It’s been a fairly tumultuous night all things considered. The pound nose-dived; the FTSE dropped significantly; markets have been experiencing volatile fluctuations; David Cameron quit; and, importantly, the nation is divided.
Whatever one’s position, Great Britain now has to build new relationships, reinforce democratic traditions, and foster prosperity and empathy between the electorate; media attention hasn’t done much to dampen the rhetoric around racial prejudices, which have occupied the majority of headlines running up to the election.
Before we draw attention to some likely effects of Brexit on the nation, which may impact peer-to-peer lending in the UK, let’s briefly recapture some headlines in light of this momentous event.
EU Referendum Vote Statistics
Voter turnout: 72%
Scotland, Northern Ireland and London backed ‘Remain’. Wales, Northern England and several other Local Authorities backed ‘Leave’.
Uncertainty in Financial Markets
The impact of Brexit on UK and neighbouring financial markets over the long term is not certain. Judging on immediate impact is not the best measure, but initial reactions don’t look promising.
- FTSE 100 index fell 500 points
- Barclays and RBS dropped 30% before pared losses to 17%
- FTSE Futures, the index traded ahead of London markets is down 9%.
- Sterling dropped dramatically to $1.3236 on the dollar
The pound dropped by 10%, a drop greater than 1992’s Black Wednesday when it fell out of the Exchange Rate Mechanism.
What is apparent is that financial markets will not let the dust settle. The implications of Brexit are significant for the banks, most notably because they trade across Europe in the EU’s single market, often in Euros.
Mark Carney, Bank of England CEO, reassured the nation this morning:
We have taken all the necessary steps to prepare for today’s events. In the future we will not hesitate to take any additional measures required to meet our responsibilities as the United Kingdom moves forward.
This statement is bolstered by £250bn of funds raised by the central bank to support financial markets in the event of Brexit. Additional liquidity, in the region £130bn with £600bn assets, contribute to a prepared stockpile, which will now surely be called upon.
Impact on Peer-to-Peer Lending UK
It’s not just immigration, the NHS, trade policy and pensions that will be affected. More broadly the economy, employment, and investment as well as wider, neighbouring financial markets will be as well. For peer-to-peer investors and the platforms facilitating loans, here are a couple of factors that could be impacted.
Increase in investor-base
The Bank of England has already revealed its support measures for the economy (Mark Carney quote above), which, irrespective of increased liquidity and assertions of control, may see savings rates reach zero per cent, possibly even negative rates.
P2P lending offers a reprieve from record-low rates, but only if the investor’s risk appetite is appropriate. P2P lending is not covered by the Financial Service Compensation Scheme (FSCS). There is a risk of capital loss without recovery.
If an investor is concerned by inflation eating away at their cash, P2P lending offers attractive risk-adjusted returns which could add yield-producing diversification to their portfolio.
Increase in borrower-base
Bank lending to businesses will also likely reduce – Banks’ and housebuilders’ share price fell this morning by around 35% – so P2P lending could provide an alternative credit source; the efficient streamlined vetting and underwriting process provides compelling advantages.
P2P platforms employ strict credit measures in an effort to prevent borrower default. They also implement robust risk mitigating procedures to ensure the process of recovery, should a borrower default on their loan, is as efficient as possible. Borrowers should expect no less when it comes to the application process.
Default rates rise
While there is potential for P2P lending to become an attractive asset class for those who are dissatisfied with record-low interest rates and stock market volatility – as currently evidenced – it should be noted that P2P, like other investment classes, will be negatively affected by the UK leaving the EU.
Poor economic conditions may see borrowers struggle to repay their loans. Whether a business or consumer, an adverse economic environment may see unemployment rates rise and business slow. This will impact the borrower’s ability to repay their loan commitments, resulting in delayed payments (arrears) or an entire loan default. The credit agreement is between the investor and the borrower, so the investor bears the risk.
Whatever your position is on Brexit, it is going to happen. Only time will tell how the nation fairs. But, this could be as good a time as any for people to start taking their financial affairs into their own hands, and taking a more proactive interest in how their money works for them. Peer-to-peer lending works an investor’s capital, returning an average annual return of 5%.
The risk-adjusted returns offered by P2P platforms can now be benchmarked on the Orca Platform. Try it for free by clicking below.