Friday letter: Slow progress in breaking down banks’ built-in advantage

The UK still doesn’t have a competitive lending market. The government must do more to provide a level playing field for banks and alternative lenders.

It’s been a good week for online marketplace lenders in the UK. For one thing, Funding Circle, a UK-based online small business lending platform, announced that US asset manager KLS Diversified Asset Management would use the platform to lend £132 million ($207 million; €166 million). This is the first investment by a US asset manager in a European lending platform with a view to securitising its loans, and could herald a significant change in the market.

More importantly, UK Chancellor George Osborne, as part of his annual Autumn Statement, announced that tax relief on bad debts will be extended to these peer-to-peer platforms. One beneficiary, Funding Circle, told PDI this week that it had spent the last four years lobbying for the tax change, and was expecting it to increase returns to the average investor by up to 25 percent immediately.

It is legislation of this kind that will prove most significant in the long-term, because if continued, it will change the British lending market for the better.

At almost every level, banks today still have an advantage over alternative lenders. From tax relief to cheap central bank funding, they are systemically embedded as the default borrowing option.

The government’s pledge this week of support for opening up the banking system to competition is therefore a step in the right direction. But for a truly level playing field to be created, a lot more needs to be done.

Private lenders may not have access to cheap Bank of England funding, but they are able to source capital that is adequately priced elsewhere. What they do need, more than anything, we would argue, is equal access to borrowers.

The government has promised to name specific banks that will be required to share credit data and refer on SMEs. A very positive move but limited, all banks should be required to share that information for a truly open debt market.

The chancellor’s statement also made reference to other important potential reforms; extension of ISA (tax-free savings account) eligibility to marketplace lenders and tearing down regulatory restrictions blocking institutional lending through marketplace lenders.

But these changes are not sure to go ahead, they will merely be reviewed. And they are focused specifically on online lenders, ignoring the sizeable pools of capital available within direct lending and private credit funds actively seeking opportunities to lend to the real economy.

In terms of opening up the competitive environment, this week has seen the door open a crack, but there is a lot further to go. It took four years of lobbying for a single small tax break. As for the other measures mentioned in the autumn statement, the government has promised little more substantial than reviews and consultations. If it is serious about introducing competition to the lending market, the UK must aim to make much greater strides, and faster.