Peer2Peer Finance News July 2018

>> 5

LIFE AFTER COLLATERAL

Huddle steps in to refinance collapsed lender’s loans HOT PROPERTY

Full coverage of our roundtable event

>> 10

Abundance Investment founder Bruce Davis on ethical finance >> 29

ISSUE 22 | JULY 2018

Banks reject P2P lenders on money laundering concerns

PEER-TO-PEER lenders have been turned away by banks when trying to open the client money accounts that are legally necessary for them to operate.

Despite the vast majority of platforms now being fully regulated, Peer2Peer Finance News has seen messages from high street and challenger banks showing they are reluctant to accept clients in the P2P sector – particularly property lenders – because of concerns over anti-

money laundering (AML) compliance.

Frazer Fearnhead, founder of P2P buy-to-let and development lender The House Crowd, said that he was refused by a number of banks when trying to open a client money account, while other firms have reported similar experiences in the past.

P2P lenders can use a bank or an e-money provider to manage their client money to comply with regulations regarding the segregation of investors’ funds.

Many P2P lenders opt for a client money account with a UK-based bank as they get the added benefit of protection from the Financial Services Compensation Scheme until the money is invested. Furthermore, e-money providers can be based anywhere in the world so could be operating under a different regulatory framework entirely.

For P2P lenders offering Innovative Finance ISAs, it is preferable to have a client money account

with a UK bank as it allows them to accept ISA transfers. P2P lenders can still offer an IFISA using an e-money provider but cannot facilitate transfers from other ISA managers.

Banks’ concerns stem from the fact that P2P lenders tend to operate pooled client accounts, combining all funds rather than segregating each user’s funds separately.

Banks are uncertain of their approach to AML so are taking a tougher stance on providing client money services.

A bank has to be satisfied with the AML process or can simply reject an application to provide client money services.

“Many of the business sectors that are required to ring-fence client monies often choose to do so through pooled client accounts due to the volume and pace of their business,” said a spokesperson for banking trade body UK Finance.

“Under the 2017 Money Laundering Regulations banks are only allowed to offer pooled client >> 4

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EDITOR’S LETTER

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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 PRODUCTION Tim Parker Art Director Zac Thorne Logo design COMMERCIAL Amy St Louis Director of Sales and Marketing amy@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.

F

or those of us involved in the peer-to-peer lending industry, it’s possible to get an inflated idea of general awareness of the sector when surrounding ourselves with knowledgeable colleagues and business contacts.

Going to the National Association of Commercial Finance Brokers’ (NACFB) Expo in Birmingham last month gave me food for thought.

On the plus side, it was great to see that P2P was firmly on the radar of the conference – there was a panel dedicated to P2P, which I chaired – and the people in the audience, many of whom were brokers, were clearly interested in finding out more.

However, the vast, overwhelming quantity of lenders at the Expo and the continued dominance of the best-known brands provided a stark visual reminder of how far there still is to go.

The fact is, there are plenty of brokers out there who are still giving business to their mates at the tried-and-tested high street banks and missing out on what P2P has to offer.

This won’t change on its own, but it was clear from the P2P lenders on the panel that they are making concerted efforts to educate the broker community. Combined with conferences like the NACFB Expo, this should certainly help in putting P2P in a prominent position on the brokers’ smorgasbord.

SUZIE NEUWIRTH EDITOR-IN-CHIEF

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NEWS

cont. from page 1 accounts to customers in specific circumstances.

“Banks must satisfy themselves that holders of pooled client accounts from other sectors present a low degree of risk and apply their own form of identification checks, in order for simplified due diligence to continue to be applied to these accounts.”

This has already happened in the lettings agency sector in Scotland, where firms must have a separate client account for all customer funds by October 2018. This has led many banks to turn away agents as they are unsure how they are tracking the source of funds.

However, Peer2Peer Finance News understands that banking bodies are working on guidance for lower-risk sectors such as lettings agents and may consider doing something for other industries such as P2P. Emails seen by Peer2Peer Finance News to The House Crowd suggest rather than just turning his firm away, many lenders are deterred by the whole P2P sector.

“Due to the nature of the business the bank does not place reliance on the due diligence measures applied by crowdfunding platforms on their clients,” RBS said via email.

An email from HSBC said the bank “doesn’t have an appetite to

onboard businesses in the sector you operate in”.

Similarly, Handelsbanken said it “currently has no appetite for client accounts” while Metro Bank, which has a lending partnership with Zopa, said it was “at capacity.”

All the banks said applications are dealt with on a case-by-case basis and denied they were unwilling to provide services across the P2P sector.

Fearnhead says he doesn’t blame the banks but thinks it is the regulations that are at fault.

“The regulatory burden is so onerous the banks are throwing away business and telling some companies, ‘We don’t want your business’,” he said.

Fearnhead added that the Financial Conduct Authority (FCA) has told him of other P2P firms that have faced similar issues.

The FCA declined to comment but highlighted a recent report on its regulatory sandbox – which allows start-ups to test products – that said it was aware banks have been withdrawing

or failing to offer banking services to some types of customers.

The FCA said in the report that this practice, referred to as de-risking, could be due to AML and terrorist financing risks or just strategic decision but warned it could harm competition.

Other P2P firms have said they have had issues in the past.

Bridging and buy-to-let lender Kuflink said banks were reluctant to let them open client accounts initially.

“It took us many months to open our first account and the regulatory process was extensive,” Narinder Khattoare, founder of Kuflink, said.

“However, as Kuflink has grown and achieved FCA regulation, HMRC authorisation and most recently ISO27001 certification, the banks are starting to acknowledge our commitment to due diligence and adapt their approach to provide faster access to client accounts.”

Business lender ArchOver said it had

applications refused “point blank” at first but said it came down to explaining how the platform worked and the structure of the business.

“New entrants armed with more knowledge will be subject to a more in-depth grilling around their business model by the banks,” Ian Anderson, chief operating officer for ArchOver, said.

“At the same time, senior management within those banks will have set out their policy on P2P to their branch management and it could just be a simple ‘No more P2P’.”

Under new government AML regulations released last year, firms must now take a “risk-based approach” to pooled accounts.

Previously, they could undertake the lowest level of due diligence known as standard due diligence to assess the risk of money laundering within pooled client accounts, so they would just need to identify each client.

This typically applied to firms seen to have a low risk of money laundering or terrorist financing such as life insurance companies and local authorities.

But under the new rules, there must be evidence of extra due diligence on where the money in a pooled client account comes from and where it will end up.

NEWS

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Huddle refinances Collateral loans PEER-TO-PEER business lender Huddle has stepped in to refinance some of Collateral’s loans after the platform went into administration earlier this year.

The first Collateral loan to go live on Huddle’s platform was a £80,500 facility secured by way of a first legal charge against a property.

A Huddle spokesperson told Peer2Peer Finance News that there has been a great investor

response to the loan, both from existing and new customers, with around two dozen new lenders signing up after the loan went live.

The spokesperson said the platform was set to list two more Collateral loans and have paid out the first one by the start of July.

“As long as the underlying deals are solid and they’re only part of the performing loanbook then we’re happy to take on more Collateral loans,”

said the spokesperson.

“These are things that P2P has already lent on and there’s a proven appetite.”

Huddle is not the only firm to express an interest in Collateral’s loanbook.

P2P investment manager BondMason, HNW Lending and Ablrate – which now owns an equity stake in Huddle – have also thrown their hats into the ring.

Collateral collapsed in February after it emerged

that it had been operating without the required regulatory permissions.

Huddle is also expanding into a new type of P2P loan, where it lends to law firms secured against insurance policies.

