The Role of Politics in Alternative Finance

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Nick Moules
25th June 2014

Whatever your opinion of the role of Government in free market economics, there is no questioning the importance of its stance and the value of a positive position to those operating in a market that has been touched by Government, like alternative finance.

Anything new in financial services poses challenges for Governments and questions like:

Is it a good thing? Should we regulate it? How can we get involved without compromising our neutral position?

The situation is arguably more complicated now given the sheer acceleration in disruption, driven by technology, which is leaving policy makers behind.

This week, at a seminar hosted by Interel, the Public Affairs consultancy, the attitudes of policy makers towards alternative finance were revealed in the launch of a paper called ‘Banking on Innovation: Uncovering the Political Barriers to Innovative Financial Services’.

What was clear in the report was a low level of understanding exists among MPs and trust is yet to be established from a survey of approx 25% of MPs:

  • A large portion of all respondents (35%) had either never heard of, or had a fairly poor understanding of crowdfunding and peer-to-peer lending. This low level of understanding is particularly pronounced among older and less-recently elected MPs: 43% for MPs over the age of 55 and 56% for MPs elected between 1992 and 1997. Regionally, there are significant variations: 62% of Scottish MPs and 43% of MPs in south west England reported a very low level of understanding, while among the English regions respondents from the Midlands were more likely to have never heard of crowdfunding and P2P.
  • Nearly 50% of MPs are unsure about whether alternative  finance providers are trustworthy and the sector still lags behind all others except payday for positive trust ratings
  • A large percentage of the respondents from the Conservative and Labour parties (42% and 41% respectively) simply didn’t yet
    know whether the platforms’ interests, particularly crowdfunding and P2P, were aligned with those of consumers.

So what does this mean for the sector? The lack of awareness is certainly surprising given the level of media coverage around the market and the formation of an All Party Parliamentary Group (APPG). It means the people directing policy around financial services lack the full perspective and a possible reason for this is that MPs typically have their money activity taken care of – there’s not much need for them to know peer-to-peer on a personal level, when compared to high street banks.

Trust

There was full agreement at the seminar that trust is the critical aspect required for the future growth of the market and Government involvement is seen as a measure of trust. Even if this doesn’t extend to the Financial Services Compensation Scheme. At rebuildingsociety we talk a lot about the trust cycle. It’s devilishly hard to measure and pin down as every individual is different, but there are points where people trust the platform enough to commit in the first instance and then more substantially in the future. Of course there are many who will never get beyond registration because it doesn’t match their risk appetite.

There’s also motive and desire to do something different among consumers – inertia is still a big player in financial services. Rhydian Lewis of Ratesetter said anecdotally that 9 in 10 people he talks to agree that peer-to-peer is an excellent concept, but when that moves on to actual involvement, you would be looking at 1 or 2 in 10.

It could be that MPs will find it hard to trust in any financial services provider, traditional or alternative, after the financial crisis. Either because they believe they don’t act in the interests of the consumer, or they haven’t been around long enough to be trusted. In this environment, challenger banks appear to be set fair because they’re a new name in a traditional market, especially if the Labour Party win the next election after Ed Milliband’s stated desire to reduce the market share of big banks.

Building societies and credit unions scored well for awareness and trust, particularly among Labour and Liberal Democrat MPs, so the social aspect of the alternative finance market could turn into a real strength, once awareness is increased.

Backing the whole alternative finance market

At the moment there is also the acute possibility of the Government backing winners. Pumping cash into the market leaders is a great show of confidence in a fledgling sector and it should be congratulated for its quick action, but it needs to ensure equal opportunities are provided to smaller players. Otherwise the market will be increasingly difficult to enter or disrupt, which would ironically turn the alternative finance market mainstream.

It’s certainly not easy to make policies that protect consumers and leave space for disruption and innovation but the positive response to the FCA’s initial regulatory framework suggests a balance has been struck. How policy makers respond when a bad news story strikes will be a good measure of the political classes’ long-term commitment to the sector.

Threats

Political threats to the alternative finance market include a change of government, markedly improving customer sentiment towards big banks could dampen enthusiasm among policy makers for alternative providers and lobbying on behalf of big institutions towards more restrictive legislation.

Opportunities

Government backing continues to present opportunities for the sector, perhaps most notably in ISAs. If it finds a way to fairly back the rest of the market using the British Business Bank, then more platforms can parade their badge of approval. Regardless of whether you consider it to be a positive that the Government partakes in loans alongside regular lenders, there’s little disputing the comfort factor that it brings to those at the early stages of the trust cycle.

For a copy of Banking on Innovation: Uncovering the Barriers to Innovative Financial Services, please email john.fearn@interelgroup.com

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