Peer2Peer Finance News January 2020 by Alternative Credit Investor

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PLAYING BY THE RULES

What the new appropriateness tests look like

IFISA special report supported by

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LITIGATION FINANCE

A new opportunity for P2P lenders

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ISSUE 40 | JANUARY 2020

New wind-down rules present legal quagmire for lenders PEER-TO-PEER lenders have been warned to choose their wind-down options carefully so they don’t get caught out by Financial Conduct Authority (FCA) guidance. Under the new FCA regulations, firms must notify investors of their wind-down arrangements and inform them if it will be managed by themselves or by a named third party. Another option suggested by the new rules is that platforms could hold sufficient collateral to manage a wind-down that is “ringfenced in the event of the firm’s insolvency.” But legal experts and insolvency practitioners warn this approach could be tricky. Dena Chadderton, partner at compliance consultancy Adempi, said the most obvious method to follow that guidance would be to put the funds in a separate bank account from the main business bank account. “But the key is that account still belongs

to the firm so it is not ringfenced in insolvency,” she said. “I am not aware of a legal means to do this.” Before the new rules were introduced in December the guidance suggested firms hold collateral in a segregated account but Chadderton said adding the line about ensuring it is ring-fenced from insolvency has made it harder to follow. Frank Wessely, partner at insolvency firm Quantuma, suggested firms would need to

create a separate trust, legal structure or company if they wanted to ring-fence funds but said issues remain with this approach. “The source of the collateral funds and timing of the transaction will require careful consideration,” he said. “In the event that such funds were set aside from company resources and then within a relatively short period, up to two years, the platform failed, was placed into insolvency and the company’s

creditors suffered financially as a result, the insolvency practitioner would have the ability to potentially challenge the arrangement as a possible voidable transaction. “Additionally, the conduct of the directors would be reviewed which could possibly expose them to some risk.” Mark Turner, managing director of compliance for consultants Duff & Phelps, said firms using this approach would have to ensure the failure >> 4 of the platform

For even more peer-to-peer finance news, go to our website at www.p2pfinancenews.co.uk. With real-time news and exclusive insights, www.p2pfinancenews.co.uk is your indispensable portal into the world of peer-to-peer lending. Go online to sign up to our e-newsletters, for a comprehensive digest of the latest peer-to-peer finance news sent straight to your inbox. You can choose our weekday e-newsletter, which comes out by 7am Monday to Friday, or sign up for our once-a-week version that is sent out at noon on Wednesdays. www.linkedin.com/company/peer2peerfinancenews/ @p2pfinancenews

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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 Features Writer Hannah Smith Features Writer PRODUCTION Tim Parker Art Director COMMERCIAL Alamgir Ahmed Director of Sales and Marketing alamgir@p2pfinancenews.co.uk Tehmeena Khan Sales and Marketing Manager tehmeena@p2pfinancenews.co.uk SUBSCRIPTIONS AND DISTRIBUTION info@p2pfinancenews.co.uk Find our website at www.p2pfinancenews.co.uk 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.

s we enter a new decade, what does the future look like for peer-to-peer lending? This is undeniably a pivotal time for the sector, which has had to comply with regulatory changes and deal with the reputational fall-out of multiple platform collapses last year. Furthermore, two Peer-to-Peer Finance Association members – Landbay and ThinCats – announced last month that they are exiting the retail P2P lending market to focus on institutional money. Investor marketing restrictions now require retail investors to pledge not to put more than 10 per cent of their investable assets into P2P loans. These regulatory changes and the lure of large funding lines from institutional investors have led some to question whether the retail investor still has a place in P2P. It should be noted that the largest players in the market are still open to everyday investors. RateSetter and Assetz Capital are among the platforms that have reaffirmed their commitment to retail investors and the P2P model in the wake of the rule changes. But the signs that everyday investors are getting from the regulator – and the mainstream press – is that they should think carefully before putting their money into the sector. The retail investor is at the very heart of P2P and I certainly think they have a place in the sector’s future, but whether that place will be diminished due to City investors and tougher regulation is yet to be seen.

SUZIE NEUWIRTH EDITOR-IN-CHIEF

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NEWS

cont. from page 1 doesn’t result in whoever is holding the ring-fenced account failing. “It is important to remember there is a difference between guidance and rules, this is just a suggestion,” he said. “This approach is expensive as it involves stripping capital out of the firm.”

P2P lenders appear to have adopted different approaches to their winddown plans. Funding Circle, Zopa and Lending Works all say they would transfer operation of the platform and loans to a third party – Target Servicing – in the event of a wind-down, which could

charge an additional fee to cover its costs. Assetz Capital said it has a standby plan to repay lenders and close the platform, which would be managed by RSM Restructuring Advisory in the event of a wind-down. It said the income it

receives under the loan agreements is “more than sufficient to cover the expected costs of winding down the loanbook”. Meanwhile, RateSetter has said it will manage a wind-down itself but investors may have to pay a fee to fund the costs of closing the business.

Untapped potential for P2P in Scotland THE SCOTTISH peerto-peer lending market is “under-served” and “under-represented”, according to industry experts, as England-based P2P platforms start to expand into the country. RateSetter, Assetz Capital, ThinCats and The House Crowd are just four of the national lenders who have expanded their presence in the country. Scotland's only homegrown P2P lender is LendingCrowd, which has demonstrated strong growth over the past year. The Edinburgh-based firm has expanded its team and secured a £18.75m funding deal with Scottish and Dutch investment banks. Meanwhile, recoveries specialists Wrights Recoveries told Peer2Peer Finance News recently that it established a base in Scotland due to rising demand and the lack of coverage.

“Scotland has been very under-represented,” said Stuart Law, chief executive of Assetz Capital. “It’s getting better now but the banks don’t seem to operate much in Scotland, so it’s massively underserved as a market.” Frazer Fearnhead, founder and chief executive of property lender The House Crowd, agreed that Scotland is an underserved market. “The mainstream lenders retrenched in 2009/10 to markets they felt were less risky,” he added. “The different legal structures in Scotland also made more mainstream

lenders cautious. However, there is an opportunity for sensible lending to be done that generates a good return for investors as long as they operate within the legal system.” However, Scotland’s potential appears to be weighted towards the borrower side, with business financing, property-backed lending and consumer finance forming the backbone of the lending community. LendingCrowd has built up a £72m historical loanbook by offering lending services to the hospitality, manufacturing and e-commerce sectors, while Assetz Capital has used its Edinburgh office as a base from which to expand its care home loan business. However, Law pointed out that while there is a huge trove of borrowers

north of the border, “we don’t have a hotspot of investors who come from Scotland.” “People in England are funding Scottish loans primarily,” he said. “We could target investors there but in terms of our marketing we’re agnostic on our location.” From a borrower’s perspective, Fearnhead said that “borrowers are looking for alternative lenders who are prepared to put boots on the ground and come and see them on their own turf,” whereas The House Crowd’s investors are primarily looking for better yields, regardless of their location. “Scotland is underserved and needs new lenders,” added Fearnhead. “Independence might change things, but an independent Scotland will still need investment.”