The loan is secured with a charge over a case, so will be paid out from the proceeds if they win, or by the insurance policy if they lose. Investors have the added assurance of personal guarantees from the solicitors.

Landbay co-founder looks to shake up property market GRAY Stern, the cofounder of buy-to-let peer-to-peer lender Landbay, is aiming to shake up the UK property market with his new company.

The investment portal, called Dot, enables amateur landlords to invest in UK and US properties that it has already sourced via estate agents and property portals. The properties come with a pre-approved mortgage, enabling anyone with a 30 per cent deposit to buy them instantly.

“Landbay has done a great job of specialising in and targeting professional landlords who run their business as a businessmen,” Stern told Peer2Peer

Finance News. “I saw the opportunity to provide that professional solution to amateur landlords – people who don’t have time to build a property portfolio at the same time as holding down a day job.”

As part of its package, Dot provides all the services a landlord would need, including insurance, tax compliance, lettings and management, thereby taking some of the hassle out of the process.

Stern suggested many of Dot’s customers would be higher-rate taxpayers who have built up enough savings for a deposit and want to take advantage of the tax benefits of buy-tolet property. However, he claimed young Londoners who can’t afford a

property locally could also use Dot as a way of getting onto the housing ladder.

Dot’s mortgages are around 0.5 to one per cent more expensive than those provided by Landbay and challenger banks because they do not require a personal guarantee.

“If something goes dramatically wrong then the maximum liability owed by the investor is the deposit,” Stern explained.

“With traditional mortgages, the lender can pursue you personally through the courts.”

Stern also said that because Dot is lending against the property’s expected rental income, rather than the customer’s credit score, it can provide a mortgage to pretty much anyone – as long as they can afford the deposit.

“The private rental sector is an incredibly important part of the housing mix in the UK,” he added. “Any product that is designed to make the market more efficient is good for developers – and the more sales and bigger margin they generate, the more they will invest in building new homes.”

For even more peer-to-peer finance news, go to our website at www.p2pfinancenews.co.uk.

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NEWS

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Advisers eschewing P2P due to insurance ‘grey area’ FINANCIAL advisers are avoiding giving advice on peer-to-peer lending because they are worried it will not be covered by their professional indemnity insurance (PII).

Max Lehrain, chief operating officer at P2P property lender Relendex, said P2P investing is a “grey area” when it comes to PII. Some independent financial advisers (IFAs) assume it is covered under the general advice section of their policy, whereas others do not think it is covered at all.

“P2P lending is a new area for IFAs so they lack understanding and are wary their PII won’t cover them if they get it wrong,” said Lehrain.

Brendan Llewellyn, cofounder and director of communications platform Adviser Home, suggested PI insurers will decide whether or not to cover P2P investments on a case-by-case basis.

If, for example, P2P lending comprises a very large proportion of an adviser’s business, it would probably be

deemed unacceptable by the insurer and therefore not insured under the policy.

Russell Facer, managing director of threesixty, an adviser support services company, added that insurers are generally sceptical of P2P lending because there is a question mark around whether advisers add value in what is traditionally a direct lender-borrower relationship.

“The risks are unknown, so if the insurer does cover P2P lending they

will probably add on a risk premium,” he said.

“For advice to be costeffective, the adviser would therefore need to be recommending P2P lending to high-net-worth individuals.”

A spokesperson for Markel International, a PI insurer, said: “There’s no reason why P2P investments shouldn’t be covered, unless they are specifically excluded.

While Markel currently writes IFA business our appetite for new exposures is limited.”

London Fintech Week founder says sector is booming despite Brexit THE FOUNDER of London Fintech Week has affirmed that the capital is still “open for business” despite Brexit and remains a “world leader” in the fintech and start-up space.

Luis Carranza (pictured) told Peer2Peer Finance News that he expects a more diverse audience than ever at this year’s event, despite the deadline looming for the UK’s divorce from the EU in March 2019.

“Last year’s event went really well and it looks like it will be a slightly bigger event this year, with delegates coming from as far as Egypt, Qatar and New Zealand,” he said.

“We’re a lot closer to Brexit this year but fintech

is still maturing and thriving, Revolut being a prime example.”

The digital strategy expert also noted the UK’s peer-to-peer lending

sector as a particularly mature segment of fintech, which he attributed to “a proven model and institutional investment”.

With rumours of initial

public offerings (IPO) circulating, Carranza added that a P2P public listing would be “a sign of the times” as “you don’t IPO in a new sector”.

London Fintech Week 2018 takes place between 6 and 13 July, comprising a series of conferences, exhibitions, workshops, hackathons, meetups and parties.

The main event takes place at the QEII Centre in Westminster and is set to attract over 1,000 conference delegates and 40 exhibitors per day. Peer2Peer Finance News is partnering with London Fintech Week, so follow us on Twitter @p2pfinancenews for regular updates.

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NEWS

Lenders slam rise in SME funding aggregators RAPID growth in the number of small- and medium-sized enterprise (SME) funding aggregator platforms has been met with scepticism by peer-to-peer lenders, who argue they are a tiny source of business and add an unnecessary extra layer of fees.

The past 12 months have seen a plethora of new aggregators being launched, enabling SMEs to compare finance solutions from many different lenders. They include Swoop, which is a rebrand of BizFly; the Federation of Small Businesses’ (FSB) Funding Platform; and Capalona, developed by Sorodo.

For most P2P lenders, however, aggregators account for a very small level of business.

Adrian Innes, head of origination at LendingCrowd, said they only get a small proportion of deals from aggregators, primarily because many of the borrowers presented do not meet its eligibility criteria.

“SMEs often need guidance from lenders or brokers when applying for funding,” he said. “When aggregator platforms simply collect applications and farm these out to lenders, conversion rates can be poor.”

David Bradley-Ward,

chief executive of Ablrate, said he does not see the point of aggregator platforms for lenders.

Ablrate has a deal with one platform but volumes of business are low.

“What we have found is that if any significant level of business is going to be done, a lender may start on an aggregator and come straight to us to open an account for any large deposit,” he said.

P2P lenders are also concerned about the fees levied by aggregators.

The payment structure varies from one platform to another, but typically involves the lender either paying for each lead regardless of whether it converts into a deal, or paying simply to appear on the website.

“Fundamentally I disagree with charging for the layering of services on top of P2P, unless it is a genuine service to lenders,” Bradley-Ward said. “Talk of ‘enhanced

due diligence’ tends to be the pitch and I think that is particularly insulting to platforms.”

In some instances, aggregators simply do not gel with P2P lenders’ business models.

Giles Cross, chief executive of Folk2Folk, the rural business lender, said aggregators do not compare “apples with apples” and so aren’t something Folk2Folk has been very involved in to date, but that the company regularly reviews its position.

“The P2P lending industry is very broad and complex – for example, different platforms have different lending criteria and, in some cases, sliding scales of risk and fees – so it is difficult for some aggregators to provide a fair comparison,” he added.

Dave Stallon, the FSB’s commercial director, admitted the large number of aggregator platforms

and differences in quality can be confusing and offputting for small business owners. He said the FSB launched its own platform in order to provide credibility and instil trust amongst its users.

The huge growth in the number of aggregators has led to suggestions the market could become saturated.

Conrad Ford, chief executive of the more established aggregator platform Funding Options, said it is unclear why there are still new market entrants, since aggregating any type of market online tends to favour scale.

“We’re not really seeing the impact of other players yet – new or old – but that’s mainly because Funding Options is uniquely large in this category,” he said.

Meanwhile, Katrin Herrling, chief executive and co-founder at Funding Xchange, another more established aggregator, argued the market is at the start of an “exciting journey” as the integration of bank and non-bank finance solutions kicks off.

