Peer2Peer Finance News August 2018 by Alternative Credit Investor

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NO GOOD ADVICE

Why are adviser platforms shunning P2P? PLAYING BY THE RULES

The latest update on P2P regulation

>> 10

Assetz Capital’s Stuart Law on balancing growth and profits >>

ISSUE 23 | AUGUST 2018

P2P lenders mull bids for Countrywide’s mortgage arm PEER-TO-PEER lenders are among the firms encircling the mortgage brokerage arm of troubled estate agency group Countrywide. Britain’s biggest estate agent has issued four profit warnings in eight months and seen its share price plummet by two thirds since the start of the year, hammered by a downturn in the property market and growing competition from new online rivals. While the agency side is struggling, the financial services division – incorporating 600 mortgage consultants offering home loans, remortgages and insurance services – has proved more resilient. Countrywide’s estate agency and lettings business saw its core earnings plunge by 45 per cent to £26.4m in its 2017 annual results, while its mortgage brokerage arm posted a comparatively smaller 13 per cent decline to £19.7m. The value of total

mortgages arranged grew by £2bn to £17.7bn last year. Lee Birkett, founder of bridging and buy-tolet P2P lender JustUs, told Peer2Peer Finance News he was considering making an offer for the mortgage brokerage arm of Countrywide. “There have been no formal discussions, but I have made it public that I am interested in regulated mortgage contracts for P2P,” he said.

“The financial services side of Countrywide is a fantastic business. It is the biggest distributor in the UK and this wonderful asset is keeping the group together. “Countrywide is a business that if broken up and transformed would be very valuable.” Chan Garcha, executive consultant for buy-to-let platform LandlordInvest, also expressed an interest in Countrywide’s mortgage brokerage arm,

although he said that a potential acquisition would need to be further down the line. “The value would lie in the investment properties, where Countrywide has provided mortgages for investment clients,” he told Peer2Peer Finance News. “That same individual or company may want some bridging finance in the future or second charge finance, that level of data is quite >> 4 valuable and

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EDITOR’S LETTER

Published by Royal Crescent Publishing

WeWork, 2 Eastbourne Terrace, Paddington, London, W2 6LG info@royalcrescentpublishing.co.uk EDITORIAL Suzie Neuwirth Editor-in-Chief suzie@p2pfinancenews.co.uk +44 (0) 7966 180299 Kathryn Gaw Contributing Editor kathryn@p2pfinancenews.co.uk Marc Shoffman Senior Reporter marc@p2pfinancenews.co.uk Andrew Saunders Features Writer Emily Perryman Reporter emily@p2pfinancenews.co.uk Danielle Levy Reporter PRODUCTION Tim Parker Art Director COMMERCIAL Ashleigh Sadler Director of Sales and Marketing ashleigh@p2pfinancenews.co.uk Amy St Louis Sales and Marketing Consultant amy@p2pfinancenews.co.uk Tehmeena Khan Sales and Marketing Support admin@p2pfinancenews.co.uk SUBSCRIPTIONS AND DISTRIBUTION info@p2pfinancenews.co.uk Find our website at www.p2pfinancenews.co.uk

ugust is typically a quiet month for business. Executives go on holiday, important announcements are shelved until September and there’s little corporate news of note – all of which makes life pretty tricky for financial journalists who still have pages to fill. Luckily for the team at Peer2Peer Finance News, the peerto-peer lending sector doesn’t seem to take any notice of the summer lull. In August 2017, we saw Funding Circle scrap manual lending, re-jig its target returns and unveil a major re-brand. That same month, RateSetter left the Peer-to-Peer Finance Association, ThinCats gained Financial Conduct Authority approval and Zopa revealed that it had reduced its exposure to higher-risk loans due to the UK’s worsening consumer credit outlook. What will this August hold? If this month’s print issue is anything to go by, it’s unlikely the industry will sit still. Whether eyeing a potential Countrywide deal (see front page), tapping into the opportunities offered by Open Banking (page 4) or expanding into the motor finance market (page 20), P2P lenders are set on disrupting and scaling up, whatever the weather. Happy reading! SUZIE NEUWIRTH EDITOR-IN-CHIEF

Printed by 4-Print Limited ©No part of this publication may be reproduced without written permission from the publishers. Peer2Peer Finance News has been prepared solely for informational purposes, and is not a solicitation of an offer to buy or sell any peer-to-peer finance product, or any other security, product, service or investment. This publication does not purport to contain all relevant information which you may need to take into account before making a decision on any finance or investment matter. The opinions expressed in this publication do not constitute investment advice and independent advice should be sought where appropriate. Neither the information in this publication, nor any opinion contained in this publication constitutes a solicitation or offer to provide any investment advice or service.

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NEWS

cont. from page 1 would be to any P2P platform.” He added that LandlordInvest was focused on scaling its existing model but said there was no reason why in 12 months that “if we felt it was the right thing to do and it ticked the boxes we could look to acquire an element of the business.” Countrywide issued a fresh cash call in late June in an attempt to halve its £192m debt pile, which could bring new bidders into play. There has been speculation that US alternative asset manager

Oaktree Capital, which is Countrywide’s largest shareholder with a 30 per cent stake, could use this opportunity to increase its holding and take control of the business. Oaktree, which declined to comment on a possible Countrywide acquisition, is no stranger to boardroom tussles. It is also a major shareholder in Ranger Direct Lending and played a key role in pushing for the alternative finance fund to be wound down following poor performance. Countrywide’s share

price fell below 50p in late June from a 2014 high of 694p and has made little recovery since. Neil Wilson, chief analyst at online trading platform Markets.com, said Countrywide’s low market value made it an attractive takeover target. “A potential tie up with a technology firm is another option although the problem with the hybrid thing is it already tried this and didn’t really work,” he said. “You could see it merge with Foxtons for instance to cut costs. A break-up ultimately may be the only way out to salvage

those bits of it that are doing ok.” However, Russell Quirk, founder of online agent Emoov, which has also expressed interest in acquiring Countrywide's mortgage arm, said a break-up of the business was unlikely as it is linked to all other parts of the operation. “There is a logic that Countrywide has a slick financial services operation, but it is predicated around estate agent activity so if you severed it that would be an issue,” he said. Countrywide declined to comment.