NEWS

How are the largest platforms applying the new P2P investor requirements? INVESTOR marketing restrictions have become a requirement for the peerto-peer lending sector but new customers will have different experiences depending on which platform they choose. Under the new Financial Conduct Authority (FCA) regulations, which came into effect on 9 December, all new investors must complete an appropriateness test to ensure they understand the risks of P2P lending. Additionally, customers must complete a self-certification questionnaire, to identify whether they are a sophisticated, highnet-worth, advised or retail investor. The retail investors must then pledge not to invest more than 10 per cent of their portfolio in P2P loans – a so-called restricted investor. Analysis by Peer2Peer Finance News of the tests offered by four of the largest P2P lending platforms – Funding Circle, Zopa, RateSetter and Assetz Capital – shows a variety of approaches. Funding Circle, Assetz Capital and RateSetter all ask new users to select their investor profile first,

while Zopa invites users to do so after the test. The investor descriptions are different depending on the platform. RateSetter and Assetz Capital both offer the options of being self-certified sophisticated, certified sophisticated, high net worth or restricted. Zopa’s categories are experienced, high net worth or less experienced, while Funding Circle’s options are everyday, sophisticated or high net worth. Each platform has seven questions in their tests that cover issues such as the lack of Financial

Services Compensation Scheme protection and the other risks involved with P2P lending. Investors will need to get all questions correct with Funding Circle, Zopa and RateSetter but Assetz Capital users only need a 70 per cent pass rate, although there are some questions that must be answered correctly. Zopa, RateSetter and Assetz Capital customers are told which questions they have got wrong and given extra information as they go along, while Funding Circle has split its test into four categories and you are only told at the end if you got a question incorrect.

RateSetter gives users a second chance to answer a question they have got wrong before moving on and in all cases investors will still need to go back and redo any questions that were answered incorrectly. Andrew Holgate, chief executive of fintech consultancy Equitivo, said there are no exact requirements for how to set out the tests. “As with many rules set out by the FCA, the onus is on the platform to ensure it sets out policies that are appropriate to the size and complexity of the business and the product being offered, including that there is a risk of loss,” he said. “A platform is obligated to ensure its customers understand the risks of the types of investments it offers. “A platform that only offers direct P2P investments may have a less taxing test than one that offers multiple ways to invest. “Therefore, there is no guidance on pass rates. It is down to the platform. Could this lead to a scandal? I'm sure the FCA will be investigating platforms and their tests very closely in the coming weeks.”

NEWS

Local bank partnerships could be key to P2P growth PEER-TO-PEER lenders have been urged to consider models that combine bank partnerships and local lending, to grow their businesses in the wake of the new regulations. Rebecca Dury, a partner in the corporate team of City law firm Ashfords, said the firm is seeing more lenders coming to market that are sitting between the high street bank and P2P models. “These lenders are accessing credit via block discounting facilities from banks with specialist sector experience and are then able to utilise these funds

to lend, typically in specific areas where the lenders have local real estate knowledge and insight,” she added. She cited an example of this as Exeter Finance, a private lender in the South West of England, which uses banking facilities to lend to local property development projects. “For platforms to adapt and be successful in this newly regulated environment, perhaps the key to success is adopting an ethos which is very much geared around meeting customers face to face, as opposed to via a more complex digital

platform, so you can work with the right borrower with the right quality of security assets, protecting your investors’ interests,” Dury added. “We expect to see more banks offering these block discounting facilities in future, as the model of national and international funders providing finance to specialists with local industry experience is clearly effective in providing a sustainable business model.”

Many P2P lenders have regional business development managers but the only brand with physical branches is rural business lender Folk2Folk. “We launched the concept of ‘The Local Lending Movement’ in January 2018 to embrace our wider ecosystem and communicate the value of ‘lend local’,” a spokesperson said. “Our branches are part of that. We do not rely on them for loan origination, instead they have evolved into local relationship points; places where we can connect with new and existing customers and contacts face to face.”

‘Big three’ show there is more than one way for P2P to evolve THE BIGGEST peer-topeer lenders in the UK – Zopa, Funding Circle and RateSetter – have taken decidedly different approaches to their growth. The world’s oldest P2P lender, Zopa, has been focused on launching a digital bank to complement its consumer P2P lending business. Meanwhile business lender Funding Circle has launched an initial public offering (IPO) and expanded internationally, while RateSetter has maintained its focus on retail investors and its diversity of loan types but revamped its investment product range.

However, scaling up does not come without its challenges. Zopa struggled to raise the funding it needed to gain a full banking licence, completing the deal just in time for its regulatory deadline. Funding Circle’s share price fell to less than a quarter of its IPO value within a year of its listing despite strong revenue growth and RateSetter is only now beginning to approach profitability. All three brand names have revised their investor interest rates downwards over the past few months. Despite these hurdles, analysts have praised the industry leaders for

their strikingly different approaches to scalability and noted the untapped potential that still remains for P2P lenders of all sizes. “[The ‘big three’] are all pursuing very different models,” said John Cronin, an analyst at stockbroker Goodbody. “While the sector is in the spotlight in a very negative context right now, I don’t think that’s a reflection of the lack of growth. Yes, defaults have risen and like any industry it is maturing, and I guess some of the lending and funding they’ve provided has been of the high-risk variety, but I don’t think they’ve peaked in terms of their viability.”

Neil Faulkner, managing director of P2P analysis firm 4th Way, added that Funding Circle’s “rapid growth” is now behind it and the platform “will become profitable”. On Zopa, Faulkner said that its bank launch has ensured that it “likely has a good path to further strong growth in the coming years”, while RateSetter “will probably grow in spurts as and when it successfully tests new product lines”. “Growth will slow for the big platforms, but paths are still available for substantial expansion,” Faulkner added.