However, she added that she does expect a “shakeout” in the aggregator market, with those focusing on clear value propositions most likely to succeed.

NEWS

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Ranger Direct Lending: What really happened AT ITS annual shareholder meeting on 19 June, Ranger Direct Lending (RDL) officially began the process of winding down its alternative lending fund, just three years after it was launched on the London Stock Exchange.

The previous day, three of the fund’s four board members – including chairman Christopher Waldron - had stepped down, after months of shareholder spats, public statements, and declining values.

But what really happened behind the scenes? And does this signal the beginning of the end for alternative finance investment funds?

It would be easy to blame RDL’s woes on the costly, drawn-out legal battle with the Princeton Alternative Income Fund.

Ongoing legal battles with

the defunct fund have had a notable impact on RDL’s net asset value (NAV), with the investment manager using the fund’s monthly factsheet to show what the NAV would have been without the Princeton exposure.

However, according to analysts and shareholders, the Princeton issue was merely symbolic of greater problems within the RDL fund.

In March, analysts at Numis warned that “we

have been wary of the fund, believing that it was invested in platforms with a higher risk profile than its peers”. Numis added that the fund’s exposure to Princeton highlighted “significant questions over the manager’s due diligence”.

When the RDL board nominated Ares as the fund’s new investment manager, there were rumblings among shareholders about a lack of transparency in the

nomination process. Soon after, major shareholders Oaktree Capital Management and LIM Advisors went public with their views that the fund should be wound down.

However, in a series of calls with RDL investors, Peer2Peer Finance News has found that there was one shared concern that did not make it into the public letters and investor notes. Put simply, the fund lacked the capacity to scale up. This is an issue that will resonate with investors in other alternative lending funds, in the aftermath of the RDL wind-down.

Perhaps the alternative lending market is simply too small to support more than a handful of investment funds.

Or maybe one bad investment is all it takes to lose the trust of your shareholders.

The best from the web

We round up the biggest stories from www.p2pfinancenews.co.uk over the past month • Funding Circle withdrew its downloadable loanbook and stopped publishing loan performance data on a daily basis, replacing it with a new statistics page that will be updated every three months.

• RateSetter is reportedly in talks for a £30m fundraising round as it continues to gear up for an initial public offering.

The lender is looking to raise £30m through investment bank Lazard and stock broker Peel Hunt, according to Sky

News. This funding round is expected to value RateSetter at around £280m.

• An update on closed P2P platform Collateral from administrator BDO suggested investors may end up having to recoup

any unpaid interest owed as a creditor of the company. This means they would have to submit documentation to BDO on what they are owed and wait to see what funds can be recouped through the administration.

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PROPERTY ROUNDTABLE IN ASSOCIATION WITH WELLESLEY

Supporting the nation’s housebuilders From Brexit to stamp duty costs and the dreaded planning process, there are plenty of stumbling blocks to getting Britain building again.

A shortage of suitable properties is pushing up prices, making it harder for first-time buyers to get on the property ladder and for homeowners to take the next step.

At the same time, smaller housebuilders often find there is a lack of finance available and they may have to jump through several hoops to get planning permission approved.

Peer2Peer Finance News, in association with Wellesley, gathered property experts – Peter Andrew, deputy chairman of the Home Builders Federation, Mark Harris, chief executive of SPF Private Clients, Andrew Turnbull, managing director of Wellesley and Russell Quirk, founder of online estate agent Emoov – for a roundtable chaired by P2PFN editor-in-chief Suzie Neuwirth to decipher how to give the housing and property development market a kickstart.

What’s your perspective on the current state of the property market?

Andrew Turnbull: It’s very much a tale of two markets. We’ve got the high-end prime assets and expensive housing where it’s struggling.

At the other end of the market sensibly-priced houses or blocks of flats

are selling, typically in the regions, on sensible multiples relative to salaries.

Naturally, we’re avoiding large prime, typically London-based assets.

We’re noticing that pricing is converging around the threshold of £600,000 for the Help to Buy schemers.

Due to natural supply and demand there’s

going to be plenty of opportunity within that sector, but on the higher end, until they do something about stamp duty we’re not particularly excited about it.

Peter Andrew: The market is pretty strong up to £600,000 and that’s partly due to Help to Buy, which is probably 45 per

cent of that marketplace.

Above £600,000 it is a much different picture and up above a million it is very, very tough and that’s pretty much nationwide.

In the second-hand market there’s more coming off it than going on it.

Russell Quirk: The difference between prime

PROPERTY ROUNDTABLE IN ASSOCIATION WITH WELLESLEY

central and everywhere else is stark, though prime central is starting to come back a little. The market is confused in terms of the various indices we see. They completely contradict each other.

Mark Harris: There’s an abundance of funding in the homeowner space.

There’s a mortgage price war and there’s that cheap source of debt and a more flexible underwriting shown by the banks as we come out of the credit crisis. They all want to write more business.

The top end of the market is slower, but it’s not that big a market anyway.

Peter Andrew: It’s actually making more money for the Treasury in terms of stamp duty take than it was beforehand.

Mark Harris: Which

Andrew Turnbull Andrew Turnbull is managing director of property peerto-peer lender Wellesley. He co-founded the firm with Graham Wellesley in 2013 and the platform focuses on providing development finance in UK regions.

is why stamp duty isn’t going to change. I think we’ve got a very weak government in terms of their political strength and the ability to introduce what would be seen as a tax break for the rich.

People are still doing transactions but the discretionary mover is sitting on their hands or improving what they’re already in. They’re weighing up £200,000 in stamp duty versus £200,000 invested in their current home going up.

people coming into the industry and linked to quality as well.

The biggest challenge for small developers is finding the site and then how do you grow? There are three per cent fewer sites

11

both perspectives, both as a property guy in the private sector, then the bureaucratic treacle of the public sector, particularly the planningauthority element.

The biggest problem

“ There’s an abundance of funding in the homeowner space

”

What are the key challenges facing property developers and housebuilders?

Peter Andrew: The big guys don’t have a finance issue, their biggest problem is probably skills, so that is linked to Brexit, it’s linked to a lack of

and about 20 to 40 per cent more permissions.

That’s the problem for small businesses, but it’s not a making of the big housebuilders, it’s a making of the planning process.

Russell Quirk: I was a planning chairman for two years on Brentwood Council, so I saw it from

then and surely now, whether they’re big or small, is the not-inmy-backyard (NIMBY) mentality that the UK seems to advance more.

Mark Harris: What we would want is development finance for the small developers.

Hopefully they get to meet businesses like mine, or

Russell Quirk Russell Quirk is founder and chief executive of online estate agent Emoov.

Quirk launched fixed-fee online agency Emoov in 2010 and recently led a merger with internet-only brands Tepilo and Urban Lettings.

Mark Harris Mark Harris is chief executive of independent debt and broking business SPF Private Clients, which spun out from Savills Private Finance in 2011. The firm works with a range of traditional and alternative lenders.

Peter Andrew Peter Andrew is deputy chairman of building trade body the Home Builders Federation.

Previously UK land and planning director for Taylor Wimpey, he helped write the National Planning Policy Framework in 2011.

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PROPERTY ROUNDTABLE IN ASSOCIATION WITH WELLESLEY

Wellesley directly, because there’s an abundance of debt funds and peer-topeer lenders out there.

They would have been more expensive than the client may be used to paying, but when you run the models, nonutilisations versus exit fees, entry fees, there’s not actually that much in it.

Andrew Turnbull: The biggest issue SME housebuilders face is margin. They don’t have the ability to landbank, so they don’t get the uplift on the value there, so they’ve got to buy sites. There’s not enough of them and there’s the planning-

permission treacle so therefore they’re bidding up on the land.