Lenders gear up for Open Banking revolution MORE peer-to-peer lenders have revealed how they propose to capitalise on the opportunities presented by Open Banking. David Bradley-Ward, chief executive of Ablrate, told Peer2Peer Finance News the secured business lender wants to automate some of the functions that are manual at present and is investigating how it can use Open Banking to provide more tools to lenders. “The main business opportunity for us will be on the borrower side,” he said. “We already provide credit data to lenders on all our borrowers, which is updated monthly via API (application programming

interface). This allows lenders to have current credit data as well as historical data to aid their decisions when trading loans. To get even more granular would be great for lenders who trade loans on our secondary market, but it will also be a valuable credit monitoring tool.” John Battersby,

spokesperson for RateSetter, said Open Banking has the potential to fundamentally change how customers use their data, but making the most of the opportunity ultimately depends on enabling great customer experiences. “We’ve been collaborating with the Open Banking

Implementation Entity to ensure that APIs are not built simply to meet regulation, but to bring something new and useful to customers and thirdparty providers,” he added. Earlier this year, Zopa and Lending Works separately announced plans to streamline the lending process through the new data-sharing initiative. Zopa launched an income verification tool that automatically pulls data from a person’s bank, while Lending Works introduced a similar tool through a partnership with credit reference start-up Credit Kudos.

NEWS

High street lenders react to altfin threat FIERCE competition from alternative lenders is thought to have driven Barclays’ decision to double its unsecured business lending limit to £100,000. “There is growing competition in that segment and to be fair Barclays is not the only major bank to make a move here; RBS/Natwest have launched their Esme loans product,” said Conrad Ford, chief executive of small- and medium-sized enterprise (SME) finance aggregator Funding Options. Esme Loans is a digital lending platform, which provides SMEs with unsecured loans up to £150,000. “Banks are saying, ‘Why

are these propositions attractive to customers? The lending isn’t necessarily cheaper but they are transparent, fast and easy’,” Ford added. “Maybe these characteristics are more important to our customers than we realise and we should react.” Ford suspects other banks will look to increase unsecured business loan

volumes, which could pose a challenge to P2P business lenders, who compete particularly well in that space. However, P2P business finance provider MarketInvoice is not concerned. Product manager Christopher Guttridge argued that alternative lenders will adapt their limits quickly, depending on their risk appetite.

Ford does not expect increased competition from the banks to ruffle P2P lenders’ feathers. “The market is already competitive, so I am not sure there can be much of a reaction – for the simple reason that rates are good at this point in the economic cycle,” Ford said. Looking ahead, MarketInvoice’s Guttridge expects to see more collaboration between alternative lenders and high street banks. “Another way that banks can and are looking to better serve the UK SME market is by partnering with these same lenders,” he said. “For example, Santander’s partnership with Kabbage.”

Widespread variation in access to secondary markets THE TIME it takes to fund and exit loans on the secondary market varies considerably across peerto-peer lenders, research by Peer2Peer Finance News has found. Lenders claim secondary markets enhance liquidity for investors, but on some platforms it can take up to a week to sell on loans and withdraw money. At Zopa, for example, it takes an average of 1.5 days for investments to be deployed and 4.4 days to

withdraw funds. Lending Works said it typically takes less than a week to deploy investments, while requests to exit money “occur instantly”. At Landbay, loan parts are typically sold within a few days. “Our secondary market is very liquid, however the sale of a loan is subject to new investment inflows being available which we cannot guarantee,” said Landbay chief executive John Goodall. RateSetter claimed its

secondary market operates the fastest, with money matched within a day and 99 per cent of requests to take money out processed within 24 hours. Mario Lupori, chief product officer at RateSetter, said this is because the platform spreads risk by using a provision fund, which offers the same level of protection to lenders irrespective of which, and how many, borrowers they are matched to.

“Other platforms protect lenders by spreading risk across individual loans,” he said. “If someone wants to invest, say, £100,000, they have to wait for 10,000 customers to come onto the platform and for £10 to be matched with each one.” A Zopa spokesperson said its method of splitting investors’ money into chunks and matching it across multiple borrowers provides a level of diversification “unrivalled by other P2P platforms”.

NEWS

Why do adviser platforms shun P2P? THE PEER-TO-PEER lending industry has disputed the suggestion that adviser platforms eschew P2P due to lack of demand. None of the major adviser platforms contacted by Peer2Peer Finance News, including Ascentric, Nucleus, FundsNetwork and AJ Bell Investcentre, said they listed P2P lending or crowd bonds as an option for their users. The main reason given was insufficient adviser demand. Charlie Musson, spokesperson for AJ Bell, said the provider’s resources are focused on developing products and services that advisers say they want. He also pointed to HMRC rules that can result in tax charges being levied if a P2P loan is arranged through a SelfInvested Personal Pension (SIPP) operator. “In relation to crowd bonds, we have never permitted unlisted bonds/ equities as they can be more administratively complex and there can be issues with ownership limits, as well as low demand,” Musson added. David Beacham, head of distribution at direct lending investment manager Goji, said he does not think lack of demand is the real reason

for the reluctance to list P2P investments. Rather, he thinks it is because of issues around product structure. “Although P2P lending is Financial Conduct Authority-regulated, the loans themselves aren’t regulated and they don’t have coverage from the Financial Services Compensation Scheme or the Financial Ombudsman Service,” he said. “Advisers don’t tend to want to touch something that is unregulated. “Moreover, platforms are built to hold funds, which have a collective structure and are priced daily. Individual loans are a long way away from that – they don’t have a regulated unit trust structure, they aren’t priced daily and they aren’t easily tradable.” Brendan Llewellyn, co-

founder and director of communications platform Adviser Home, added that adviser platforms tend to take on a custodian role when they list assets, which would effectively result in them acting like the lender in P2P investments. “This wouldn’t be a comfortable position for platforms to be in,” he said. Meanwhile, Sam Handfield-Jones, head of P2P lender Octopus Choice, suggested the biggest challenge for platforms is that the underlying assets in P2P lending vary hugely from one provider to another. “We’ve had 1,000 advisers register on our platform and it’s growing every day, so from our perspective there is demand from advisers for an alternative to equities and cash,” he added.

