Peer2Peer Finance News June 2020 by Alternative Credit Investor

>> 14

MITIGATING RISK

How platforms are protecting investors during the crisis

SIPPS APPEAL

>> 22

P2P firms are tapping into the pensions market

Simple Crowdfunding chief Atuksha Poonwassie talks to P2PFN >> 10

ISSUE 45 | JUNE 2020

Why CAN’T retail investors finance government-backed emergency loans? • Pressure grows for British Business Bank to remove restriction • Everyday investors treated unfairly, industry claims • P2P lenders deterred from participating as a result THE BRITISH Business Bank (BBB) is under mounting pressure to explain why retail investors cannot participate in the coronavirus business interruption loan scheme (CBILS), as industry stakeholders argue that ordinary people are being treated unfairly. Retail investors are not allowed to fund loans that are part of the emergency scheme, which offers an 80 per cent government guarantee on the value of loans to small businesses to support them during the pandemic. Accredited peer-to-peer lender Funding Circle has temporarily paused all non-CBILS lending to concentrate on sup-

porting the government programme until further notice, meaning that retail investors are now unable to fund new loans via its platform. The only other accredited P2P lender, Assetz Capital, has kept its nonCBILS products available, meaning that retail investors can still fund other loans on its platform. The state development bank did not explain why retail investors are exempt from CBILS. It is understood to have deterred some P2P lenders from applying

for accreditation under the scheme, potentially shutting off further routes of supply. P2P property platform Proplend last month abandoned its plan to offer a CBILS Innovative Finance ISA (IFISA). “We applied as a CBILS lender, promoting the coronavirus business interruption loan IFISA concept along with institutional funding,” said chief executive Brian Bartaby. “But following discussions with the BBB we dug deeper into

the detail of the scheme and decided that it was something that Proplend would not proceed with. “Allowing individual investors to participate in CBILS via their ISA wrappers would have provided them with much-needed income, at a time when bank interest rates are at historic lows. “The fact that it’s 80 per cent government backed would have been a nice kicker for investors. On paper it seemed a winwin solution.” A RateSetter spokesperson said the platform would take a close interest if CBILS were opened up to accept retail money. Retail investment makes up the vast majority of RateSetter’s funding. Stuart Law, chief executive of Assetz Capital, said the platform did not ask why there is a block on retail involvement but maintained that there are wider benefits for everyday investors regardless. “It is a rule from >> 4

It has never been more important to keep up to date with the latest peer-to-peer lending news. These are extraordinary times and our team is working hard to keep you informed about how the UKâ&#x20AC;&#x2122;s P2P sector is responding and what new trends are starting to emerge. If you want to be the first to learn about the latest developments in the world of P2P, please purchase a subscription today. We offer a range of subscription options, starting at just ÂŁ1.95 a week. Please go to www.p2pfinancenews.co.uk/subscribe to buy a subscription today, so that you can enjoy unlimited digital access to P2PFN, with the option of a monthly print magazine. For more information on subscriptions, including overseas queries, please email tehmeena@p2pfinancenews.co.uk.

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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 Michael Lloyd Senior Reporter michael@p2pfinancenews.co.uk Andrew Saunders Features Writer PRODUCTION Tim Parker Art Director COMMERCIAL Tehmeena Khan Sales and Marketing Manager tehmeena@p2pfinancenews.co.uk SUBSCRIPTIONS AND DISTRIBUTION tehmeena@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.

he government’s emergency support schemes have been front page news in recent weeks, across most newspapers and, of course, the Peer2Peer Finance News website. While it’s great that growing numbers of loans are being facilitated, I’m sad to see that only two peer-to-peer lenders have been accredited for the schemes at the time of writing. There are plenty of good-quality platforms in this sector which could channel much-needed funding to small businesses in need of help during the public health crisis, at a quicker pace than the banks. Furthermore, as this month’s front page story shows, it’s not just the platforms being excluded from the schemes but everyday investors too. We’d like to see retail investors benefitting from these government-guaranteed loans in the same way that institutions can. After all, P2P lending was borne out of the idea of democratising debt investment – so it seems a shame that its earliest supporters should miss out now. If you have any feedback on these issues, or if you have a story, feel free to email me personally at suzie@p2pfinancenews.co.uk. SUZIE NEUWIRTH EDITOR-IN-CHIEF

We hope you’re enjoying the latest edition of Peer2Peer Finance News! We have now moved to a paid-for subscription model. If you would like to continue reading the magazine, please go to www.p2pfinancenews.co.uk/subscribe/ to find out about subscription options.

NEWS

cont. from page 1

RY ST

BACK

UR IND

the BBB that everyone is following,” he said. “Retail investors would generally benefit from the reduced economic impact as a result of CBILS introduction, as would everyone else in the country.” But Neil Faulkner, of P2P analysis firm 4th Way, said it makes no sense that the banks are allowed to benefit from governmentbacked funding while retail investors are not. “By locking out retail lenders now, the government is continuing to treat ordinary people

unfairly,” he said. “The banks simply have too much power over the country and its elected representatives.” John Cronin, analyst at brokerage Goodbody, agreed that the policy was unfair in some ways but

suggested there may be valid reasons. “At one level it is completely unfair – unequal treatment, denying retail investors the opportunity to secure potentially lucrative return opportunities in the long-run,” he said. “However, the CBILS rules have likely been designed in that manner for a few compelling reasons: CBILS loans are interest-free for the first 12 months, which means such an investment product is unlikely to be deemed attractive by the vast majori-

ty of retail investors. “Retail investors can obtain exposure via self-invested personal pensions and selfadministered personal pensions in any event. “It could slow the process down as it may take longer for accredited lenders to assemble a pool of retail investors in certain cases and these are high-risk loans so the Treasury may have been keen to minimise risks to retail investors.” The BBB has been contacted for comment.