Meanwhile, construction costs are going through the roof. The 20 per cent movement of sterling we saw as a result of Brexit is coming through now, so what everyone is noticing is bricks, steel, everything is more.

How good is awareness of alternative lending?

Peter Andrew: Those who have been in the industry quite some time are fairly aware of it.

The smaller the guy, the more head down

they are in the weeds.

They don’t have the resources to try and find it so they probably go with somebody they know or the first one they come across.

Mark Harris: We just refinanced somebody who’s got four completed homes which are selling quickly. They’re reasonably high end so we’ve put something in place to give them some additional time to sell and we’re talking to them about development finance.

They’ve borrowed from one bank for 25 years and that bank has asked them to refinance. It’s not in distress, they’re geared at 40 per cent, it’s not a problem, but ‘refinance or we don’t do what you want anymore’. It’s a great little business, but it’s like you’re getting divorced and you’re out dating again.

Andrew Turnbull: The number-one reason people come to us is speed of execution. All the other things are slightly secondary. if they went to NatWest, it is four months to get a decision and it is sometimes a no after four

high-street banks really burnt that badly in 2008-2009?

Andrew Turnbull: It’s a mix. If you want to run a

“ Culturally, we are a nation of home-owning aspirants”

months. Whereas what they want is a really quick no, if that’s the outcome, or a relatively quick yes.

Russell Quirk: Were the

really large company that does lots of different things it’s difficult to be able to give that much authority to people in the bank.

PROPERTY ROUNDTABLE IN ASSOCIATION WITH WELLESLEY

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concerned about. We don’t underwrite to that because we don’t know how long it’s going to last. We focus on fundamentals. Can the local owner-occupier market buy this flat at the right price? Is it the sort of stick they want? Are there too many of them?

What we’re seeing is with all of the alternative lenders, there’s one thing we have in common: we’re all focusing on niches.

Are there opportunities for developers outside London?

Peter Andrew: There is a market everywhere. It all comes down to price. If you buy it at the wrong price and try and sell above the market, you will have all sorts of problems.

Mark Harris: The other thing we should all have concerns about is the

South-East Asia and makes 50 sales in Singapore and Hong Kong. That’s not

“ There’s an abundance of

debt funds and peer-to-peer lenders out there

developer who’s got a pre-sale level to achieve, which you don’t get in the domestic market, so he jumps on his aeroplane to

”

what we’re all trying to achieve here.

Andrew Turnbull: The Far East investor point is something we’re

What types of property developments are suitable for different types of investors?

Andrew Turnbull: We’re seeing a lot of investment with private rental sector (PRS) groups, that’s probably one of the areas where we’re seeing inbound investment, which is an institutional gain.

It’s very suitable for pension funds. It creates a long-term annuity for them. Some of them are even getting into being a developer as well.

Peter Andrew: Institutional PRS will grow. It will have to because the earnings ratio for people to buy is not going to get any easier in the short term and these people want to live somewhere.

Russell Quirk: There will have to be some other changes. If you look at the US, where they have a huge buildto-rent sector, someone will come in, build 100 units and have security of tenancy. What we have here is the scourge of assured shorthold tenancy agreements, which are

14

PROPERTY ROUNDTABLE IN ASSOCIATION WITH WELLESLEY

12-months long and then it’s a roll of the dice whether the landlord is going to re-let it or if the tenant will stay.

As an investor I’m not going to roll that dice for 12 months at a time.

I want a tenant that locks in for three years, five years, or maybe an inflation-linked rental increase per annum.

Do you think the government is doing enough to support housebuilding?

Russell Quirk: The government does very well at pledging and regurgitating money, and creating headlines. I see at a national and local level very little action.

One of the solutions is all the land and buildings that local government owns, they hold the key to housing supply.

Andrew Turnbull: Some things have been relatively successful, like Help to Buy. There are definite dangers but it has certainly created new houses. I’m a bit worried about when it has to stop. Some of the changes to stamp duty, while frustrating for some people, do seem to be working. It comes down to the planning process. That is one of the biggest issues.

Mark Harris: There is a disconnect between national government and local government. It’s a bit like working for a big national company and the

big guy tells you what the company strategy is and you’re all sat there going “no chance”. We will all just be belligerent and we will defy.

Do you all agree it’s a bureaucracy issue rather than supply of land?

Peter Andrew: There’s enough land out there. The problem is land with a relevant

to deliver against their trajectory. They can’t say ‘well, the sites didn’t come forward, we never found the sites’ or they will face planning rules being removed.

Russell Quirk: The government know if they price a whole generation out of home ownership, which arguably is happening, those people won’t vote for the party

“ It all comes down to price” planning consent in the right place. Local authorities through the new National Planning Policy Framework have

they believe has done that to them. Housing is the Conservatives’ biggest problem after Brexit and the economy.

How do you see the property development market changing?

Peter Andrew: If the government brings the Help to Buy limit down from £600,000, to let’s say, £400,000, that will be where developers go, because that’s where the market is.

Housebuilding is always going to be basically a traditional business. If we can get to a place where you can buy a house online and five weeks later it’s delivered on the back of a truck and erected, there will be a market for that as well.

But we’re not there yet.

Andrew Turnbull: I’d like to see planning improved.

PROPERTY ROUNDTABLE IN ASSOCIATION WITH WELLESLEY

There’s a lot of funding in the market. Awareness is improving, it’s more about increasing the scale of lenders to make it more mainstream.

How does Brexit influence everything?

Russell Quirk: It’s Brexitrelated sentiment, fuelled by the media, which is ensuring people simply sit on the sidelines.

Culturally, we are a nation of home-owning

aspirants, you’re never going to get away from that. I don’t think Brexit provides a structural issue, as far as the

in for housebuilding.

That is a problem because EU workers coming into the UK have been a great

“ I’d like to see planning improved”

housing market.

Andrew Turnbull: My view is that the skill shortage is the one big thing we need to factor

source of fantastic, hard-working labour, with decent skills.

We’re not very good at apprenticeships. We

15

haven’t been very good over the last 20 years at persuading people it’s really good to be a bricklayer. You go to university and study a nonsense course that’s not going to get you a job.

For more up-to-theminute property news and analysis, head to the new property section of www.p2pfinancenews.co.uk, supported by Wellesley.

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JOINT VENTURE

17

Capturing a trend The Help-to-Buy initiative has transformed the UK housing market, creating new opportunities for property bonds, as Andrew Turnbull, managing director and co-founder of Wellesley, explains

W

HEN THE government launched its Help to Buy scheme in 2013, it was billed as a way to help first-time buyers enter the housing market. But recently, a new group of beneficiaries has emerged: property bond investors.

“The Help to Buy scheme set out to provide first-time buyers with equity loans and the ability to get their foot on the housing ladder,” explains Andrew Turnbull, managing director and co-founder of Wellesley.

“So the government would put down 20 per cent of the equity required, the buyer would put down five per cent and then a bank would lend 75 per cent of the value of the property.

“It’s been reasonably successful at enabling those who would have otherwise struggled to get on the housing ladder. However, it has also given a significant boost to one segment of the market, which is now outperforming in comparison to other property segments.”

This booming segment is mid-range properties which have been developed with the Help to Buy market in mind.

This means that developers have been focusing on properties which can be sold for no more than

on those types of properties.”

Wellesley’s property bonds are used to fund building projects across the UK. This means that Turnbull spends most of his time travelling around the country going

“ The scheme has certainly achieved its purposes ”

£600,000 (the upper price limit on all Help to Buy homes), and they must be suitable for the average first-time buyer.

