Julian Rose cites elements in Chancellor’s Summer Budget as a boost for alternative finance providers

Unlike the bank levy which only applies to the largest banking groups, the new 8% higher rate of corporation tax will apply to all banks with profits over £25 million. It reduces the incentive for non-bank asset finance companies to convert to banks in order to raise more funds for lending.

The surcharge flies in the face of the UK government’s efforts to boost competition in small business banking. Ironically (and presumably uncoordinated) just two days later the government announced that the Prudential Regulation Authority and the Financial Conduct Authority were launching a new unit to support prospective new banks.

For asset finance, the surcharge seems to further ingrain the sector’s reliance on the established banks. According to the Competition and Markets Authority (CMA), the largest four banks account for over 60% of the small and medium-sized businesses asset finance market. Non-bank competitors often have to call on the same banks for part of their funding.

Perhaps it’s no coincidence that the Chancellor used the Budget statement to promote alternative finance providers, as he has done now for several years. The Innovative Finance ISA for Peer to Peer loans will launch in April 2016, it was confirmed. Meanwhile a new consultation was issued on whether to extend the list of ISA-eligible investments to include debt securities and equity offered via crowd funding platforms.

Crowdfunding may still off the radar for many in the asset finance industry (but certainly not the brokers). However if we needed any further reason to take another look at this fast-growing alternative to bank finance it was announced on Budget day that ‘peer-to-business’ lender Funding Empire had sold a majority stake to Paratus AMC.

Caerphilly-based Funding Empire is only small but this move is significant for two reasons. First, Funding Empire is a specialist in asset-backed loans to businesses which are offered in conjunction with the asset finance broker, Business Lending Exchange. Second, according to the alternative finance trade publication Altfi News, this is the first takeover of an alternative finance platform by a traditional financial services company in the UK.

Crowdfunding

If it’s becoming harder or less attractive to be a bank, non-bank finance companies may increasingly be looking for alternative sources of capital for lending including crowdfunding.

For now at least, most major investors seem unable to fund non-bank asset finance companies, whether that is due to the need for larger-scale investments or (more likely) the lack of industry-wide data in the UK on the key metrics of probability of default and loss given default. Therefore the best bet could be to attract smaller investors through crowdfunding.

Whether it’s through the Innovative Finance ISA or the potential extension of ISA-eligible investments to include debt securities (perhaps including securities issued by non-bank asset finance funders) the tax breaks becoming available for alternative finance seem set to become more important under this Government.

The details of the new corporation tax surcharge on banking profits could still change. The Government might, for example, find a way to link the level of tax to the size of the bank. However the new tax is not the only reason for non-bank funders to be thinking twice about their ambitions to become banks.

Apart from the extra regulation and tax, the CMA revealed in May that only a very small proportion of business current account holders take out asset finance. The synergies between banking products appear less important than previously thought.

Banking status also doesn’t seem to do much to raise an institution’s profile. A new qualitative survey from the CMA published last Friday found that “some newer banks specialising in asset finance were unfamiliar to most (SME businesses) across the sample”.

The consultation published last week suggests that the Government has not yet made any decisions on the scope of any extension of ISA-eligible investments.

For non-bank asset finance companies looking for an alternative to a future as a bank, the ability to sell securities on a tax-efficient crowdfunding platform could be of interest. If so, the case needs to be made quickly to the Government for including non-bank finance companies in the extension of ISA-eligible investments.

This could help investors to benefit from the essential skills of established non-bank asset finance funders, and help funders to grow without having to become highly-regulated and now highly-taxed banks.

Julian Rose is director of consultancy Asset Finance Policy Limited (www.assetfinancepolicy.co.uk) and runs the Asset Finance 500 directory of asset finance brokers (www.assetfinance500.uk)