Even if adviser platforms decide to host P2P lending and crowd bonds in the future, there may be some reluctance to list from the P2P lenders themselves. Julia Groves, partner and head of crowdfunding at P2P bond platform Downing, said adviser platforms all want a fee to host products and P2P providers work on very slim margins. “We would be happy to consider putting our bonds onto adviser platforms in the future, if they decide to embrace Innovative Finance ISAs and crowd bonds, but currently they are set up for large funds not individual investments and the subsequent cost for a £2m to £4m crowd bond means it is not a good deal for investors,” she said.

JOINT VENTURE

Decoding risk

Louis Schwartz, chief executive of Loanpad, explains what investors need to look out for when considering peer-to-peer lending

ITH EVERY investment comes an element of risk, and peer-to-peer investing is no exception. But communicating this risk to investors can be a tough task. However, according to Louis Schwartz, chief executive of soon-to-launch P2P platform Loanpad, there are three key points to consider when talking to investors about risk. “There are three main types of risk associated with P2P lending: platform risk, credit risk and liquidity risk,” he says. “Platform risk is essentially the risk of the platform itself going out of business, while credit risk is the chance of loans defaulting and losing money, and liquidity risk is how long it may take you to exit a platform if you decide you no longer want to invest there.” Schwartz believes that these three risk concerns should be at the forefront of any investor’s mind, and Loanpad is committed to spreading this message among all of its existing and future customers. “I think it's important that investors look at all of those three areas,” says Schwartz. “And that they

have a clear understanding of where they would sit in bad conditions as well as good conditions.” So, how does Loanpad mitigate these three risk areas? 1. Platform risk Platform risk has been making headlines this year in the wake of the Collateral collapse. Investors now know that P2P platforms can fail, and they want to know what will happen to their money in this worstcase scenario. Collateral’s situation was unique as the platform was not regulated by the Financial Conduct Authority, and Schwartz says that he doesn’t expect to see a similar situation within the P2P sector. However, he has put a number of checks and balances in place at Loanpad to further reassure investors.

“We have a back-up arrangement with the multinational accountancy firm RSM and I think they are comfortable to take on that role because of our lending partner model,” he says. “So, in the event that our platform goes into administration or insolvency, or simply decides to close, then RSM would take over the management of the entire loanbook with the aid of all lending partners, in order to repay investors. RSM have agreed to operate on a small fixed percentage basis, so the worst-case scenario for investors is a small reduction in what they would have otherwise received.” 2. Credit risk Loanpad has built a unique model to mitigate credit risk, which involves creating a senior and a junior loan structure where the lending partner retains a higher level of risk. “This means that the security underpinning each and every loan on our platform is greater than can typically be invested in elsewhere,” Schwartz explains. “Furthermore, Loanpad’s investors are spread across every single loan in the portfolio every

day, which has the effect of reducing the impact if any losses occur. So, essentially our lending structure reduces the likelihood of any losses and our daily diversification function reduces the impact of any losses even if they do occur.” 3. Liquidity risk “Every platform has different liquidity terms ranging from instant access to no access,” says Schwartz. “However, all platforms are essentially reliant on other lenders buying investors’ loans to provide the liquidity they may offer. So, to understand the true underlying liquidity on a platform it is imperative to consider the length of the underlying loans.” Typically, P2P loans can range from one year to 10 years. Loanpad minimises the liquidity risk by focusing purely on short-term bridging and development finance loans. “The longest loan on our platform is likely to be no longer than eighteen months, with the average term probably around twelve months,” says Schwartz. These timeframes ensure that no one should be trapped in an investment for multiple years, thus improving the overall liquidity of the platform. And combined with Loanpad’s mitigation of credit and platform risk, Schwartz is confident that investors are kept well-informed and well protected.

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JOINT VENTURE

Building relationships Every successful building project starts with a strong foundation. Jay Patel, relationship director at Wellesley, explains why the same rule applies to alternative lending

T’S NO SECRET that some of the best UK property investments are currently to be found in the north of England. Wellesley is just one of the alternative lenders taking advantage of the Northern property boom, but it is not in the market for short-term rewards. Through a series of lasting partnerships and long-term investments, Wellesley is laying the foundations for ongoing growth in the Manchester area. “Manchester’s potential is great at the moment,” says Jay Patel, relationship director at Wellesley. “There is a very real need for property in Manchester and there is certainly a demand there. And Manchester is a global brand. You recognise it overseas - I dare say partly because of the football club and partly because of the government drive to incentivise overseas investment into the Northern Powerhouse.” In March 2017, Wellesley completed a £39.9m funding package with construction firm The McGoff Group to fund a 368-unit apartment

complex in the region. Situated on the banks of the River Irwell between Manchester and Salford, the Manhattan-style complex will include studio and multi-room apartments, as well as a series of commercial spaces on the ground floor. The project has been split into two phases, with 160 apartments constructed in ‘phase one’ and the remaining 208 apartments created during ‘phase two’. Already, around 90 per cent of the units have been sold to a mix of both onshore and offshore investors. The early success of this project will be welcomed by Wellesley’s property bond investors. But this was no happy accident. Wellesley’s loan officers are well versed in due diligence, and place huge value on choosing borrowers who have a strong track record. In this sense, the McGoff loan represents a typical project for Wellesley. “What lured us toward the project in the first instance was the experience of the developer,” explains Patel. “McGoff are regional