“We’ve noticed that developers both small and large have readjusted their focus onto creating housing stock that meets the needs of those types of buyers,” says Turnbull.

“And I think where you see this most prolifically is on the outskirts of London where the price of land makes it possible to build flats and houses that are in and around or under the £600,000 level.

“And as a result, we've also seen lenders like ourselves focus on lending

from one building site to another and vetting the individuals and companies behind each development.

“We are looking for trustworthy developers, and we are looking at properties that we consider to be affordable by the average person living in that area,” he says. “And we'll always readjust our view on how we underwrite loans and what sort of assets we're willing to fund.

“Our goal is to get out of every single loan successfully, on time if not early.”

Wellesley measures liquidity by looking at the number of transactions

that have occurred over a certain period of time among similar properties.

This gives the firm an idea of the affordability of the properties under development, and the likelihood that they will sell upon completion.

“To give an example the average house or flat that we financed in 2017 was valued at £311,000,” says Turnbull. “That was typically a two or three bed dwelling in somewhere like Manchester, Birmingham or Leeds or Nottingham.”

In the future, Turnbull expects the Help to Buy boom to lead to a surge in demand for properties in the north of England. But long-term, developers – and lenders – cannot rely on the Help to Buy scheme to prop up the UK’s housing market.

“Whether it lasts for another one, two, three or, five years, I think [the scheme] has certainly achieved its purposes,” adds Turnbull. “But I wouldn't be surprised if there are some adjustments made to the way it works in the very near future.”

18

BREXIT

Living without EU With the Brexit deadline looming ever closer, what does the future look like for UK peer-to-peer lending after we exit the bloc? By Marc Shoffman

I

F A WEEK IS A LONG time in politics, two years must seem like a lifetime. But that is how long it has been since the UK voted to exit the European Union, and with less than a year to go until Brexit is official on 29 March 2019, should peer-to-peer lenders be concerned?

Perhaps one of the most memorable aspects of the Remain campaign was then-Chancellor George Osborne’s threats that a vote to leave would send property prices crashing.

If this were to happen, many of the P2P lenders in the popular

plateaued, it’s heartening to see that the fears of a significant and lasting decline in the property market haven’t been lived out,” says Sam Handfield-Jones, director of property P2P platform Octopus Choice.

“Though of course it’ll be interesting to see how the market fares over the next few years.”

There is still plenty that could shake both the property market and the wider economy – and by extension the P2P sector – if the Brexit negotiations end up going wrong though.

Economics research

“ Banks and traditional lenders typically pull out of lending due to uncertainty so supply is likely to fall

property, buy-to-let and development lending space would have suffered.

But this prediction failed to materialise, and platforms insist it is business as usual.

“While the market has

”

consultancy Capital Economics thinks that the main risks facing the UK are: running out of negotiating time and reverting to World Trade Organisation tariffs; a leadership challenge or

general election that would create political instability; or parliament voting against any deal.

“Brexit doesn’t appear to have had too much impact on consumer confidence yet,” says Victoria Gregory, analyst for Capital Economics.

“There are a number of risks on the horizon but so long as progress continues to be made the economy doesn’t seem likely to be buffeted too hard by Brexit uncertainty over the next few years.”

It is against this backdrop that it is business as usual for P2P platforms.

Individuals, property professionals and small- and mediumsized businesses still need to borrow money, while investors are still searching for yield.

All these parties often find themselves ignored by the banks.

Narinder Khattoare, chief executive of P2P bridging and development lender Kuflink, explains that while the London property market has undergone a correction – which has been attributed

by many to the high prices and stamp duty costs rather than Brexit – there are opportunities elsewhere.

“There hasn’t really been a downturn, investors are driving more towards P2P because it offers higher interest rates than the mainstream market and there is still demand to borrow for property,” he says.

“There is uncertainty but people will always want to move and will

BREXIT

always want a property so there will always be a demand.

“We haven’t seen a decrease in the number of borrowers, what we have seen is more competitive pricing.”

It is a similar picture in the small- and mediumsized enterprise (SME) lending space.

Stuart Lunn, co-founder and chief executive of LendingCrowd, said investors may want to

invest smaller amounts due to the uncertainty, but insisted the higher rates offered by P2P platforms maintain the sector’s attractiveness.

“Small businesses are nimble and adept at ‘getting on with it’; Brexit is just one issue that they have to deal with, and LendingCrowd has just completed its best-ever month in terms of loan origination,” Lunn explains.

“Smaller businesses tend to serve a local, rather than overseas, market.

As a result, they are potentially more resilient to any Brexit impacts.

“As with any period of uncertainty, some businesses may be discouraged from borrowing and making significant investment decisions, but P2P platforms offer a flexible alternative to the banks and can deploy funds quickly to

19

satisfy both borrower and investor demand.

“The fundamentals of the P2P market, including affordable rates for borrowers and the potential for higher returns for investors, remain sound.”

Additionally, it is worth remembering that it is the banks that have a poor track record when it comes to shutting up shop in times of uncertainty, which P2P firms argue leaves the way open for alternative finance providers.

“Banks and traditional lenders typically pull out of lending due to uncertainty so supply is likely to fall,” explains Karteek Patel, co-founder of P2P business lender Crowdstacker.

“The business community's recent memory of the financial crisis will accelerate the need to diversify their funding streams.”

As well as providing an alternative for business loans, P2P lenders could also benefit in the invoice finance space if uncertainty in the economy means invoices start getting paid later.

“In light of Brexit difficulties, invoice finance is a preferred method of business lending for SMEs when a variety of businesses feel that they need more ready access to cash,” says Benjamin Gedeon, chief executive

20

BREXIT

of P2P invoice finance platform MatchPlace.

“Businesses that are expecting their customers to take longer to pay can opt for the flexibility of the P2P platform. Invoice funding is an alternative finance product that can help SMEs in these circumstances. Regulation and tools used by the P2P lending platforms will help to make the lending market more secure.”

So it seems there are some reasons to be cheerful. In fact, P2P platforms such as Kuflink and MatchPlace have launched after the Brexit vote, suggesting the sector isn’t feeling the threat of leaving the EU. However, one area where P2P lenders in the UK could lose influence after Brexit is ongoing moves toward crossborder regulation of the sector on the continent.

“The European Commission has started considering harmonising P2P regulation across member states under the Capital Market Union action plan,” says Iain Niblock, chief executive and co-founder of P2P analysis firm Orca Money.

“The UK regulatory framework for P2P lending could be used as an example to follow, however with Brexit negotiations ongoing the UK’s influence over this type of policy will have been reduced.

“That is bad news for UK platforms with crossborder growth ambitions.”

European P2P lending and analysis firm Robo. cash said the experience of British platforms will allow the country to keep its leading fintech position for a long time but warned many platforms on the continent are increasingly thinking globally, where rates for investors will be better.

“This period is characterized by intensified international financial projects in alternative lending,” says a spokesperson for Robo.cash.

“Our platform is among them: it is based in Latvia and lends to Spain and Kazakhstan. Currently, we notice the growing financing of developing countries in Eastern Europe, Asia, and Africa coming from Europe.”

The spokesperson

confirmed that British investors would still be able to lend through its platform after Brexit.

So far, only business P2P lender Funding Circle has significant European operations in Germany and the Netherlands, but there seems to have been very little appetite for others to expand onto the continent.

Instead, there is a feeling that European lenders could be attracted to the already-established UK market.

“International businesses may see a weaker pound as a good thing – the UK’s P2P sector is growing and could attract large European investors looking to enter new markets, although they may balk at the additional barriers they will face in obtaining UK customers,” Lunn suggests.