PROMOTED CONTENT

Investing in the North West property market via P2P The House Crowd founder and chief executive Frazer Fearnhead explains why the North West is particularly attractive for peer-to-peer property investors

VER THE PAST FIVE years, various legislative changes have made it virtually impossible for a private investor to build a profitable buyto-let portfolio. However, property is still undoubtedly viewed as an attractive asset class. What has changed is the way people can invest in it. With the advent of peer-to-peer property lending, people can now invest in property with less capital outlay for potentially better and more consistent returns. They can also enjoy better security, greater liquidity and tax-free income via a self-invested personal pension or Innovative Finance ISA –all without the hassle of dealing with tenants, burdensome regulations and maintenance issues. If people can rid themselves of the anachronistic assumption that they need to own an asset to benefit from it, they should appreciate that P2P property lending offers a much better investment than buy to let ever did. However, even when you are lending against property rather than purchasing, the value of the secured asset and the underlying property market are paramount to the overall success of your strategy. The House Crowd provides development finance throughout the UK, but our focus is predominantly on funding developers in the North West who are building good quality, affordable homes in areas with strong demand. Why do we focus on the North West? We are based there, so our

view that it’s the best place to invest may be biased, but it’s supported by research from Lambert Smith Hampton, which revealed that 68 per cent of property investors see it as the best place to invest. Property values are less affected by Brexit and the vagaries of foreign capital. Capital values are forecast to increase between four and five per cent per year, over the next few years. Whilst that doesn’t directly affect someone making a P2P development loan, it does mitigate the risk of the development project failing as it has not achieved its predicted sales prices. My top three property investment areas in the North West: Stockport: The commuter town boasts direct rail services to Manchester, Liverpool, Birmingham and London. With a £42m transport interchange under construction and £1bn being invested across retail, residential and commercial sectors, Stockport is establishing itself as a regional business hub.

Altrincham (including Bowdon and Hale): Altrincham town centre has experienced a fantastic regeneration over the past seven years thanks to the pioneering artisan food and craft market. Regardless of that, entrepreneurs, footballers and celebrities have gravitated towards the area for decades. It’s not cheap: the area has some of the most expensive roads in England outside London. However, with prices increasing steadily year on year, it’s a safe bet. Wythenshawe: Wythenshawe’s position close to Manchester’s ‘Airport City’ is a huge bonus. There is massive infrastructure investment and many companies are moving there. House prices are predicted to grow by as much as 36 per cent over the next five years. The House Crowd is based in Altrincham and has a strong team which knows the local markets very well. This focus on the North West gives the firm an unparalleled level of expertise.

JOINT VENTURE

Compounding expectations

The House Crowd’s founder and chief executive Frazer Fearnhead explains why investors are turning away from cash ISAs and stocks and shares ISAs in favour of property-backed Innovative Finance ISAs

ROPERTY-BACKED Innovative Finance ISAs (IFISAs) are not the only way for retail investors to access the opportunities in the UK housing market. For centuries, people have been investing in property directly by buying houses either to resell or rent; and by buying up stocks and shares which are linked with the property sector. But according to Frazer Fearnhead, founder and chief executive of The House Crowd, it is property-backed IFISAs that currently represent the best value for money – especially when you look at the effects of compound interest. After all, property prices have stalled since the housing market crash of 2008, and stocks and shares are relatively inconsistent, while cash ISA rates have decreased. “People want to get a better rate than cash ISAs and a more consistent rate than stocks and shares ISAs,” says Fearnhead. “To really benefit from compound interest, you need to invest regularly and for the long term. “It’s not unheard of for stock market investments to fall by 10-15 per cent in a single year, so if you have £100,000 in your fund, and it falls by 15 per cent, that means that your returns the following year are only based on £85,000. You have to have several years of significant gains to get back up to where you once were.”

By contrast, property-backed IFISAs offer relatively consistent returns within a tax-free wrapper, which means that investors can effectively earn interest on their interest, year after year. This is why Fearnhead himself has chosen to place the maximum value of £20,000 into the IFISA from his personal funds. “My choice as an investor would be to opt with safe, steady returns with asset-backed security,” he says. “It’s much less hassle than having a buy-to-let property with tenants and a variable rate of return, especially when you are no longer likely to see high returns from capital growth.” Fearnhead is not the only one taking advantage of the benefits of property-backed IFISAs. Over the past couple of years, Fearnhead has

seen “very large amounts of money” being transferred into The House Crowd’s IFISA from other ISAs – primarily cash ISAs and stocks and shares ISAs. This is down to the fact that the platform offers higher rates than cash ISAs, more consistency than stocks and shares ISAs, and instant diversification across a portfolio of property loans. The platform’s new auto-invest products allow investors to withdraw their money with just 30 days’ notice. According to recent data from Zoopla, it takes an average of 50 days to sell a house – and that doesn’t include the extra time required for legal checks and conveyancing. “In essence P2P property-backed ISAs allow you to invest in property as a bank does where you’re funding a loan secured against the property, you get a good rate of return on it, it’s generally a lot more stable than actually purchasing the property, and when you want to get out of it you can get your money back within 30 days,” Fearnhead explains. “You’d be hard pressed to buy a house with £20,000. With an ISA your money is diversified across a number of different properties so if something does go wrong it is likely to affect only a small part of your portfolio.” Diversification, liquidity and consistent returns all within a taxfree investment wrapper – it’s easy to see why the IFISA appeal is growing.

LITIGATION FINANCE

So sue me

Litigation finance is increasing in popularity, so it’s no surprise that peer-topeer lenders are getting in on the act. Emily Perryman reports

NCE THE PRESERVE OF hedge funds and private equity houses, peer-to-peer lenders are opening up the litigation finance sector to individual investors – and the returns are not to be sniffed at. AxiaFunder launched in January 2019 specifically focusing on litigation funding, while P2P business lender Money&Co is now expanding into the space. There is also the Just ISA, managed by Northern Provident Investments. Advertised returns are highly attractive, ranging from eight per cent to a whopping 30 per cent. Litigation finance is a very risky investment, but the platforms

claim they are offering investors a potentially lucrative opportunity that is uncorrelated with other asset classes. What is litigation finance? Litigation finance providers offer funding to claimants who can’t afford their legal fees. If the claimant settles or wins their case the provider takes a share of the costs and damages, but if they lose the claimant doesn’t owe the funder anything. Litigation funding became accepted into UK law around 15 years ago, and over the past five years it has developed into a mainstream funding option

for people involved in litigation. There are a whole host of litigation funders in the market and, as the sector picks up speed, this has caught the eye of P2P and crowdfunding platforms. “Litigation finance is increasingly in demand on both the supply and the demand side, i.e. from both investors and from claimants and their lawyers,” says Louis Young, managing director of litigation funder Augusta. “For investors, we represent a strongly yielding asset class, uncorrelated to traditional securities, which is important in a highly volatile, low yield environment. For claimants and their lawyers, litigation funding offers a