developers who have undertaken a number of transactions of this size and ilk which appeals to us. These guys do this dayin, day-out, so it made sense to focus on someone like this. “We are looking to focus on more regional developers of this size, with healthy balance sheets that are able to stand up should things go awry.” In fact, Wellesley was so impressed with McGoff ’s pedigree and potential that it has already provided funding for another project with the firm, and Patel is confident that they will work together on a number of Manchester-based projects in the future. “In lending there are two types of relationships: a transactional relationship or a relationship lender,” says Patel. “Transaction banking is a one-off thing that does not tend to involve repeat clients. Relationship lending is different in that you actually secure that long-term relationship and you can focus on multiple projects with the

same client, so you gain a greater insight into the business. As a lender, this gives us more control over how they operate, and as the borrower, it gives them a reason to trust us.” Wellesley takes a handson approach to its loans, and it has appointed an independent monitory surveyor who conducts monthly site visits. The lender also maintains its own regional presence in Manchester, allowing Patel to receive ad-hoc updates from the site. This combination of hands-on expertise and relationship building has the dual effect of appealing to both investors and borrowers. As more and more alternative lenders target property developments in the Northern Powerhouse, it is this experience that will ensure that Wellesley remains ahead of the curve in Manchester and beyond.

REGULATION

A rocky road

Regulation has played a key part in the peer-to-peer lending sectorâ&#x20AC;&#x2122;s story to date. With the City watchdog yet to publish its full review, there could be more changes ahead, as Marc Shoffman reports

N THE TWO YEARS since the Financial Conduct Authority (FCA) commenced its post-implementation review of the peer-topeer lending industry, so much has changed. Whereas a mere handful of P2P platforms had

full FCA authorisation in 2016, now the vast majority are approved by the City watchdog. Furthermore, many lenders have gone on to achieve ISA manager status in order to offer Innovative Finance ISAs. Among the biggest

lenders, there are plans to launch a bank and even float on the stock market. However, while platforms focus on building their business, the spectre of the FCA postimplementation review still hangs over the industry. Interim findings were

released at the end of 2016, but the full review is yet to be released despite indications that it would be published during the summer of 2017. Since then, the report has disappeared from the FCAâ&#x20AC;&#x2122;s policy development webpage

REGULATION

and the FCA no longer comments when asked when it will be published. Nonetheless, industry onlookers still believe the full review will be published but is just facing delays due to the big political and economic focus on Brexit. “The sector has somewhat been forgotten since the implications of Brexit for financial services have become clear,” explains Jonathan Segal, partner at law firm Fox Williams. “Whilst the P2P sector is close to my heart, its relative importance in the UK’s financial services sector is still insignificant. “Quite rightly, the FCA has been concentrating its resources on Brexit planning which affects the whole of the UK’s economy. Unfortunately, I think P2P has been an early Brexit casualty.” Meanwhile, Robert Pettigrew, director of self-regulated trade body the Peer-to-Peer Finance Association (P2PFA), believes the delay could be due to the complex nature of such an innovative sector. “I don’t believe that the FCA has forgotten about P2P lending, but that the time they are taking reflects their determination to understand the underlying dynamics of a sector which continues to evolve

and which continues to establish itself in the financial services landscape,” he says. Ian Anderson, chief operating officer of business P2P platform ArchOver, suggests the delay could actually benefit the industry. “While the FCA still needs to continue to enhance their rules of the P2P sector, in light of the

are good arguments on both sides. “I’d also expect the review to look at financial promotions and disclosure. There is significant variation between platforms at present and a standard framework for the sector would be beneficial to consumers to make likefor-like comparisons.” This is supported by

“ I think P2P has been an early Brexit casualty”

uncertainty around Brexit, it’s surely better to come up with recommendations for the industry’s future carefully, rather than quickly,” he says. “Giving the FCA time to prepare for the impact of leaving the European Union will be the most effective way of ensuring the P2P sector can continue to grow and thrive.” Some platforms are hoping the full review goes further in its measures than the proposals in the interim report. Sophie Pearce, managing director of business P2P lender MoneyThing, says she would like to see an appropriateness test introduced. “This is already in place for crowdfunding but not for P2P,” she explains. “Is this needed to better protect consumers? There

Jake Wombwell-Povey, co-founder of P2P investment manager Goji, who suggests there could be enhanced disclosure and appropriateness requirements. ArchOver’s Anderson adds that whatever comes out of the review, it’s important that it doesn’t diminish the unique characteristics that embody P2P of “innovation, flexibility and the provision of a genuine alternative to traditional savings and investments”. He says the FCA will be looking to balance innovation and freedom of choice with trust. “It will want to ensure that robust systems are in place to protect lenders and borrowers,” Anderson explains. “Having stringent borrower vetting

processes and strong borrower relationships is where the real security lies. Whether the FCA reflects that in the spirit of its review remains to be seen.” In the meantime, there have been plenty of other P2P-related issues to occupy the City watchdog. First there was the FCA’s letter to P2P bosses in February 2017 telling them wholesale lending through their platforms could be in breach of regulations. The watchdog said that if a lending business borrows through a P2P platform and lends that money to others, it may be “accepting deposits”. If the borrower does so without the correct regulatory permissions, this would involve a breach of the Financial Services and Markets Act (FSMA) and may be a criminal offence. More recently, property and pawnbroking P2P platform Collateral went into administration. The FCA showed some teeth when it intervened and installed its own firm BDO rather than the platform’s chosen administrator Refresh Recovery, which it said it did to protect investors. Could there be more skeletons in the P2P sector’s closet? “We can’t comment on another platform’s behaviour or performance,” Anderson says.

