and RBS) – is at its lowest ebb.
The peer-to-peer (P2P) lending industry is now regulated by the Financial Conduct Authority (FCA). The regulatory framework has been designed to protect customers and promote effective competition.
Loan underwriting is the process that we undertake to analyse all of the information provided by each loan applicant and their credit file to assess whether or not that applicant meets our minimum loan criteria. As part of that process all data is verified, analysed and summarised to paint a picture of each applicant.
When you earn interest from a regular bank savings account, for example, the bank automatically deducts basic rate tax (currently 20%) before paying your interest. With interest earned from peer-to-peer lending, tax is not deducted automatically so lenders will need to declare their income to HMRC.
As 2018 draws to a close, with our bellies full of Christmas turkey, it's only natural to look back on the past 12 months and reflect. No doubt, it's been a turbulent one economically and politically, and not everyone has had it all their own way.