LITIGATION FINANCE

risk management tool, providing the opportunity to seek redress without taking on the financial burden should the claim fail.” Neil Faulkner, managing director of P2P comparison site 4th Way, suggests P2P platforms are attracted to the sector because the risk-reward profile of litigation finance is easy to understand. “If you focus on one very specific niche you will more quickly build a portfolio of those kinds of loans and improve your underwriting more swiftly,” he says. Investment opportunity Individual investors who are interested in dipping their toe in the litigation finance sector currently have three propositions to choose from. AxiaFunder enables sophisticated investors to back individual litigation cases. Cases are structured as Innovative Finance ISA (IFISA)eligible bonds or equity-based

investments. There was one case open for investment at the time of writing – a professional negligence case offering a return of 61 per cent. AxiaFunder recommends investors build a portfolio of 10 cases and says potential returns on a portfolio basis are 20 to 30 per cent. Just, an ISA managed by Northern Provident Investments, offers an eight per cent return, but unlike AxiaFunder, investors don’t pick individual cases. Investors put their money into a five-year bond and the company’s directors decide which cases it will back. Money&Co has just launched into the space and, as of the time of writing, hasn’t yet listed a litigation finance loan on its platform. Money&Co says investors will receive a return of eight per cent per annum. Aside from the high returns on offer, litigation finance could be attractive to investors seeking diversification in their investment

portfolio. Cormac Leech, chief executive of AxiaFunder, says litigation finance is uncorrelated with stocks, property and credit and unaffected by macroeconomic risks. “In addition, each case is almost entirely non-correlated with every other case, so when investors add new cases into their portfolio they get a rapid reduction in the volatility of their portfolio,” he states. “Investors probably need at least 10 cases to get a decent level of diversification.” Risk vs reward Litigation finance is a high-risk investment because there is a strong chance the claimant will not win their case. Leech says around a quarter of cases won’t be successful and the impact on investors depends on how the case is structured. In some instances the majority of the principal is protected so investors will only lose 20 per cent of their capital. In other

“ Litigation finance is increasingly in demand

”

LITIGATION FINANCE

cases – typically the ones with the highest return – investors will lose all of their money. “Statistically about 80 per cent or more of cases will settle before trial,” says Leech. “If the case goes to trial, the claimant typically wins 50 to 55 per cent of the time. Essentially, 80 per cent of the time you’re getting a good return, however 10 to 20 per cent of the time cases go to trial and the risk of losing is higher. “Often we will structure our funding agreement so that the rate of return increases if the case goes to trial in order to compensate for that extra risk.” Litigation funders put a lot of work into analysing cases to try to minimise the risk of cases failing. They look at the legal merits of the case, the quality of the legal team, the attitude of the claimant, the risk versus the return, and whether the claim is of a high enough value relative to its costs. Cases also need to have after-the-event insurance in place, which covers instances where the claimant loses and is required to pay the defendant’s fees. The insurance policy ensures investors won’t lose more money than they put in. “Investors should expect, as always, that the people behind the platform have plenty of experience,” says Faulkner. “Here, they need solicitors with a great deal of experience in litigation. Preferably, the P2P lending platform also has experience in the credit-risk space.” On average, funders take on one in 10 cases put before them, however despite going through a stringent due diligence process the risk of failure is still high. Augusta’s long-term success rate is around 70 per cent on more than 220 individual cases. “Professional funders with a

“ About 80 per cent

or more of cases will settle before trial

”

track record of success over a number of years are able to offer strong returns over a portfolio of cases,” says Young. “The model is however non-recourse, so any individual case can fail, leading to a total loss for funders.” Alex Jakubowski, a partner in Clarke Willmott’s commercial litigation team, says that even

the strongest claim with the best lawyers and the most bullish advice can still lose. “Any solicitor worth their salt will tell you that if the witnesses don’t perform on the day they can look unreliable or dishonest and the judge just won’t believe them,” he warns. “A case can be lost simply because the witness has a bad day in court.” Issues can also arise when trying to recover damages from the defendant. Jakubowski points out that even if the defendant appears to have sufficient money on paper, published accounts can be misleading. Moreover, some

LITIGATION FINANCE

“ Professional funders

with a track record of success are able to offer strong returns

”

litigation can take years to conclude, during which time an unscrupulous defendant could move their money offshore or spend it. “For the right claimant, litigation finance is an excellent resource to have available to them,” Jakubowski adds. “It can provide access to justice for claimants who can’t otherwise afford it and can be a potentially lucrative investment for those who are willing to back the claim. The underlying principles are the same as for any investment: do your due diligence and understand your investment.”

Future expansion Most experts think the litigation finance sector will continue to grow, thereby attracting more P2P platforms to the space. Nicola Horlick, founder of Money&Co, says she expects litigation finance to be a major source of finance for legal firms in the future. And unlike other commentators, she doesn’t think it is particularly high risk for investors. “In fact, it is significantly lower risk than making a working capital loan unsecured to a small business as many other P2P platforms do,” she argues.

Tony Lewis, dispute resolution partner at law firm Fieldfisher, suggests there is more scope for P2P platforms to enter the sector because platforms are leaner than traditional funders and are able to take a smaller cut from claimants. This means they can consider funding the smaller claims that traditional funders are not interested in. “I think the sector will continue to expand because there will always be people who are willing to trade risk – who can afford legal fees but who would rather share the risk with someone who is prepared to fund their claim,” he says. AxiaFunder’s Leech adds that there are lots of meritorious cases around that cannot progress to trial because of lack of funding, or which go to trial but with excessive stress and risk being carried by the claimant themselves. “Anecdotally, almost every adult knows someone or some SME that has suffered clear wrongdoing by a large company or wealthy individual with deep pockets,” he says. “For the sector AxiaFunder is focused on, we believe the addressable market is £2bn to £5bn annually. In the very long run, arguably, ready access to litigation funding capital will make the market start to shrink as would-be defendants reconsider their positions – a positive externality for society.”

JOINT VENTURE

The scales of justice

Just over a year after the platform’s launch, Cormac Leech, chief executive of AxiaFunder shares its plans to scale up…

HEN AXIAFUNDER launched in 2018, it pledged to bring innovation to the world of litigation funding. Just over one year later, it is still evolving. The litigation financing platform has just closed its largest funding campaign to date, successfully raising £550,000 for a commercial fraud case. It took just six weeks and 47 investors to reach this key milestone. “As we do larger cases, we start to become more relevant to institutional funders as they can now deploy more capital into each case,” says Cormac Leech, chief executive of AxiaFunder. As well as increasing the value of its cases, AxiaFunder has also seen a rise in the frequency of its cases over the past couple of months. The platform funded two cases in January – which Leech described as “minimum viable product cases”. In September, the platform stepped up its goals with a £40,000 case; followed by the £550,000 commercial fraud case, and £70,000 for a professional negligence case, which is just about to close. Behind the scenes, AxiaFunder reviews around 20 cases for every one that is presented to investors. “Next year we expect to launch at least one case per month on the platform,” says Leech. “Being able to fund cases requiring over £500,000 is a significant proof point for us. It increases our relevance, since it is difficult to conduct meaningful commercial litigation in the UK for