REGULATION

“Platform behaviour will always be linked directly to the quality of the management team. When it comes to transparency, we could ask ourselves: how transparent are platforms, really? “Take default rates, for example. Do investors really understand them? These rates are notoriously difficult to truly understand, and there’s certainly a chance that we could see them unravel over the next couple of years. “What’s more, there could be other obstacles on the horizon. Smaller platforms, with less backing, could see their funds run out, and any crash on the property market could significantly damage certain P2P platforms.” RateSetter says it is not currently anticipating any specific regulatory issues in the P2P sector. “In terms of the future, we expect the regulatory framework for P2P will evolve over time, with the sector maintaining its leading position in terms of transparency and platforms continuing to innovate,” Laurence Perrin,

there is an argument that the P2P sector could take a lead on it. Pettigrew says the operating principles of the

“ Regulation is not a panacea” head of compliance for RateSetter, says. Rather than sit and wait for action from the FCA,

P2PFA – set up in 2011 as a self-regulatory body for the industry – “continue to send a clear signal that

responsible platforms are willing to embrace standards beyond that which is mandated by regulation.” Pettigrew explains that these standards have set good practice measures in place that could be used across the wider industry. “For example, a standardised methodology for calculating and reporting on bad debt and loan de-

faults which would ensure that net returns quoted by platforms could properly be compared and assessed by investors,” he adds. Similarly, the UK Crowdfunding Association (UKCFA) whose members include P2P bond providers Abundance and Downing – has its own code of conduct for members to follow.

REGULATION

“Regulation is not a panacea,” a spokesperson for the UKCFA explains. “Platforms and their senior management are responsible and accountable for their behaviour. We have always argued that principles-based regulation puts the onus on companies to be 'good actors' rather than hiding behind or simply avoiding one dimensional rules. “To support that we constantly discuss ethical and practical issues of running crowdfunding platforms and will issue our own voluntary guidance where we feel either regulation is not clear enough or does not reflect the unique issues of the sector.” Standard-setting bodies outside the sector also have their eye on the world of P2P. The Lending Standards Board (LSB) – which sets a benchmark for good lending practice in the UK by outlining how firms should deal with personal and small business customers – is looking to expand its remit to P2P. Firms pay to register with the LSB and are regularly monitored to ensure they keep up with the standards. “P2P is pretty well recognised and as it is looking to build its reputation, working to a set of standards is an opportunity to outwardly

demonstrate that it is building trust,” says David Pickering, chief executive of the LSB. He says the LSB has the powers to publicly reprimand firms and can also spot and deal with

the fast pace of innovation, voluntary standards can help fill this gap and help firms to demonstrate that they are acting with integrity. Maintaining good practice is imperative for a confident market

“ The faster P2P platforms grow,

the more likely they are to attract the stern gaze of the regulators issues faster than the FCA may be able to, which is of benefit to the consumer. Wombwell-Povey believes the most successful industry standards are led by the sector as it can lead to better outcomes than standards that are “lumped on commercial entities by state entities like regulators.” However, MoneyThing’s Pearce insists financial regulation can still be more effective. “Voluntary standards certainly have their place, but by their nature they lack genuine teeth,” she says. “Being asked to leave an association is not a strong enough sanction to be a useful deterrent to poor practice. If you want to hold the industry accountable for a standard, then that has to come from the FCA. “However, where regulation lags behind the market, as it inevitably does from time to time due to

”

to blossom.” There are also plenty of established overarching regulatory rules for P2P platforms to follow beyond operating principles and codes of conduct. “As well as the review, the FCA has been working on other topics that are of direct interest to our sector including on assessing creditworthiness in consumer credit and reviewing the motor finance sector,” RateSetter’s Perrin adds. The next big regulatory step could be P2P platforms going public. Funding Circle, Zopa and RateSetter are all rumoured to be considering initial public offerings (IPO). “IPOs will bring more credibility to the sector but no doubt also more scrutiny,” WombwellPovey predicts. Anderson warns an IPO may also place extra pressure on the whole sector.

“Shared ownership results in new sources of capital and adds another level to the lenderborrower relationship,” he says. “But it also places excessive demand on P2P platforms to keep that capital performing. “The faster P2P platforms grow, the more likely they are to attract the stern gaze of the regulators – and rightly so. If this should negatively impact smaller, niche P2P players that are focused on providing quality service on closely managed platforms – this would be unfortunate.” The FCA may have thought regulating P2P was going to be easy when it took ownership of consumer credit in 2014. But you only have to look at the time it has taken for many platforms to become regulated to see how complex the P2P sector has become, with many established brands having waited years for approval. Balancing regulation and innovation is an ongoing challenge for the FCA, particularly in its oversight of the ever-evolving P2P industry. Whenever the full review is released, all P2P stakeholders will be hoping that not too much complexity is added, so that the industry can continue to flourish.

JOINT VENTURE

An egg in every basket Narinder Khattoare, chief executive of Kuflink, explains why he believes investors should continue to diversify within the peer-to-peer space

