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Can alternative finance help build a better economy?

Can alternative finance help build a better economy?

A new report into the UK’s burgeoning alternative finance industry is calling on the Government to underwrite consumers’ investments in the sector in a bid to encourage wider participation.

The UK is the home of Europe’s rapidly-growing “AltFin” movement – encompassing peer-to-peer lending, community share schemes and crowdfunding.

Fast becoming a major player in the financial sector, it was valued at £3.2 billion in 2015 – almost five times the 2013 figure.

In what is the first independent qualitative evaluation of the sector, academics from the University of Leeds interviewed companies at the vanguard of the movement to understand their motivations.

Their report, Financial Innovation Today: Towards Economic Resilience, launched today, examines the sector’s role in democratising finance and building economic resilience.

They found a dynamic social movement encompassing multiple innovative finance models, trade bodies and regulators. But they make recommendations aimed at boosting confidence among consumers to encourage wider participation and improve public understanding of finance.

Lead author Dr Mark Davis, an Associate Professor in Sociology, argues that to deliver progressive social change, people need to do different things with their money and break the habit of using high street banks.

He said: “A big part of the appeal of alternative finance is that we can know precisely where our money is and what it is doing.

"This moral appeal to people’s wallets is already building renewable energy infrastructure, supporting small- and medium-sized enterprises and helping to fill the funding gap for a range of public services.

“Despite the loss of reputation suffered by high street banks following the financial crisis, we still trust them with our money – even though we know little about what they do with it.

"One of the reasons might be that we don’t know what else we can do with our money.”

The report recognises that alternative finance is unfamiliar territory for many people, and that taking any risk can be off-putting.

But in continuing to assume banks are the best place to invest, it argues people might be missing the opportunity to make their money “do good” by investing in good causes in their communities.

He added: “I think the time has come for a fundamental review of our understanding of money, finance, and wealth and what it is contributing to society. What is the point of a financial system that few people understand and which seems to provide such a narrow range of alternatives?

"It’s vital we know more about alternative finance to see if it really can disrupt the power of the high street banks to benefit society.”

But he cautioned: “Financial innovation is not in and of itself always a good thing. After all, it was financial innovation happening away from any democratic oversight or control that created those volatile financial products which triggered the global crisis. That’s why alternative finance worthy of the name needs to be part of a wider movement for economic democracy.

“We are at the start of a cultural war over the meaning of money, and that involves sociologists, anthropologists, historians, and those economists fighting from within the discipline – anyone who can show the assumptions of mainstream economics to be flawed.

“With this report, we are calling on the Government to work with the alternative finance movement - including campaign groups – to develop a policy to guarantee a maximum amount of investment in the peer-to-peer market, perhaps up to £5,000 per investor.”

The Financial Services Compensation Scheme currently guarantees cash deposited in UK-regulated current or savings accounts in banks and building societies up to a limit of £75,000.

The report argues that a guarantee for alternative finance investors would help boost their trust, especially if introduced alongside conditions to ensure their investment would be used in the “real” economy in a transparent and accountable way.

Dr Davis, Director of the Bauman Institute – part of the University’s School of Sociology & Social Policy – also called on the Government and the alternative finance sector to provide greater funding for the campaign groups which underpin the “moral mission” of democratising finance.

“This funding should be used for a large and co-ordinated campaign for public education in money and finance,” argued Dr Davis.

The report also suggests that the AltFin movement should publish a manifesto of “Standards of Alternative Finance”, to help maintain its independence from the mainstream banking sector and allow companies complying with such standards to carry a readily identifiable mark to increase public confidence.

  • The report, Financial Innovation Today: Towards Economic Resilience, by Dr Mark Davis and Dr Tim Braunholtz-Speight, will be available after Thursday’s launch at Leeds Town Hall via www.baumaninstitute.leeds.ac.uk/fitter/report. It was funded through a grant provided by Friends Provident Foundation, an independent grant-making charity.

Further information

For more information, interviews, or a pre-embargo copy of the report, contact University of Leeds Media Relations Manager Gareth Dant via g.j.dant@leeds.ac.uk or call 0113 3433996.

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