“European lenders

may be more likely to acquire UK platforms than navigate a shifting regulatory landscape and create their own operations from scratch.

“Likewise, expansion of UK businesses into EU countries is likely to be lower until it becomes clearer exactly which additional costs and burdens may apply.”

He said UK investors already have access to a wide range of platforms and said while some may look abroad, they could be put off by any additional costs.

Closer to home, a more pressing political issue is freedom of movement, which could impact access to skills for P2P lenders, depending on how the UK’s immigration policy ends up after Brexit.

Carly Lake, of fintech recruiters Certus, says that recruitment slowed down in the first months

BREXIT

“

London, whether in the EU or not, is still a massive hub

following the Brexit vote but has since bounced back.

“London, whether in the EU or not, is still a massive hub,” she explains.

“If we come out of the EU fully and need visas to travel around, that may have an impact on work, but there is no evidence of that happening.

“We are still far away from that point and until then panic is never a good idea.”

Lunn says he has heard “anecdotal evidence” of a reduction in the number of overseas candidates looking to enter the market, but so far hasn’t seen any impact at LendingCrowd’s Edinburgh headquarters.

Similarly, several P2P lenders in London have

”

told Peer2Peer Finance News that they have not faced any issues.

However, some professionals working in career development and fintech recruitment insist that staffing risks may be on the horizon.

Dan Kiernan, career development consultant at Henley Business School, said he has already seen a fall in the number of international students expressing an interest in staying and working in the UK. “In a decade we might be looking at exciting fintech firms in Germany, Scandinavia or even further afield and rueing a missed opportunity,” he asserts.

He says that London retains its other

advantages of a deep pool of venture capital, a huge financial services industry and a sympathetic regulator, but may suffer without talent.

“But without access to talent, firms will find it hard to leverage these advantages,” he adds.

The government has said it is committed to backing fintech and there is support in the form of an exceptional talent visa, run by Tech Nation for the Home Office, that helps firms secure staff with particular skills from abroad. The visa was launched in 2015 and made available for 1,000 people a year, but increased to 2,000 in 2017.

MarketInvoice was among the first P2P lenders to make use of this, nabbing Rija Javed from Silicon Valley in the US as chief technology officer last month.

21

That isn’t to say there won’t be any British talent post-Brexit.

Property platform Lendy says it is already recruiting skilled individuals from established financial brands.

“At Lendy, we have attracted people from an institutional background, such as RBS and HSBC,” Paul Riddell, head of marketing for Lendy, explains.

“However we are now seeing signs of people moving around within the sector as it has grown and people have developed skills. We have not, so far at least, experienced any change to this as a result of Brexit.”

Handfield-Jones has revealed that Octopus Choice is launching its own academy to address any potential skills gap.

“In a post-Brexit Britain, we need to lean on our worldleading educational establishments, as well as the UK’s impressive assembly of fintech companies, to nurture home-grown expertise,” he says.

While politicians may be arguing out the finer details of customs arrangements, freedom of movement and single market access, whether by choice or continued demand, it seems it is business as usual for P2P..

JOINT VENTURE

Side by side investing Kuflink was one of the first P2P platforms to invest alongside its customers and is now reaping the rewards from offering low-risk investment opportunities, as chief executive Narinder Khattoare explains

O

VER THE PAST few years, low interest rates and rising inflation have turned a nation of savers into a nation of investors. According to recent statistics from UK Finance, just £322m was invested in cash ISAs in March 2018, down from £773m in March 2017.

Meanwhile, the UK’s peer-to-peer lenders are reporting record investment into their Innovative Finance ISA (IFISA) offerings, as once-conservative savers chase higher returns, even if they come with a little more risk.

This trend has been particularly pronounced at P2P platform Kuflink. Earlier this year, the property lender reduced its own stake in its loans from 20 per cent to five per cent, in response to overwhelming investor demand.

“The loans were going on our platform and they were getting funded very quickly,” says Kuflink’s chief executive Narinder Khattoare.

According to Khattoare, retail investors are now looking for higher rates of return, and the current

low interest environment is encouraging more and more people to consider alternative investments such as P2P lending.

“But with this comes risk,” he warns. “If somebody is paying you a higher rate, what are the risks involved with it?

With cash ISAs, customers seem to like the Financial Services Compensation Scheme which covers any losses. P2P platforms don't have that cover, but we do have provisions in place.

With Kuflink, we have skin in the game where we’re lending alongside every single investor in our platform.”

Kuflink is on a mission

which have a maximum loan-to-value of 75 per cent. This means that the property market has to decline by more than 30 per cent before investors see any losses.

“We see these loans as relatively safe,” says Khattoare. “For us it's all about investors being able to sleep at night

“ We've got a very thorough and rigorous underwriting process ” to minimise risk to its investors. As well as having ‘skin in the game’ by making its own five per cent investments in each loan, Kuflink also offers a 15 per cent first loss cover. Furthermore, the platform will only invest in property-backed loans

knowing that their money is in a safe place. And that money is being deployed to loans that are backed by property.”

Khattoare says that the IFISA has been “brilliant” because it allows investors to deploy and diversify their funds. “Investors

23

should always be diversifying their funds,” he says. “They should not only be deploying funds to one particular platform or one type of investment.”

Kuflink currently offers three types of property loans to investors: the ‘select-invest’ loan, where lenders can invest in individual loans to earn up to 7.2 per cent per annum; the ‘auto-invest’ loan, where investors choose between a one-year term paying 3.99 per cent, a three-year loan paying five per cent, and a fiveyear loan paying 5.35 per cent; and an IFISA-ready version of the ‘auto-invest’ loan. New customers can open the IFISA with as little as £100.

Since the platform was established in 2016, more than £19m has been traded, with not one single loss to its investors.

“Nobody on our platform has lost money to date,” he says. “We've got a very thorough and rigorous underwriting process so any deal that goes into our platform has to go through two forms of underwriting and two Credit Committees.”

If the base rate rises as expected, and cash ISA rates go up, it is this rigorous approach that will ensure that Kuflink remains attractive to savers and investors alike.

The cash ISA is dead… long live the propertybacked IFISA.

24

CONSUMER LENDING

Other people’s money

Consumer lending is a cornerstone of peer-to-peer finance, but with fears of a personal debt crisis and fierce competition, should platforms be worried?

Andrew Saunders investigates

P

EER-TO-PEER lending is a pretty diverse sector, with dozens of platforms out there offering everything from domestic loans of a few hundred quid at one end to full-blown commercial facilities of several million at the other. It attracts an equally

diverse range of investors to fund those loans, ranging from retail money looking for better returns than a savings account to increasingly sophisticated institutions building substantial portfolios.

But one of the biggest divides remains the one between the platforms

offering unsecured consumer loans, and those which operate in the small- and mediumsized enterprise (SME) space. So what are the characteristics of a consumer lender, and how do their models and operational priorities differ from platforms

making business loans?

P2P has built its name on doing things better, faster and cheaper than traditional players, says Nick Harding, chief executive and founder of Lending Works, which means in turn that the quality and speed of the technology platform is

CONSUMER LENDING

year, and this year is running at 125 per cent to date, a hectic pace which, Harding says, it could not have achieved without fast and reliable automation of as much of the process as possible.

By comparison, SME loans tend to be substantially larger – the average loan size in 2018 for the largest SME platform Funding Circle is just over £65,000, down from a peak of £74,000 in 2016, according to data from P2P analysis firm Orca Money. And while – with loans of £3bn under its belt - you can hardly accuse Funding

“ Consumer lenders are

all fighting for super prime borrowers, and the competition has pushed down returns especially significant for consumer lenders.