less than a few hundred thousand pounds, unless the legal team is working on a full contingency basis.” At the time of writing, AxiaFunder had approximately £3m worth of funding requirements in its pipeline, covering seven “pre-vetted” cases, and once they go live on the platform they will be available to both retail and institutional investors. While there has been a recent trend for alternative lenders to shift towards institutional funding and away from the retail model, AxiaFunder will always seek to be accessible to both types of investor. “We expect there will be cases that will be more attractive to retail investors than institutional investors and in any event, having diversified sources of funding makes AxiaFunder more resilient,” Leech explains. Of the 47 people who funded the £550,000 case, around two thirds were previous investors. There has also been “very high demand” for the platform’s Innovative Finance ISA (IFISA), which appeals to

savvy investors who want to shield their returns from taxation. And AxiaFunder’s returns are not insubstantial. The platform’s first case returned an impressive 43 per cent to investors, and its other cases are targeting up to 70 per cent per annum with the possibility of investing tax-free via an IFISA. While the returns reflect the higher level of risk involved, as the platform scales up it expects to be able to offer more diversification options for investors, while also hiring more legal professionals to help with the rigorous due diligence on potential new cases. Of course, capital is at risk and returns are not guaranteed – investors should bear in mind that there is a possibility they can lose all of the capital invested and, in remote cases, could lose more than their original investment. To fund these plans, AxiaFunder will soon launch a Seedrs fundraising campaign to raise working capital which will be used to build the team. In another sign of the platform’s innovative outlook, it will also work to develop a portal through which it can leverage input from a group of accredited case assessors on a remote basis. “Our vision is to be able to tap into a large number of carefully vetted and incentivised litigation experts, distributed around the country and internationally,” says Leech. “This will enable us to profitably scale the business.” With plans like this, the outlook for AxiaFunder looks positive.

EVENT

Educating the adviser community

Peer2Peer Finance News was delighted to host the P2P Lending Zone at

this year’s VCT & EIS Investor Forum, where an array of expert panelists enlightened the audience about the benefits of the P2P industry

HY ARE SOME financial advisers wary about recommending peer-to-peer lending? That is a question that many in the P2P industry have asked and one that Peer2Peer Finance News hoped to address at this year’s VCT & EIS Investor Forum. We hosted a P2P Lending Zone at the event for the very first time, giving peerto-peer lenders the opportunity to speak in detail about the sector to a room full of financial advisers, wealth planners and sophisticated investors.

A big thank you to our sponsors RateSetter, Somo, Relendex, ASMX, Octopus Investments and FutureBricks, and of course to our event partners Angel News, who hosted the VCT & EIS Investor Forum. Our first panel of the day focused on debunking the myths around P2P lending. Mario Lupori, chief investments officer at RateSetter, kicked off the proceedings, addressing one of the most common concerns about P2P: what happens if a borrower does not repay their loan?

“[Loans] have got a very good track record of being a good investment,” he explained. “If you can price for defaults, you can price for risk. If you predict risk, you can price risk. If you can price it, you can get a return.” However, he noted the wide diversity of business models in the market and suggested that advisers and investors consider the platform’s liquidity, track record of credit management and diversification of loans. There was a debate on the panel about whether P2P is an asset class.

EVENT

Charlie Taylor, head of Octopus Choice, said that he saw this a “red herring” among advisers. “It’s not an asset class, it’s more a technology and to have to categorise it collectively as an asset class, I think misses out on the investment opportunities and ignores the important differences between business models,” he added. Conversely, Jeffrey Mushens, technical policy director at The Investing and Saving Alliance and RateSetter’s Lupori both said they thought P2P is an asset class, with Mushens calling for it to become a normal addition to an investor’s portfolio alongside equities and bonds. The panel also discussed the importance of managing expectations on liquidity. David Bradley-Ward, chief executive of blockchain-powered secondary market ASMX, said he

Mario Lupori, chief investments officer at RateSetter

“

Diversify by platform and type of loan

”

thought that liquidity “is going to become more of an issue” and suggested that platforms should embrace technology to boost liquidity, as well as working with other partners such as institutions, traders, brokers and debt investors. Our second panel of the day focused on P2P property lending. Arya Taware, chief executive of FutureBricks, explained how P2P property lenders like her firm were filling a gap in the market for smalland medium-sized housebuilders that typically struggle to access mainstream finance. From an investor standpoint, she noted that retail investors are able

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Panel (L to R): P2PFN founder Suzie Neuwirth; Louis Alexander, chief executive at Somo; Michael Lynn, chief executive at Relendex; Peter Swinburn, partner at Clarke Wilmott; and Arya Taware, chief executive at FutureBricks

EVENT

“ Liquidity is going to become more of an issue

”

Panel (L to R): P2PFN founder Suzie Neuwirth; David Bradley-Ward, chief executive at ASMX; Charlie Taylor, head of Octopus Choice; Jeffrey Mushens, technical policy director at Tisa; and Mario Lupori, chief investments officer at RateSetter

“ It’s also important to look at the track record of the borrower

”

to benefit from higher returns than you would get from a bank account and with less volatility than stocks and shares. Fellow panelists Michael Lynn, chief executive of Relendex, Louis Alexander, chief executive of Somo and Peter Swinburn, commercial property lawyer at Clarke Wilmott, all highlighted the attractiveness of loans secured on property. “When you lend over residential bricks and mortar or buy to let, worst-case scenario, you get your money back if you have to repossess the property,” said Alexander. “It provides a high level of comfort and security for investors.” So what should investors and advisers look for within the P2P property space? The type of security is important, Taware explained. “Is it first charge or second

charge? What’s your risk appetite? What’s the loan to value?” she said. “It’s also important to look at the track record of the borrower. The more information given by the platform, the more informed a decision you can make.” Swinburn noted that certain parts of the property market are more challenging than others. “Retail is very, very tough,” he said. “Offices – depending on where you are in the country – is a tough gig at the moment. “I think you need to be very careful with what you’re investing in. You need to spend a bit of time looking at what due diligence has been done and what the financial metrics look like. “Valuation is obviously crucial,

Arya Taware, founder and chief executive, FutureBricks

establishing what the yield and return is going to be and understanding what due diligence has been undertaken on the asset beforehand to make sure you know what you’re firing at.” Alexander said that investors and advisers should give careful consideration to the background of the people running the business. “I don’t want to dwell too much on Lendy, but when they started, they started on boats and then they moved into property and for me, their modus operandi was caveat emptor, stick anything on the platform, investors will go for it because it’s property backed, but they didn’t in my opinion know what they were doing when it came to property investment,” he said. Meanwhile, Lynn added that retail investors are missing an opportunity if they don’t participate in the better-quality P2P platforms. “The institutions are funding P2P platforms behind the scenes every day, on a large scale,” he said. “Zopa and Funding Circle, two of the largest platforms, are 50 per cent funded by institutions. If these institutions thought that, as an asset class, this was not an acceptable destination for their funds, they would not be participating in this area. “They go for diversification, so I would suggest to every retail investor, diversify by platform and type of loan, and that will work out for you in terms of a riskadjusted return.”