ARINDER Khattoare does not worry about competition in the peer-to-peer space. In fact, he welcomes it. “There are plenty of deals out there,” says Khattoare, chief executive of P2P property platform Kuflink. “There are plenty of investors out there. And I might be biased, but I know that we offer a very, very attractive proposition.” In fact, Khattoare is so confident about Kuflink’s proposition that he has one very unusual suggestion for would-be investors: don’t put all your money into our platform. According to Khattoare, diversification is essential when it comes to investing in P2P. As the sector grows, P2P platforms are beginning to carve out niche areas of specialisation and this means that there is no longer a ‘one size fits all’ solution for investors seeking to include P2P exposure. Rather than putting all their eggs in one basket, Khattoare suggests that investors spread their money across platforms offering

property, business and personal loans. “Investors are getting to know a bit more about P2P lending,” he explains. “There are risks, but with risk comes high reward. And if you're diversifying your funds, you're minimising your risk.” Khattoare believes that investors are more willing to diversify now after the closure of P2P lender Collateral earlier this year. Now that consumers know platforms can fail, they are less willing to keep all their P2P investments in one place, he says. “There could be a few more casualties going forward in the P2P space,” Khattoare predicts. “Hence the reason why it's important for every investor to diversify their funds.” Of course, Kuflink’s business model is very different to Collateral’s. For one thing, Collateral was not operating with full permission from the Financial Conduct Authority. And despite being in business for just two years, Kuflink’s credentials are impeccable. “We have five per

cent skin in the game, we offer a 20 per cent first-loss guarantee on all investments, we have zero losses on our platform, and most of the people on our board have property experience,” says Khattoare. “We have evolved from property lending whereas most of the other P2P platforms have evolved from friends who were working in investment banking. “If I was coming into the marketplace, I would first of all look at the business proposition,” he adds. “Who are you lending to? What is the calibre of the staff who are working there when doing the due diligence? How experienced are the underwriters? These are the kind of questions I would want to raise. I wouldn't want to deploy

cash on a platform which has got an inexperienced board of directors.” Kuflink has reached a series of milestones this year. Just two years after launching, the platform has passed £20m in lending, with a chunk of this coming from its Innovative Finance ISA (IFISA). Khattoare describes the success of the IFISA as “an extra bonus” and expects IFISA uptake to be even greater next year. “We didn’t envisage getting ISA approved so quickly,” he says. “So from a business perspective that has been a big bonus for us. However, the next ISA season's going to be a big one for us. We didn’t do a big push on the ISA this year because we’re still growing as a team. We will be in a better position come ISA season in 2019.” For now, the company is concentrating on growth, and Khattoare’s message of diversification is already paying off. “Over the last 12 months I've seen a lot of P2P investors come our way from our competitors,” Khattoare says. “And I think the reason for that is because they are diversifying their risk across a number of platforms.” Indeed, this balanced approach is already delivering rewards for Kuflink and its investors.

PROFILE

Sustainable success

Stuart Law, chief executive of Assetz Capital, tells Andrew Saunders how the UK’s fourth-largest P2P lender has managed to achieve both growth and profitability

ITH A 35-YEAR track record in property behind him, Stuart Law is not your typical twenty-orthirtysomething peer-topeer platform founder looking to shake up the competition with a whizzy website and a new app. Instead, he is an experienced and straighttalking professional investor who started converting properties after university, moved into buy-to-let and purpose-built student accommodation and was drawn to the P2P model for his Assetz Capital business, not so much out of ideology but simply because it works. In the aftermath of the financial crash, he explains, his existing property business had a supply of registered investors who wanted something that provided good returns but was less exposed to equity risk than the buy-to-let property deals they had been doing. “We were looking for something property-backed and

high interest, but not buy-to-let,” he says. “Our investors were definitely of the mind that prices [at the time] were more likely to fall than rise. “That led us to funding property development and also lending to businesses more generally who could offer us property security. We trialled it and there was a lot of demand.” Thus in Spring 2013 Assetz as a P2P platform was born. Not only was it the first UK P2P lender to purely offer secured loans, its first deal was the country’s largest P2P transaction at the time. “It was a £1.5m development loan funding a small purpose-built student accommodation block,” says Law. “It showed the appetite there was from investors.” In its first year of business, Assetz lent £19m in total and that first deal set the tone for the firm’s ongoing approach to development funding – big enough to move the dial but also very carefully risk-

managed. “It was very safe – our money only started going out of the door as the bricks pretty much reached the top floor of the building,” Law explains. “We haven’t really changed that

policy – the developers’ money goes in first and our money second. We are not very keen on out-of-the-ground risk, because no matter how much due diligence you do, you just don’t always

PROFILE

know what you will find underground.” In the five years since then, Assetz has accrued over 28,000 investors who have lent a total of over £500m through the platform. That makes it the fourth-largest P2P lender in the UK, albeit a fair distance behind the top trio of Funding Circle, Zopa and RateSetter – but the gap is closing, he says. “We are currently about half the size of RateSetter. It won’t take much more for us to be two-thirds of their size and then maybe it will be the big four not the big three.”

His ambition for Assetz is to become a billionpound-plus lender, a goal which he says is entirely within the platform’s grasp. But Law’s

platforms, he says, but not so many which turn a profit. Being both fast growing and profitable is the key to a sustainable business, according to

“ We could definitely take more

funding in and grow faster, but at what cost? experience as an investor means that he is not only focussed on growth but also on that rather more neglected commodity, profitability. There is no shortage of fast-growing P2P

”

Law. “I have been in business since I was a teenager,” he states. “We could definitely take more funding in and grow faster, but at what cost? We’ve decided to balance – we require

profit which to some degree constrains growth but it makes you more stable and gives you a better shareholder return.” P2P platforms which put growth before profit may be doing so because they genuinely need the cash to fund scale, he says. But profit-free growth can also suggest fundamental problems. “The most common reason is that the model just doesn’t work,” he asserts. “Some businesses just can’t generate sustainable profits.” To prove that its model really does work, Assetz

PROFILE

made a profit of £1m last year and £2m this year. “It will double again next year,” says Law. “It’s a perfectly sensible path that shows we are a proper business – investors want to know that.” Although P2P has been great news for the industry’s investors and borrowers, equity shareholders in the platforms themselves have often had to be a good deal more patient – the prospect of a potentially lucrative initial public offering or sale being their best hope of a decent return in many cases. Law tries instead to treat his customers and shareholders in a more even-handed manner. “Our growth comes through our network of brokers – we look after them and they look after us,” he explains. “But we also have a policy that shareholders should be doing OK as well. We have paid around £46m in gross interest to our investors since we started, and our last company valuation was around £52m. So we now have a shareholder value that is approximately similar to what we have paid to investors in cash interest.” Not only is that approach fairer, he adds, but it also makes for a better balanced and more resilient business. “You can’t just focus on

shareholders – we have seen where that leads,” comments Law. “But you can’t just focus on the customer either. People have tried that and they fail to make profits and become unstable. That’s not a good place to be.” With its HQ just south of Manchester and relationship managers across the UK, Assetz is predominantly a regional lender, and its focus is on prosperous areas outside

