Brexit and Alternative Finance

Last month, the unpredictable outcome of Britain’s EU referendum was felt, throwing the country’s political, financial and social systems into disarray, as the pound plummeted to a 31-year low. The unforeseen victory of the Leave campaign has led to anti-Britain sentiment across the EU, which added to the political volatility already extant in the country, as the frontrunners of the Leave and Remain campaigns resigned in haste. But how does this new era for the EU and the British economy affect the alternative finance market?  Equitise is here to run you through the short and long-term impact on the markets of Britain’s decision to leave the EU.

The Fallout

The headlines swirling last week read were staggering, reflecting the skepticism from the global community on Britain’s ability to retain its trading might outside of the single market, and its absence of a tangible post-Brexit financial plan. The stock markets fell, the Reserve Bank announced cuts to the interest rate, and major financial offices voiced the possibility of outsourcing industry. Already, industry commentators have been speculating as to which European capital will be poised to take over London’s status as the financial hub. Many lenders announced cuts on fixed-rate mortgages, with the lowest ever deal being 2.39%. Everyone from the property market to Richard Branson (whose Virgin shares dropped by a third following the referendum) were hit by the volatility of the Brexit outcome. The OECD issued warnings about the UK’s ability to create new jobs going forward, as postings several hundred thousand job postings were removed over the course of a week. New reports suggest approximately £5bn of commercial property may be sold as the turmoil has forced managers to revalue portfolios.

The Consequences for Alternative Finance

The borderless nature of equity crowdfunding is an advantage here - commentators from inside and out the Fintech industry have speculated that this could be a moment of opportunity for alternative capital providers. Traditionally, alternative providers function where banks do not - as they are not bolstered by deposits or short term wholesale funding tools. Similarly, the downgrading in credit ratings that has occurred does not affect alternative finance lenders in the same way - for securing short term finance, the increased demand from businesses at this time can be met via the alternative finance market. Likewise, the regulatory impacts of the UK’s departure from the EU have similar repercussions, as it remains to be seen how easily UK-regulated financial bodies will be able to invest and raise from EU members. As alternative finance lenders operate without the constraints of regulation, or with less regulation, than traditional financial institutions, whose current situation is mired in uncertainty, these bodies will not be spending as much time and money assessing the new regulations imposed on them when this occurs. This fosters opportunities for alternative finance as other lenders are more perturbed by political interference.  

While the markets contract, as they did following the GFC in 2008, which similarly saw an upshot for the alternative finance industry and has fostered it into its position today, small businesses may still be boosted by alternative lenders. Naysayers will suggest that a lack of liquidity and the recalcitrance of investors given the current scene of economic volatility will result in less P2P lending. 

However, as valuations plummet, this may bring investors back into the market with the prospect of possible returns being more gainful. Likewise, in the absence of EU regulations relating to state aid, the UK government going forward may be willing to proffer more tax-breaks, and protection of SEIS and EIS will be more straightforward.

Going Forward

The uncertainty clouding the market following the UK’s shock decision has mired many lenders in a volatile situation. Nonetheless, the above regulatory and financial impacts of the Brexit on the alternative finance industry means that, for these platforms, it’s not all doom and gloom. As one of the most culturally, politically and financially seismic events to occur in our generation, the UK’s decision to leave the European Union will have far-reaching consequences across every sector.

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