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JOINT VENTURE

Under development

Jay Patel, business development director at Wellesley, takes us behind the scenes of one of the platform’s development loans…

HE UK-WIDE SHORTAGE of low-cost housing has been well documented in the press by politicians, housebuilders and frustrated first-time buyers. But in real life, the push to develop lowercost homes has been led by the alternative lenders who are willing to source and fund the sorts of properties that people will actually want to buy and live in. Over the past couple of years, Wellesley has shifted its focus on this under-served market by investing in mass-market homes in desirable areas, which will appeal to first-time buyers and downsizers alike. “We’ve spent a lot of time looking around demographically different areas, taking into consideration figures such as the average age of an area and the average growth net migration into an area so we can actually understand who is moving there,” explains Jay Patel, business development director at Wellesley. “The majority of our loanbook is flats and houses with an average value of below £300,000, and we prefer to look at properties based around the outskirts of provincial cities such as Manchester and Birmingham.” A 213-property development in the Greater Manchester area offers an at-a-glance look at what a typical Wellesley loan can do. The Elisabeth Gardens project is based in the town of Reddish, near Stockport. 51 new-build houses and

162 new flats are being created in an old mill, in an area that is in need of more lower cost housing. “This particular project is being managed by a developer that both my head of lending and I have known for some time,” explains Patel. “We were presented with this particular project when around half of the properties had already been sold to both buy-to-let investors and owner-occupiers.” For Patel, the quality of the developer is the first thing that he will look at when considering a new development loan. Then he takes a look at the scheme itself, the

market, the construction process, and the existing demand for this particular type of housing. “We worked through that process,” Patel says. “And we concluded that they are building lower cost housing in an area that really needs lower cost housing. What’s more, the project was presold and de-risked to the point that we were selling to high-end investors and owner occupiers, and not just buy to let.” At least 170 of these units were scheduled to be handed over before Christmas 2019, along with all furniture packs and white goods installation for the new owners. As a lender, this means a timely return of the capital and interest. But as a platform which is dedicated to promoting low-cost housing options in the UK, it is particularly satisfying to know that dozens of families will spend their first Christmas in a brandnew home. As for 2020 and beyond, Patel says that Wellesley is set to maintain its focus on lower-cost homes. “There is more than enough demand for us to achieve scale, and more than enough loan facilities developers out there who are building this type of product,” he says. “I’d personally like to start focusing on some of the larger schemes, and to further diversify our loanbook. But in 2020 I see us continuing exactly what we are doing. “It’s working well.”

IFISA

Advisers and ISAs

Will financial advisers drive the next phase of growth for the Innovative Finance ISA? Hannah Smith reports

HE INNOVATIVE Finance ISA (IFISA) has been slow out of the starting blocks since its 2016 launch. But with growing investor awareness of the product, it is finally gaining traction, boasting £1bn in assets under management last year. To get to the next stage of growth, the IFISA could use the support of financial advisers,

but research suggests they haven’t embraced P2P as warmly as the industry might have liked. Intelligent Partnership, which provides research to advisers on the alternative investment sector, will soon publish a survey of more than 50 advisers on their perceptions of P2P and the IFISA. The findings, seen by Peer2Peer Finance News, reveal that less than 20 per cent of

advisers feel ‘very familiar’ with P2P, while 15 per cent had not heard of the IFISA at all. Advisers are not obliged to consider P2P lending in their recommendations to clients, but P2P is undeniably a growing part of the investing landscape and some are taking an interest. “We know that there is a core audience of advisers that do use P2P, there

IFISA

is interest in it, but advisers do see hurdles,” says Intelligent Partnership’s research manager Lisa Best. “They think it is too risky or too difficult because it doesn’t fit into their standard risk profiling and due diligence box.” She noted that the new Financial Conduct Authority (FCA) rules, which prevent retail investors putting more than 10 per cent of their investable assets in P2P, will present an opportunity for advisers. Around 43 per cent of independent financial advisers (IFA) surveyed said they expected their use of alternative finance to increase over the next two years. No press is bad press But there are some factors that have been putting them off, such as recent negative headlines for the industry. An FCA risk warning, a couple of firm failures and a minibond marketing ban have reflected badly on the IFISA. Intelligent Partnership asked IFAs if the failures of Lendy and London Capital & Finance had affected their view of alternative finance, and almost half said it had made them more cautious on the space. Following the FCA’s retail marketing ban on mini-bonds, investment platform AJ Bell called for the IFISA to be scrapped “for

the safety of savers”. Best thinks it is unfortunate that the mini-bonds scandal has engulfed the IFISA too: “The IFISA has been unfairly targeted through all this – it’s a shame it has been tarred the way it has as it can be a tax-efficient savings method which brings additional investor protections, but there are

have also raised concerns the changes could slow growth in the sector, increase product costs and reduce returns. The bigger picture To understand some IFAs’ reticence to embrace P2P, you need to look at the wider context in which advisers are operating.

“ Some IFAs have been burnt by more esoteric investments in the past”

risks attached and those risks need to be considered.” But, she adds, even negative publicity could have a positive effect in the end because it raises awareness of the sector. “No publicity is bad publicity,” she asserts. “On that basis, if the failures have raised awareness of the IFISA and new legislation means advisers become more comfortable with P2P, then those advisers worth their salt that do recommend P2P should seriously consider the tax advantages of putting it in an IFISA wrapper.” Tighter regulation of P2P, meanwhile, could boost advisers’ confidence in the sector by making it more transparent and improving its reputation. But some advisers

The failures of firms such as Harlequin, Keydata and Arch Cru are still painful memories for some advisers, while they remain under pressure to prove the suitability of every recommendation, and are naturally risk averse with their clients’ wealth. “Some IFAs have been burnt by more esoteric investments in the past, so they are reticent to jump on the latest bandwagon,” comments Jake Wombwell-Povey, founder and chief commercial officer at Goji, a platform technology provider which offers IFISA administration. “It may give your client an extra one or two per cent return and a small element of diversification, but the advice risk is very high so would an adviser say you should

IFISA

stay in strategic bonds or stick your neck out?” He thinks that there are “absolutely lots of benefits” to P2P, including the fact that it is uncorrelated to mainstream investments. However, he also notes that advisers must consider many other factors when making their investment decisions. An untested concept? While the familiarity of the ISA structure might have made P2P look more appealing to retail investors, not all IFAs have been swayed by the tax-efficient wrapper. “The ISA wrapper doesn't really make any difference to my perception of P2P,” says Carl Roberts, managing director and chartered financial planner at RTS Financial Planning. “The biggest problem with P2P is the lack of investor protection and the fact it's a concept that is untried and tested during a severe market downturn like 2008. I still feel there is also a lack of transparency when it comes to the underlying investments. With so many providers popping up over the last few years, you wonder whether the FCA is on top of them all. “At the end of the day, the returns offered for the lower end of the risk scale just make you think ‘why bother’ and why not just put your money in 'normal' bank savings accounts or invest in equity funds?” Tim Morris, an IFA at Russell & Co, says he would not recommend the IFISA because it could potentially “open the floodgates to unregulated investments that ‘a guy down the pub’ would likely be promoting. “If ever there should be a very clear risk warning and ‘caveat emptor’ applied, this is it,” he adds.