“ How can you be a fintech if you don’t do your own tech? ”

the capital. “We’ve got people on the ground from north of Edinburgh all the way down to the South Coast,” Law says. “We remain principally focussed on the regions, because where there’s muck there’s brass. There is plenty of money to be made there but

less focus from Londonbased lenders.” So where are the regional sweet spots for a property-backed lending business? The country divides into three areas, he says. Firstly London, with its dynamic economy which attracts huge global interest but

PROFILE

“

We remain principally focussed on the regions, because where there’s muck there’s brass

can be volatile. “Central London has too many ups and downs and is too reliant on speculation rather than investment when it comes to property. We stay away from that.” Secondly, the economic blackspots which it also avoids. “At the other end are the parts of the country with poor employment, poor infrastructure and poor pay. Income per

head in these regions is not enough to sustain property prices.” Thirdly, “There is everywhere else – all the other cities like Birmingham, Leeds, Liverpool, Manchester. They are evolving and those cities are becoming powerhouses,” he says. It is in those growing second and thirdtier cities that Assetz looks to do business, funding local housing developments and small businesses – provided they have property to offer as security. Assetz used to undertake some debenture investing in green energy, but since the subsidies for wind and solar PV became much less generous, the deals dried up and it has pulled out of that market. Law says it has been a sensible move. “It wasn’t big enough to focus on anymore, and it simplifies all our messaging,” he says. “There are no debentures and no loans against cash flow now. We are a purely propertybacked lender.” Although Law has been a property entrepreneur for nearly all his career, he studied electronic engineering at Sheffield

”

University and started his own accounting software business while he was there. So is Assetz a fintech or a techfin? “We were set up never to compromise the fin,” explains Law. “But we benefit dramatically from the tech – our retail-facing software is what brings the money in. “A lot of fintechs – including some quite big names – are just using other people’s software. But the majority of our systems – our loan management and investment systems, CRM for the guys out in the field – are written in-house. “Not many companies do that, but how can you be a fintech if you don’t do your own tech? I am chief executive but I can talk binary with a techie and know if what they are saying is correct or not.” Assetz is also unusual in that it retains a manual pick option for those investors who still prefer to make their own choices. “We will be maintaining that for the foreseeable future for those that want it. We don’t see the need to alienate those people,” he says.

He is sceptical of the reasons given for the increasingly common autopick-only model used by many large platforms. “I think they are scared of the challenge presented by individual loans,” he comments. “The black box might be simpler but it also hides a multitude of evils.” With all that exposure to the regional economy, has Law noticed much impact from Brexit? “It is affecting the London market to a degree, but in the regions the only thing I suspect is that businesses are being a little bit more careful, holding back a bit more cash,” he says. But as Law points out, Brexit hasn’t actually happened yet and the impact – good or bad will only really start to be felt when it does. “When the laws start changing and we leave or we don’t leave, or whatever happens. If Brexit goes well there will be a substantial property boom and a significant boost to the economy.” And if it doesn’t? “We don’t know how bad a bad Brexit could be. We do see some Armageddon analysis, but while that is possible you would have to think that we will try to avoid that.” Let’s hope that Stuart Law’s voice of experience is right on that, too.

MOTOR FINANCE

Motoring ahead Ever the disruptors, peer-to-peer lenders are now tackling the car finance market. But with so many competitors, how will they set themselves apart? Andrew Saunders investigates

EW CAR SALES may be slowing down a little, while environmental concerns over pollution and CO2 emissions are rising, but the UK remains a country demonstrably in love with its motors. Just look at the numbers – there are no fewer than 37 million vehicles on our roads, 31 million of them cars, with

2.6 million new cars registered last year alone. Registrations have dropped 6.3 per cent year on year in the first six months of 2018, but that is in the context of a historic peak – the end of a four-year period in which over 2.5 million new cars were registered annually, the highest number ever recorded. What’s been driving

those booming car sales? In a word, finance. The rise of low-cost personal loans and finance products like hire purchase (HP), personal contract purchase (PCP) and personal contract hire has made it easier than ever to get a shiny new car for an affordable monthly payment. The vehicle finance market is now worth

a whopping £27.1bn annually, of which £18.4bn is down to consumers financing private car sales. 80 per cent of those personal car loans are funded through so-called PCP finance deals, with the rest mostly via HP. Those figures only account for secured lending in the new car market – add in the

MOTOR FINANCE

8.1 million used car sales every year and the unsecured personal loans which are used to buy many of them and the size of the market increases again. No wonder that the potential of car finance is being eagerly explored by a number of peer-to-peer consumer lenders. “It’s a substantial opportunity,” says Lloyd Collett, senior manager, motor finance, at RateSetter. The number three P2P lender set up its dedicated motor finance division a little over three-and-a-half years ago, he adds. “It’s a big piece of the business and has become

will probably get an older car with a fair few miles on it – the kinds of car you typically have to pay cash for.” The average loan size is comparable with the rest of their portfolio at around £5,500 and because it is unsecured the underwriting is all done with the standard credit checking systems already in place. It also appeals to used car dealers, says Collett. By offering RateSetter loans on older cars taken in part exchange, they can sell cars for a better price, rather than sending them to auction where returns are generally lower. The business is now