“Tech is absolutely more important in consumer lending,” he asserts. “You have to operate at scale in consumer and to do that you really need good tech.”

Lending Works opened its doors in 2014 and has made just over 18,500 loans since, with an average loan size of £6,039, according to the platform’s statistics. It has sustained annual growth of over 100 per cent each

”

Circle of lacking scale or ambition, Harding’s point is that size is not so much of an existential factor for SME lending in general. Many smaller platforms in that market still provide a strong offer both to borrowers and investors whilst servicing a relatively modest number of loans.

The nature of competition in the consumer market also favours lenders whose balance on the fintech

spectrum is more ‘tech’ than ‘fin’. “We are using APIs to connect, and to drive a slick customer journey,” says Harding.

“Many mainstream banks are simply not interested in that, we have had categorical feedback from them on that point.”

Perhaps at least partly because their well-known legacy tech issues (TSB anyone?) make it that much harder for the banks to engage on the same level, he adds.

The app-ification of so many of their daily needs also means that consumers increasingly demand Uber or Deliveroo-style speed and simplicity from their loan providers, too.

“Consumer customers are really impatient and they just won’t wait,” explains Harding. “If you can say to your customers ‘Plug in your details and you’ll get a decision in two or three seconds’, that’s really powerful. But if you say ‘Someone will call you in 24 hours’ – well, maybe another lender will have said yes to them by then.”

Despite coming under the same catch-all P2P umbrella, there’s no doubt that consumer and SME lending are pretty distinct from one another, says Iain Niblock, co-founder and chief executive of Orca Money. “We are always saying that building a diverse portfolio across P2P is valuable, because

25

SME and consumer loans are not closely correlated,” he comments.

The advantages of operating in the consumer space, he adds, are the size of the market, plus the fact that consumers tend to resemble each other more closely in terms of credit profiling than businesses do. “It’s a massive market, so there are huge opportunities especially if you can find the right partners,” he says. “And the majority of consumer lending is done off scorecards, so it’s about automation, there is less underwriting required than in business lending.”

But those potential rewards come with a few inherent challenges attached. “Funding Circle’s market share in SME lending is more than Zopa’s or Ratesetter’s in consumer,” he says. “There is less competition in business lending.” The main reason for that is that SME platforms face less competition from conventional lenders than those in the consumer market. “It costs a bank the same to write a £50,000 loan as it does to write a £3m loan,” Niblock adds.

Consequently, banks tend to focus on larger loans to more established businesses and leave the smaller end of the SME market to alternative players with lower cost bases.

That competition puts pressure both on margins

26

CONSUMER LENDING

for the platforms and returns for investors. “Consumer lenders are all fighting for super prime borrowers, and the competition has pushed down returns,” explains Niblock.

“On the business lending side they can afford a bigger spread.

But at four per cent on a consumer loan, you have to give the lender a return on that and a margin for yourself – it can be challenging.”

It’s an issue which puts off some institutional investors which might otherwise be tempted to get into consumer platforms. “We are not against investing in consumer lenders in principle,” says Alison Harwood, senior vice president at Varengold Bank’s London office.

“We see platforms with good credit discipline but the biggest challenge is seeing the yield.”

So despite backing P2P lenders including MarketInvoice and EstateGuru, Varengold has yet to put any money into a consumer platform. “Compared to, for instance, propertybacked lending, there just isn’t the same yield at the safe consumer end of the market,” she adds.

The way to deal with lower margins is to have more customers, and one way in which P2P platforms do this is by offering loans through partners with access to

large customer bases, such as mobile phone providers and financial comparison sites. Building such partnerships is now a key part of the growth strategy for most platforms.

But success is about smarts as well as size - making better and more nuanced credit decisions, according to Lending Works’ Harding.

Consumers may be more alike than businesses, but there are still valuable distinctions to be uncovered if you know how to look. “The amount of data that we consume per customer is staggering, the checks are so much more sophisticated than they were even five years ago,” he reveals. “We do electronic income verification checks, affordability checks, fraud checks.”

That enables them to make better decisions, more quickly – but perhaps the biggest

“ Tech is absolutely more important in consumer lending

difference between a young and energetic startup and an established traditional lender is one of attitude. Whereas a bank might get to a point where it is happy with its credit processes and leaves them be, the culture at businesses like Lending Works is about continuous improvement.

“We are always looking to make our model better, and that never stops, we will be doing it forever,” affirms Harding.

He also refutes the idea that consumer lending is inherently less attractive to institutional investors than SME lending. “For every investor who says that, there is one who prefers consumer because SMEs

”

are too volatile,” he asserts.

“We have institutions knocking out door down – we’re in well-developed discussions with four institutions and we have one live on the platform.”

One area where life is clearly more complicated for consumer lenders however is regulation.

“Compared to SME lending, the consumer regulations are very strict on assessment and affordability, arrears handling and vulnerable customers,” says John Coley, director in the financial services risk regulatory practice at big four accountancy firm PwC. Having taken over responsibility for

CONSUMER LENDING

“

Keeping up with the sheer volume of regulations can be a challenge

consumer credit only four years ago, the Financial Conduct Authority (FCA) is very active in overseeing the sector.

“The regulator is still sitting forward in its seat and consumer lending is very much under the spotlight,” he continues.

“A phrase used a lot by the regulator is ‘consumer harm’, and that can be more prevalent in consumer lending.”

An energetic regulator means plenty of changes to stay on top of. For example, the FCA is working, says Coley, on a new definition of vulnerable customers which will be based on making an assessment of people’s financial resilience – the more resilient, the less susceptible to harm. It’s also investigating the use of technology such as voice analytics to try and spot callers who might be confused, or

”

have misunderstood what lenders are offering them. “Keeping up with the sheer volume of regulations can be a challenge,” says Coley.

The other factor that is never far away from any discussion about the prospects of consumer lending, is the UK’s rising level of debt. According to a report published by Coley’s PwC colleagues late last year, unsecured UK consumer debt grew at 11 per cent in 2017 to hit £300bn, some 30 per cent more than its pre-2008 crash peak.

That’s an average of £11,000 of unsecured debt per household.

That’s a lot of debt.

But for everyone who thinks it is too much, there are others for whom it’s simply the natural consequence of wider factors. “Why is debt rising? It’s the low interest rate environment,” says Orca’s Niblock. “The

government is keen to encourage spending, and more lending means more money in circulation and more spending. So that’s a clear reason – interest rates are low and so the cost of debt is low.”

Lending Works’ Harding adds that no lender can afford to be complacent about the wider credit conditions. “There has been some commentary about inflated credit, and I never take commentary from trustworthy sources like the Bank of England or the regulator lightly,” he states.

27

But he also points out that the type of debt – and debtor – is important in assessing those conditions. “There’s always an immediate concern ‘Is this the start of the next cycle?’” he adds. “But it’s not as negative as it’s been painted – the flipside is that the regulator has also said that credit is growing in the right places, with prime borrowers who can afford to pay it back.”

After all, providing easier access to better products and services for customers and investors is what everyone in P2P wants, regardless of whether they are consumer or business lenders.

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PROFILE

The power of green Bruce Davis co-founded ethical crowdfunding platform Abundance, helped to launch Zopa and is a director of the UK Crowdfunding Association. He talks to Andrew Saunders about ethical finance, voting with your money, and what he really thinks about Zopa launching a bank…

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VEN BY THE standards of peer-topeer lending, known for the deep-rooted desire of its protagonists to do things very differently from traditional banks and financial services providers, Abundance Investment is a pretty alternative type of alternative funder.