“ Hopefully new

regulations will provide advisers with greater comfort

”

“Well done to the FCA on finally tightening up the rules, although I still think they need to do more.” Ricky Chan, director and chartered financial planner at IFS Wealth, has concerns around the lack of Financial Services Compensation Scheme protection for P2P investments, and potential risks including a lack of liquidity, plus the fact it is still a relatively new asset class. “Clients interested in this can do their own research and do this direct, which is why greater FCA protection is needed,” he says. Platforms develop IFA portals To overcome some of these misgivings, P2P platforms such as RateSetter and Proplend are actively courting IFAs through

adviser portals on their platforms and Intelligent Partnership predicts more will follow suit. Alexa McAlister, director of wealth investments at RateSetter, says the platform is attracting more and more advisers. “The level of interest among advisers has been growing recently, particularly those who are looking for a product to deliver steady and consistent returns,” she explains. “We already have advised money investing with RateSetter and we have exciting plans to broaden access to more advisers.” Octopus Choice serves advised clients as a significant part of its business, with more than 1,000 advisers registered on its platform. The platform’s head Charlie Taylor said he welcomes increased regulation of the sector as it may

IFISA

in the upcoming ISA season, the firm is expecting sales through its own channels to grow. “I’d expect IFISA uptake to be lower than last year across the market,” says Taylor. “Marketing for IFISAs will be scrutinised much more closely, and I would imagine that many platforms will spend less too. However, because Octopus is predominantly focused on advised clients, we are less reliant on direct-to-consumer marketing, so we expect to see some growth in IFISA inflows.”

boost its appeal. “My hope is that greater transparency across the sector will give investors more confidence when selecting a P2P platform, whether in an IFISA or otherwise,” he comments. Although Octopus Choice is predicting lower IFISA sales across the industry as a whole

A push for better engagement One thing the P2P industry is really good at is engagement, and this could drive the future success of the IFISA, even with some of the headwinds it faces. WombwellPovey noted that the IFISA has proven popular as something separate from cash, equities and bonds, which meets different investor needs. “There is now close to £1bn in IFISAs, and there are more P2P loans and bonds held in ISAs than there are government bonds,” he says. “That tells you that retail investors are engaging more with P2P than they are with gilts.” With the right risk controls in place, and proper education about

“ There is a core

audience of advisers that do use P2P

”

P2P lending, there’s no reason why people shouldn’t invest in it through an IFISA, he argues, adding the industry is up to the challenge. “I don’t think P2P can ever be accused of not engaging with investors,” he says. Best, too, predicts that P2P platforms will step up their efforts to engage advisers and overcome their objections, while bridging the education gap on the IFISA. “More advisers will engage, slowly, as more platforms reach out to them once the FCA’s 10 per cent rule bites,” she states. “Hopefully new regulations will provide advisers with greater comfort about what actually goes on in P2P as it can seem a bit of a black box. All of that is quite positive for the adviser marketplace, but it could be a slow burn, it could take some time for engagement on both sides to really kick in.” No doubt P2P platforms will be working hard to engage the adviser community as they look to drive growth in the coming ISA season and beyond.

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JOINT VENTURE

Building a different model

A peer-to-peer platform backed by building societies – Brian Cartwright, managing director NEXA Finance explains this innovative new lending model…

INCE THE LATE 18th century, building societies have filled an important role in British life. They have provided an alternative to traditional banks; allowing savers to pool their money and offer out loans to retail borrowers in exchange for aboveinflation returns. Sound familiar? “In many ways, the building society movement was actually an early form of peer-to-peer lending,” says Brian Cartwright, managing director of NEXA Finance, the newly-launched P2P platform which is backed by building society funding. “If we go back 140-150 years, you might have three people putting their money together, and building up a pot, and then one of those people will decide to go and build a house. “If you look at the comparisons between the building society model, it is the same as a P2P model of connecting savers with borrowers.” With this in mind, its no surprise that NEXA Finance counts Melton Mowbray Building Society as its main backer. What is surprising is that this is the first time that these two worlds have collided. Building societies have been under increased pressure from retail banks and challenger banks in recent years. And with the introduction of Open Banking, prospective borrowers, savers and investors have more choice than ever before. By joining forces with P2P lenders, building societies can offer modern financial solutions to a younger, more demanding consumer base.

“In that sense there is a dual benefit,” says Cartwright. “The building societies get to benefit from our modernisation and younger demographic and the innovation that P2P brings, and we get to benefit from the credibility and existing regional networks that the building societies bring.” Since NEXA Finance launched in June 2019, it has gone about providing a truly regional service to both borrowers and lenders in the Midlands area. Since the team is currently based in the Melton Mowbray Building Society head office, it is this region that will be the geographic focus for the foreseeable future. And as Cartwright explains: “A lot of our mutual shareholders will want to see their capital and returns deployed in the local community. “We want to start that local economic trend, where the building society wants to lend on mortgages

and stimulate the movement of assets around the cycle as people upscale and downscale their developments, and the mutual lenders who are providing those funds will probably want to see them deployed locally,” he adds. The building society connection offers a ready-made regional network for NEXA Finance to tap into, and in return, the P2P lender can offer access to the innovation and opportunities of alternative finance. “It’s clear to me that there is an appetite to support this model and while we’re generating opportunities and liquidity for them then the future looks bright for us,” says Cartwright. “Mid-range building societies know that they need to make themselves relevant to a new market of borrowers and lenders, and NEXA is facilitating that movement.”