“ It’s a substantial opportunity” a core proposition. Our online customer journey makes the process pretty seamless, and for our investors it means we have a diversified loan book.” RateSetter deals largely in unsecured loans for used cars sourced via brokers, and targets customers who are outside the scope of existing car finance providers – a parent buying a first car for their son or daughter, for example. “They are not going to buy a new car, or even a five-year-old one,” Collett explains. “The

looking at getting into the lucrative secured finance market for used cars, too. “We have just ventured into that market, it’s a dealerled product that is not readily available to brokers,” adds Collett. The object of the exercise, he says, is to gain experience of the asset class. “We are looking at how the loan book matures over time. The biggest opportunity is in creating a seamless customer journey. Dealers and brokers both want to deal with the finance provider which

WHAT’S IN A LOAN? THE MAIN TYPES OF CAR FINANCE Unsecured loan – the bread and butter of P2P car lenders, a standard personal loan but used to fund the purchase of a car, rather than a new kitchen or TV. Hire Purchase – a secured loan which funds the entire purchase cost of the car. After a nominal final payment, ownership of the car transfers to the customer. Most popular for used car finance, being trialled by some P2P lenders including Zopa and RateSetter. Personal Contract Purchase – a secured loan which funds only the depreciation of the car over the term of the loan. Once the term is up, the customer can either return the car to settle the loan, or take ownership by paying a balloon payment equivalent to the retail value of the car. The dominant form of new car finance but also increasingly popular in the used market. Personal Contract Hire – pay-as-yougo motoring, effectively a hire car paid for monthly and kept for a set period of time and a fixed mileage allowance. The customer has no option to own the car at any point. Growing fast but from a low base. New cars only at present.

MOTOR FINANCE

offers the easiest pay-out for the customer. That gives us an edge.” In many ways, the car finance market does look like it is ripe for disruption from faster, cheaper and quicker providers. In much the same way that consumers used to get personal loans almost exclusively from their bank, the majority of car finance – new and used – is still point of sale, i.e. offered by the dealership where the car is bought and provided by car manufacturers, finance houses and specialist brokers. And there is no intrinsic reason why P2P lenders cannot get in on the action, according to Neil Faulkner of P2P analysis firm 4th Way. “It looks like a fairly safe new product line and I think it is very likely that some of the platforms will make a success of it,” he comments. “They have muscled in on unsecured and small- and mediumsized enterprise loans, so why not car finance?” But unlike those other markets, there are plenty of rivals, says Adrian Dally, head of motor finance for trade body the Finance and Leasing Association. “There is no lack of competition in the market, rather the opposite,” he explains. “There are at least three new players in the last three

years who have established themselves quickly on the basis of offering a new proposition.”

a group we are investing heavily in digital,” says Lauren Pamma, head of commercial management

“ There is no lack of competition in the market ” Nor are the incumbents unaware of the challenge posed by new entrants to the market or the importance of a slick customer experience. “As

for Black Horse, one of the UK’s largest car finance providers with a network of over 5,000 dealers serving 200,000 customers a year.

“Later this year we will be piloting a new dealer point of sale system and we are doing a huge amount of work to improve the customer experience.” And while car buyers typically now do more research online before they decide what car to buy, Pamma says that the dealer is still a vital link in the chain. “Our most recent survey showed that 45 per cent of people still want face-to-face

MOTOR FINANCE

guidance from dealers when buying a car, and that 80 per cent said they would be unlikely to buy a car without having test driven it first,” she adds. Thus, the classic P2P sales routes – direct to consumer and via aggregator sites – have to be complemented by a route to market that also takes in car dealerships, says Andrew Lawson, chief product officer at P2P consumer lender Zopa. But the

opportunity is there for the right product, he adds. “The number of target customers in our market who are using secured car finance is huge,” Lawson says. “Usually from dealers at present, and what we see is that pricing is high and flat across the board. For a secured loan it should be cheaper. That means that our lower-risk target customers are being over-priced.” So Zopa – a third of whose customers already use their loans to buy a car – is also trialling a secured HP car finance product. Launched in December via a small number of “hand-picked introducers”, it is aimed at the used car market and is being funded for the time being not by P2P investor money but using the firm’s own balance sheet. The key novel risk in car finance as far as P2P lenders are concerned is the valuation of the asset. Offering HP rather than PCP keeps that risk as low as possible – with HP the lender only has to value the car once, when the borrower buys it, whereas with a PCP deal the estimated future value of the car when the deal ends – known as the guaranteed future value – must also be taken into account. Zopa’s aim is to bring all the things that cus-

tomers like about its personal loans already – speed, simplicity and certainty on rates – to secured car finance. And to use its superior tech to deliver a more tailored result – something that incumbents cannot

search for both cars and finance at the same time, providing personalised finance quotes and doing it all in a much more customer-focussed way than is currently possible, says Clayton. “What does the customer want? To

“ The existing car finance industry is antiquated ” match, says Lawson. “It’s a question of having the tech that can do better pricing for individual risk and provide the 21st century customer experience that people have come to expect,” he explains. But P2P lenders aren’t the only eager newcomers with the car finance market in their sights. “The existing used car finance industry is struggling to make the advances seen in other online retail markets,” asserts Jonny Clayton, founder of Oodle Car Finance, a start-up which has attracted backing of over £160m from the likes of KKR and Citigroup. “The customer journey is decades old… For example, you can’t even search for a car based on an individual’s personalised monthly cost.” Oodle is a platform which allows buyers to

find out the best car they can afford on their monthly budget,” he explains. In a world where there are comparison sites for everything from plane tickets to holidays and insurance, it should be easier to make informed choices about car finance, adds Clayton. “Navigating the used car market is a minefield – there is a real opportunity to create a trusted retail brand,” he says. “We’ve had 300 per cent growth this year – the limiting factor isn’t product or sales but hiring good talented people who are aligned with the business.” There is plenty to play for in the car finance market, but there are also plenty of players, both old and new, grappling for the ball. How much of a share the P2P sector can carve out for itself, and which platforms will be the most successful, only time will tell.

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