Adam Tavener looks at a shift that has the potential to have the biggest impact on SME lending for a generation – peer to peer.
As an accountancy trade publication AccountingWEB focusses, unsurprisingly, on issues affecting the profession and its clients, who are largely SMEs. Therefore, it’s worth taking a look at wider issues and trends and how they might impact tomorrow’s SMEs and the small business funding space.
Much has been written about the rise of Peer to Peer (P2P) as a business finance product, with supporters pointing out the speedy turnaround times, technological superiority and more flexible lending criteria, whilst sceptics debate the soundness and commerciality of some in the sector and predict tears to come.
Sceptics notwithstanding I am persuaded that this model is here to stay, albeit as an evolved form of where we are now. The basic principles of direct lending are just too attractive from an investor standpoint to simply disappear.
Which brings me to the subject in hand. Until very recently the cohort of P2P investors had consisted of individuals, either directly or through an Innovative Finance ISA, and some institutional money passing through the bigger player’s platforms. So pensions, the largest single source of long-term money in the UK (or, indeed, the world), had been ignored.
There are technical reasons why. An early one was the prohibition of connected party transactions where, although highly unlikely, an individual’s pension monies might find its way onto and through a P2P platform and be lent out to a connected individual, something explicitly prohibited under HMRC rules.
Then there remains the capital adequacy issue, where Self-Invested Personal Pension (SIPP) providers are forced to treat P2P investments as a non-standard asset and thus make much higher capital adequacy provision for such holdings, something many SIPP operators won’t, or can’t, do.
Finally, there is the professional indemnity/non-standard product problem where advisers, having been badly bitten in the past, are reluctant to engage with or advise on anything that isn’t mainstream.
So, overall you would have thought that the prognosis for P2P loans entering the mainstream SIPP market was pretty grim. And yet there is a truly staggering amount of money sloshing around in private sector pensions, somewhere around the two-and-a-half trillion-pound mark.
Because of the (relatively) new pension freedoms regime, a considerable chunk of this will ultimately end up in drawdown products looking to provide a steady income without having to purchase an annuity. In an era of ultra-low interest rates and stock/bond market volatility, this can be seriously challenging.
So, what if there was a product out there where you could get smoothed returns in a risk-controlled environment with some underpinning security? Where you could reasonably draw down an income of three, four or even five per cent without depleting the capital and where the people handling your money were FCA regulated. Impossible? No, just not widely enough understood since P2P can now offer SIPP pension investors just that. This is hugely significant – as the UK SIPP market was worth £2.4bn in individual, new business annual premium equivalent across insured and non-insured products in 2017 – a rise of 55% from 2016.
So why am I writing about this in an accountancy publication, not a personal finance column? The answer is that things are changing, and this change will undoubtedly and profoundly affect the supply/demand side of SME funding to your clients.
One or two of the more technically capable SIPP providers have managed to overcome the circumstantial challenges facing SIPP/P2P investments and now happily accept them. One, Morgan Lloyd, having carried out extensive due diligence now publishes a list of ten or more platforms that it will accept within its Qualitas and Directors SIPP products.
Now that bridge has been built others will follow, and in time the hundreds upon hundreds of billions of pounds of income-hungry pension monies will begin to flow into the sector. This will mean that the supply side of P2P will most likely shoot up, which in turn necessitates a corresponding increase in the demand side, something that can only be achieved by pushing down pricing or the creation of pooled lending products to challenge forever the traditional distribution systems of the big banks in the SME lending space.
Either way, the seemingly small technical evolution which now lets pension money invest in P2P has the potential, over time, to create the biggest impact in SME lending for a generation. That’s a pretty exciting prospect and one that will affect borrowers, advisers and investors alike.
This will not be without its challenges as fools tend to rush in, but since the genie is already out of the bottle, our job is to make sure that bumps and slips are kept to a minimum and that we learn from the inevitable mistakes that will be made.
All of that said, this really will be a game changer.
About Adam Tavener
Adam is founder and chairman of Clifton Asset Management Plc, the innovators behind the designated business funding comparison platform Alternative Business Funding, providing high quality finance to SMEs across the UK. Adam hosts ‘Tav on Money’ a regular series of video opinions on YouTube.’