For a start, it specialises not in the usual fare of loans to consumers buying new kitchens or TVs, or small- and medium-sized enterprises looking to expand, but rather in funding what it calls “socially useful” investment. That’s largely been green energy in the form of wind turbines and solar farms but also includes the construction of GP’s surgeries, recycling used cooking oil into bio-diesel and, most recently of all, affordable housing.

“When we look at a project, we always put two tests against it – one, if we get involved will we produce something

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socially useful? Whether that’s affordable rent, making public transport greener, or producing more renewable energy,” says co-founder and joint managing director Bruce Davis.

But the term socially useful is not, he adds, a euphemism for poor returns, as some old city cynics used to say about green investment back in the day. “The other test is, is there an investment return there? Because we are not doing this for charity,” he continues.

Neither does Abundance aim to be a financial ghetto for starry-eyed dogooders, another criticism often aimed at any investment that dares to make sustainable or ethical claims. Rather, it’s aimed at ordinary people with a bit of money put by who’d like to see it doing some good in their local community,

cautious about doing anything alternative. So what Abundance is saying is that ethical investment is not just a niche. It’s not alternative to care about the environment. It’s a very mainstream problem that affects us all.”

Hence the specialisation in renewable energy, from the wind turbines which were its bread-and-butter in the early days, through solar PV to more recent innovations including a Cornish geothermal power plant and a couple of pump-storage hydroelectric projects in Scotland. In type, if not in size, exactly the sort of long-term infrastructure investments which are normally the preserve of governments and pension funds.

“Traditional infrastructure financiers have got the scale where they only want to look at

“ It’s not alternative to care about the environment ”

instead of living a very quiet life sat in a moribund savings account.

“There are about eight million people in the UK with money to invest who are basically altruistic in their nature,” comments Davis. “They have £100bn in investable assets and make up about a third of the active investor market.

“But they are a bit

big projects, but we tend to operate at a slightly smaller scale – multi-million pound rather than multibillion,” explains Davis.

“There is a whole swathe of infrastructure investment that happens sub-£10m where there is a shortage of capital and finance. We can fill that gap.”

Returns vary from around four per cent to

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“ We are creating an asset for the community ”

as much as 12 per cent, he says, depending on the level of risk. The nature of those projects also leads to another one of Abundance’s quirks, at least by comparison to most in the P2P sector: it is an investment rather than loans-based model. The projects it backs are funded through debt instruments called debentures, legal documents issued by a company to an investor which specify the terms of their debt.

Holders of debentures get a pretty early place in the queue of creditors should the worst happen and a business fails, but they are also more suited to the extended timescale of a typical Abundance project, which can stretch to several decades. “We chose that route because we were investing in infrastructure which has long-term revenues and is relatively low risk,” says Davis.

Abundance began 10 years ago, founded by Davis and two colleagues, entrepreneur and environmental policy expert Karl Harder and ex-UBS corporate banker Louise Wilson. The idea, like so many alternative finance start-ups of that era, was partly inspired by the scandals that emerged

during the financial crisis.

“The small guy just got squeezed out of the public markets and it was a bit of a response to that,” explains Davis. “We were saying that investment doesn’t have to work that way, it’s just how it has ended up.”

Abundance has made investments totalling £70m in around 30 projects, making it a very small, even if perfectly-formed, player by comparison with the big P2P platforms. Davis is unapologetic. “The reason we are not as big as RateSetter or Funding Circle is that our pipeline is much more targeted at particular areas and markets,” he says.

“But we don’t need to be as big in terms of capital invested, because our money is invested for longer, we’re not rotating it on a one or three year basis.”

The complex nature of its projects – which can involve local authorities and other funding bodies as well as main contractors and sub-contractors – also means that due diligence can be extensive. “We have a team of project finance experts and it takes from six weeks to six months,” explains Davis. “There are projects which fall by the

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PROFILE

wayside because they don’t want to go through the due diligence – maybe they thought crowdfunding was an easy option.”

The fact that Abundance is strictly a self-select platform is another distinction in an increasingly autopick world. It matters because it maintains the connection between investor and project, says Davis. “That’s what is important to our investors – getting a return that hopefully reflects the risk on one side, and seeing real impact in the community on the other.”

Abundance’s latest new development is an experimental affordable housing project in Liverpool, Merseyside Assured Homes. A threeyear bond paying 4.5 per cent aims to raise £4.25m to fund the construction of 30 homes that will be offered at affordable levels of rent. “We’re trying to change the way we build houses, not to build and sell on immediately,” says Davis. “We build them and then lease them to housing associations who will provide the houses as a service for up to 50 years.

“We are not making bets on future land values, we are creating an asset for the community.”

As well as offering affordable rents, Abundance says that homes built this way will be on an assured tenancy

basis. “That’s a much more stable home than the usual private rented model where tenants might only have a month or two’s notice,” Davis adds.

Davis is also proud of Abundance’s pioneering early work with the regulator on what subsequently came to be known as crowdfunding.

“We came up with a model that allowed direct investment into a project like a wind turbine using a regulated platform, and we were the first to be regulated,” he states.

The platform was authorised in 2011 after two years of hard work with [former financial regulator] the Financial Services Authority (FSA), he says. “We actually asked to be regulated the FSA didn’t know what to do with us. They said no-one had ever asked to be regulated before.

Louise Wilson really fought that battle.”

This led to the business model which allows not only Abundance to operate, but also platforms like Seedrs and

the democratisation of money. “Democracy doesn’t just mean voting

“ The problem is that P2P doesn’t have a regulatory definition ”

Crowdcube where retail investors can put up cash for equity in a vast range of start-up ideas.

It’s all part of Davis’ world view around

in elections, it’s about your money,” he comments. “If your money is invested in something you don’t agree with then you have a choice – live with the

guilt, or move it.

“All crowdfunding is doing is saying that now you have that choice – you can back someone’s home improvements on Zopa, fund some local infrastructure with us or back a tech start-up on Seedrs.”

What’s the difference between crowdfunding and P2P? There are even two separate trade bodies, the

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UK Crowdfunding Association (UKCFA), of which Davis is a founding director, and the Peer-to-Peer Finance Association (P2PFA).

“The members of the P2PFA are all loansbased crowdfunders.

The problem is that P2P doesn’t have a regulatory definition,” he says.

“On the investment side, you have us, Seedrs, Crowdcube, a range of

different models. Rather than being focussed on one model, the UKCFA is focussed on promoting diversity and innovation.

The fees are lower and anyone can join – we have 35 members.”

He does admit that there is a lot of overlap between the two, and that both bodies work closely together on areas of common interest such as the introduction of the

Innovative Finance ISA which has been a shot in the arm to all. “We’ve seen north of £20m-25m going into our ISA over the last two years and it’s continuing to grow,” Davis reveals.

The ISA wrapper has also helped boost the average sums invested in Abundance, from around £5,000 per individual to around £8,000. “In the main we are talking

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to people with cash or stocks and shares ISAs but that wasn’t really their choice,” he says.

“We sensitise them to the question of what they are doing with that money.

“They’ve got longterm goals for it so they should invest in something long term.”

Davis’ own long-term plan for Abundance is straightforward. “To maintain momentum and grow the business to the point that we can continue to grow profitably,” he states. “The aim is to achieve that in the next two years.”

With a background in ethnographic research examining ‘the social life of money’, he was involved in the original pre-launch team which developed the idea for Zopa. What does he make of the fact that it is now turning itself into a bank?

“I am a purist but I understand what they have done it,” Davis says.

“They need to expand the types of credit they can offer and to diversify the types of capital they can use.

“They are a million miles from our world in terms of competition, but Zopa wants to build a sustainable business and I am all for that because it has been a force for change. Abundance couldn’t have existed without Zopa, we all owe them a debt for that.”