Given the relative immaturity of the alternative finance market; the growth we’ve seen and the rise in the importance of alternative providers within the financial landscape is a true success story. Giving businesses more options and better ways to manage their money benefits everyone and will become even more important in the near future.
However, this level of growth doesn’t come without challenges. A changing market landscape means providers need to react to change and continue to present borrowers with the same level of flexibility, speed and security. They need to be able to do this without increasing their exposure to risk themselves. This is not an easy task when you consider the evolution of the industry through consolidation, innovation and regulation.
In the past two articles we’ve touched on the fact that the alternative finance market is consolidating - with an estimated 35 platforms becoming inactive in 2016. This was largely due to platform closures, with some smaller platforms not creating enough deals to carry on. Some also chose to leave the alternative finance market altogether and look at more deregulated activities (cryptocurrency being a popular choice). In 2017, mergers and acquisitions also contributed to the consolidation, with Ratesetter, Close Brothers and 1PM, all expanding their services through acquisition.
This trend for consolidation partly explains the high levels of innovation we’re now seeing within the sector. In the 2017 UK Industry Tracking survey, 59% of businesses surveyed either significantly or slightly altered their business model. Product innovation was even more commonplace, with 31% of those surveyed having introduced new products, and 26% slightly altering their product offerings in 2016.
Given that a key risk to the industry is the potential collapse of a well-known platform following malpractice or a major fraud case, players in the market can’t afford to stand still. Businesses need to keep innovating, looking at new ways to make sure that the process of knowing their customers is as robust as possible. For an online industry such as alternative finance, keeping ahead of the curve of new technological advancements is not only desirable, it’s a necessity.
But, with high levels of innovation comes risk of its own. High levels of change can cause a strain on business models and processes, making it hard to maintain due diligence and make sound judgements in a fast-paced lending landscape. Providers will want to be assured that, even if they’re reducing barriers to entry for borrowers, it doesn’t damage their integrity and open them up to credit risk.
As if the need for constant innovation wasn’t enough, providers also have their hands full keeping ahead of regulation that’s coming into the market. Some of which we expect to see following the Financial Conduct Authority (FCA)’s Post Implementation review into Peer to Peer lending. This was due to be released at the end of 2017 but has been pushed back due to Brexit and other market issues. Whilst 88% of alternative finance providers believe the amount of current regulation is adequate, that won’t stop the FCA from thinking otherwise.
There are, however, some known timelines for other pieces of regulation the market will need to be ready for, including the roll out of the Senior Managers and Certification Regime (SMCR). This is replacing the current Approved Persons Regime (APR) and the aim is to increase the levels of accountability and transparency within the financial services sector, especially after 29th March 2019, when the UK hopes to remain a global leader within the market.
In March 2016, the FCA introduced SMCR for all deposit-taking banks and building societies. Now it has had a bedding-in period, the FCA has announced that the regime will take effect for insurers on 10 December 2018. It’s not yet been announced when the regulation will encompass brokers and other smaller solo-FCA regulated firms, but it’s looking likely that this will be mid to late 2019. This change will require a substantial level of focus from companies affected. Given that senior management accountability will be so enhanced, policies will need to be rewritten from the bottom up to make sure companies are meeting the correct level of culpability that the FCA expect.
So, there we have it. A whole heap of consolidation, innovation and regulation – all within an industry that has to be seen as mitigating its risk better than most, given its effect on the UK economy as a whole. How can players in the market feel comfortable that this is being achieved?
We may just have the answer. You see, whilst the alternative finance industry is innovating, so are we. Our credit risk management solutions provide the latest in real-time accurate data to help manage your client information in one place. We’re true advocates of providing information in the most transparent way, so you can make the decisions you need to as quickly as possible.
Robust risk management isn’t an art – it’s a science. And it’s one we have all wrapped up.
Click here for more information on our risk and compliance solutions.