AIM, Peer-to-Peer Lending and the Innovative Finance ISA: predicting the Crowd’s next move

I will start this blog with a question: what can the Government learn from the Alternative Investment Market’s evolution over the last twenty years when it comes to finalising the regulation for the incoming Innovative Finance Isa?

Let’s start by having a look at the Alternative Investment Market in its current state. AIM is the London Stock Exchange’s international market for smaller growing companies. A wide range of businesses including early stage, venture capital backed as well as more established companies join AIM seeking access to growth capital. It has helped over 3600 companies access finance and is the biggest market of its type in the world.

However, the demise of private client brokers has meant that the Crowd no longer can easily access Alternative Investment Market-listed companies. In their place, sophisticated investors have moved in, with IPO’s and listings funded by institutions. Subsequently, it has become a more established market containing companies that have outgrown the index. AIM can no longer provide private clients with an accessible route to investing in innovative SMEs that have the potential to grow.

However, Peer-to-Peer finance has afforded the Crowd another chance to invest their money in new ways, cutting out the Private Client Brokers of old. GLI Finance’s unsuccessful capital raise is a case in point: the Crowd has the power to do what it wants without the need of third party interference. The good news keeps on coming: the Innovative Finance ISA will bring even more individual wealth to the table and afford tax breaks on earnings made through Crowdlending.

And that is why the recent news limiting users of the new Innovative Finance ISA to only one platform is a hammer blow for both parties involved. Whilst it is possible to build a diversified investment portfolio on a single platform, part of the allure of Peer-to-Peer Lending has been the ability to choose to lend money to a range of companies across multiple platforms. At ArchOver, and I am sure this is the case at other platforms, we interested to find lenders who have lent over other platforms, and are therefore both wise to the general processes and are aware of the benefits and risks of lending money to UK SMEs. Taking away this variety will inhibit growth within the industry, and more importantly restrict the flow of private money to SMEs looking for alternative forms of low cost finance. The investor becomes exposed to more risk by lending to a P2P lender who could have overexposure to a specific market (Landbay and property being an obvious example), or uses a particular financial tool that only works for specific businesses (Market Invoice and invoice finance, for instance). And that’s not even considering the apocalypse if a P2P Lender actually failed.

The Government’s commitment to Peer to Peer Lending shouldn’t be questioned: the Isa is a huge vote of confidence for what is still a fledgling industry, and the regulation that has been introduced is certainly well-intentioned. But ensuring that investors have a greater choice when lending will encourage price competition and innovation and allow the small platforms to grow. There is a willingness on the Government’s behalf to continue to alter the regulation, which is a positive; obviously the sooner the better for platforms so as the technical side of things runs like clockwork come April.

The evolution of the Alternative Investment Market (whilst not necessarily a bad thing) should be seen as a cautionary tale for Alternative Finance. Peer-to-Peer Lending in particular is already in a state catharsis. Indeed, the reality that Goldman Sachs, the behemoth synonymous with banking opulence, has a presence in the Peer-to-Peer Lending sector in the US is evidence that history already may well be repeating itself. It is important for platforms to continue to welcome the Crowd alongside, and on the same terms as, the institutions, maintaining the democracy that saw alternative finance really take off in the first place.

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