PROFILE

Deciphering the rules The regulatory landscape of peer-to-peer lending has evolved considerably in recent years. Now that the new rules are in place, what can the industry – and its customers – expect? Frank Brown of regulatory consultancy Bovill talks to Andrew Saunders

IVE YEARS IN TO THE Financial Conduct Authority’s (FCA) reign, is the peer-topeer lending industry’s regulatory honeymoon period drawing to a close? Frank Brown, managing consultant of financial services regulatory consultancy Bovill, thinks that it might be. “The regulator has absolutely changed its focus,” he asserts. “Look at authorisations for example, often a good yardstick. A couple of years ago they were going through fairly quickly and fairly easily. Now they are slower and more challenging, with more questions on the business model.” The arrival in early December of more stringent legislation – particularly around marketing, investor appropriateness and the ’10 per cent rule’ – plus the fallout from platform failures like Lendy and Funding Secure, certainly suggest a sea-change in regulatory attitude towards the sector. Established platforms which grew up under the ‘old regime’ might not have felt like they were receiving special treatment at the time, but they will notice – if they haven’t already – a change in terms of both tougher language and action, Brown says. Take the policy statements now emerging from the FCA. “In terms of regulation, it’s quite prescriptive and there is more

control than there was previously,” he adds. It’s a shift that is driven, he says, by the FCA’s need to balance its two overarching obligations – to foster competition and good customer outcomes on the one hand, whilst simultaneously maintaining market integrity on the other. The FCA took over regulation of P2P from the Office of Fair Trading in 2014. Having initially approached the sector more as a

tender young plant that needed to be encouraged in order to promote competition in the lending market, the FCA now seems to have decided that it is mature and competitive enough to cope with a more robust approach. Attention is thus moving towards the business of maintaining market integrity in the wake of those aforementioned high profile collapses. “Embarrassing headlines about P2P firms falling over don’t do

PROFILE

much to help market integrity,” Brown comments. The stage of the economic cycle is another major influence. “I think there is a recognition that [the P2P platforms] have grown up in incredibly benign economic circumstances – you could not wish for a better place to be launching products,” he states. Persistently low interest rates have created demand for better returns for investors on the one hand, whilst also making it easy for borrowers to budget for repayments on the other. But Brown cautions, such unusually-favourable conditions cannot last forever and a slowdown is widely believed to be on the way. “Bad debt on lending is quite stable at the moment, but you know economic cycles,” he says. “We are already over 10 years out from our last recession in this country.”

“ There is a fork in the road”

It all adds up, he says, to one unavoidable conclusion: “There is quite clearly a view from the regulator that this is a market that needs tightening up.” Not that this comes as too much of a surprise to anyone who read the FCA’s 2018 consultation paper on P2P, or its response to industry feedback on the paper which followed in the summer of this year. But we’re now getting the first real taste of what it all really means, in the form of the package of legislation which came into force on 9 December. The new tougher requirements include marketing restrictions for everyday investors and much more

stringent requirements for winddown preparations in the event of a platform failure, as well as higher standards on the information that must be provided to investors. Some industry figures worry that the FCA crackdown is going a bit too far, a bit too fast and risks killing the goose that lays the golden egg. Particularly when it comes to the 10 per cent rule: in a sector whose roots lay in democratising returns for smaller investors, this restriction will mean that someone with £20,000 to invest can put a maximum of just £2,000 into P2P. It may have the unintended consequence of pushing platforms away from retail funding and towards institutional money – a trend that was already in train anyway – but overall Brown is sanguine and thinks that the impact of the legislation will be less

PROFILE

dramatic than feared. “People often look at new regulation like this, the marketing restrictions and appropriateness tests, and think that it is going to be the end of the world,” he says. “But generally speaking, it doesn’t turn out like that.” For Brown, the wind-down rules are perhaps more structurally significant. Partly because they make it clear the regulator is prepared to let platforms fail – in as orderly a manner as possible – and partly because they emphasise that platforms have a duty of care towards investors, even though they don’t actually hold funds in the way that traditional investment companies do. “Wind-down is incredibly important from a maturity, good practice and consumer information perspective,” explains Brown. “It’s being able to demonstrate that you have thought about end-oflife and you have a credible solution for keeping the lights on during the time it takes to find somebody else [to take on the loanbook].” At least one platform’s wind-down plans are being tested for real right now – on 6 December, P2P lender MoneyThing announced its closure, citing economic uncertainty and diminishing returns on lending. Unlike Lendy or FundingSecure, MoneyThing is not in administration and has shut down voluntarily. According to a statement on its website, it plans to “exit the market quietly and with minimum disruption to our customers and the industry as a whole”.

Another new regulatory change worth thinking about is the Senior Managers Certification Regime – the requirement for firms to have named individuals who are responsible for regulatory compliance. It was introduced to the banking sector in the light of Libor manipulation and other misconduct scandals and is now being applied to consumer finance – including P2P – as well.

“ Wind-down is incredibly important from a maturity, good practice and consumer information perspective

”

In banking, SMCR hasn’t resulted in much in the way of enforcement to date; Brown reckons the FCA may be looking to this wider rollout for an opportunity to prove that the rules do have teeth after all. “It will give them a chance to put some metaphorical heads on poles,” he asserts. “I think there are some areas of P2P – high-cost, short-term lending, perhaps some aspects of motor finance – where the regulator has a view that things are not as they should be.” You have been warned. P2P platforms also need to start thinking about how all the new regulations might impact their business plan, and growth forecasts in particular.

PROFILE

“ Targets that are

unobtainable are the root cause of poor customer outcomes

”

“I do advise people to have a look at their business strategy and their three-year plans, because [the new regulation] is going to make some difference,” Brown says. In other words, best to dial down your growth targets now to avoid the temptation to lower your lending standards and pile on risk later. “The worst thing you can do is strive to meet a target that is unobtainable,” he states. “Targets that are unobtainable are the root cause of poor customer outcomes.” Brown himself comes from a Big Four consultancy background, before which he had stints at Home Retail Group and Santander. He moved to

his current role in March 2017 from PwC and enjoys the contrast that Bovill’s more entrepreneurial culture provides. “There are short reporting lines and quick decisions, which is helpful,” he explains. “You can have an idea and pursue it, rather than being constrained by a large bureaucracy. It’s horses for courses, but for me personally it has been a positive change.” That culture helps Bovill identify more strongly with the similarly entrepreneurial P2P platforms it advises, says Brown, and also influences the nature of the advice given. “Bovill’s USP has always been around giving clear advice that answers the client’s questions – we

tend to be quite practical. ‘You have a risk here and this is what you should do about it’. We don’t produce large reports that don’t say anything.” In his view, it’s decision time for the industry. “There is a fork in the road,” Brown says. “Does P2P want to be a boring – in a good way – mainstream product, or does it want to be a sort of fast and loose piece of niche investment exotica?” The most benefit will accrue to the greatest number if it chooses the mainstream fork, he argues. “That’s where the money from investors is and it’s where the stability is, without question. If it goes the other way it becomes much smaller and the number of players that could make money in that space also becomes small.” While going mainstream inevitably involves greater regulatory scrutiny, nipping bad practice in the bud now is good for the industry as a whole. The quid pro quo is enhanced consumer confidence and more consistent and more sustainable growth, says Brown. “A few more platform failures could see the Daily Mail’s and Martin Lewis’s of the world get very vocal about P2P,” he warns. “It would be relatively easy for it to become seen as risky and for people to turn against the sector.” So the honeymoon may be over, but now it’s up to both industry and regulator to make sure that a long, happy and profitable marriage ensues.