P2P consumer loans could be hardest hit by Covid-19 PEER-TO-PEER consumer loans may be worst hit by the coronavirus crunch but there will be a knock-on effect elsewhere, industry observers have claimed. Andrew Hagger, founder of personal finance website Moneycomms, has warned that consumer lending will see a higher level of defaults than other segments of the credit market but said no sector will be immune. “No sector will come out of this unscathed – with many potential job losses, consumer loans will suffer higher levels of defaults than platforms will have prepared for, however this will also have a knock-on effect and the property

market will be negatively impacted,” he said. Hagger also highlighted issues with demand for withdrawals – there have been delays on platforms such as RateSetter and Assetz Capital – meaning investors will have to “sit tight.” However, Lisa Best, head of financial services content at alternative investments research firm Intelligent Partnership, said consumer loans could offer better returns as there are now higher risks due to the economic uncertainty. Meanwhile, property loans offer the security of bricks and mortar but valuations may change, she added. “For P2P, the depth of

provision funds may well be tested as well as the real extent of diversification across loans,” she said. Arrears and defaults may only be declared in the coming weeks, but most platforms have been working with borrowers to assess their needs and in some cases allow repayment plans or payment breaks. In the consumer space, Zopa has tightened its

lending criteria, while Lending Works initiated a 90-day ban on new loans due to end in July. The Financial Conduct Authority has ordered consumer lenders to honour requests for payment breaks, but Nadeem Siam, founder of P2P consumer lender Fund Ourselves, said not many borrowers have taken these up. “Maybe the government’s furlough scheme has done its job or people in our portfolio are not affected,” he said. “We are keeping an eye on things though. “Some of our larger investors have added to their portfolio and it is the smaller ones who have tried to withdraw.”

NEWS

Relendex seeks approval to offer advice to investors RELENDEX is planning to offer advice to investors and manage their portfolios, subject to regulatory approval. The peer-to-peer property lender has applied to the Financial Conduct Authority to become an alternative investment fund manager, so that it is authorised to advise on alternative investments. Paul Sonabend (pictured), executive chairman of Relendex, said the platform will only advise on its own products and hopes to receive regulatory approval by the end of the third quarter. He said that Relendex

will act like a fund manager, managing investors’ portfolios in line with their criteria, in exchange for a fee. For example, some investors may only want to lend in England or stipulate a minimum and maximum amount for

each loan, he added. Relendex is considering setting up an associate company to manage the new services. “This is definitely going to help retail investment,” Sonabend said. “Financial advisers do not recommend P2P

for various reasons, but mostly because they don’t understand it. “The sooner we get the license the better it will be. It will be easier to explain to people what we do for them and to manage their money because every conversation we have with investors has to start with saying ‘we’re not permitted to give advice, we can provide information, not advice’. “We can help people who don’t want to, or don’t have the time to, read all the documentation and want to spread their risk across many different loans.”

Nicola Horlick says Money&Co is prepared for downturn MONEY&CO chief Nicola Horlick has said that the platform was lending with caution even before Covid-19, due to concerns of a Brexit-induced economic downturn. The City superwoman said the peer-to-peer business lender had decided purely to offer secured loans even before the pandemic hit, focussing on music loans and litigation finance. Money&Co’s music loans are secured on music rights. Its litigation loans are secured on the legal case, with an insurance policy to cover

costs if the claimant does not win the case. “We didn’t know there would be a pandemic, but we thought there would be a very sluggish economy and potentially a recession, so we were already prepared to an extent,” Horlick said. “For the small- and medium-sized enterprises (SMEs) we’ve already lent to, we’ve extended their loans or made them interest-only. “We do everything we can to help our borrowers but at this moment we don’t want to take on new SME borrowers because

of what could happen to their businesses.” Horlick has argued that a V-shaped recovery will be impossible because many businesses will never reopen. She said the government needs to be proactive to facilitate a recovery. “We need to work hard to avoid there being a depression,” Horlick said. “The government needs to make capital available to start-ups and growing small businesses that have survived. People who build small businesses need to be supported. “The government should assess where skills

shortages are, such as building, plastering and more computer-savvy sectors, and train unemployed people on public finances to fill these roles.” Horlick added that many businesses will not be able to repay emergency loans, so the government will likely have to convert a lot of debt into equity in these businesses. She said this would need to be managed by an independent group of venture capital specialists. “It’s going to be an interesting time, but we have to be incredibly proactive,” Horlick said.

GOOD GOVERNANCE. TRANSPARENCY. TRUST. Some things canâ&#x20AC;&#x2122;t be bought, sold or traded. Clients rely on Duff & Phelps and Kroll to help protect, restore and maximise these ideals and mitigate risk. As companies find themselves navigating a new reality, addressing issues from crisis response and cyber threats to valuations and financial stress, our valuation, restructuring, regulatory, security and risk management experts can help you assess and manage the risks to your business and provide transparency to key stakeholders. Balancing proven technical skills with deep industry expertise, we help our clients address their most complex business needs. Learn more at www.duffandphelps.co.uk

JOINT VENTURE

Shelter in the storm

There are still opportunities for peer-to-peer platforms despite the pandemic, says Duff & Phelps’ Geoff Bouchier and Mark Turner

HESE ARE unprecedented and stressful times for the financial markets. But for peer-to-peer platforms, there are still a few opportunities, even amid a pandemic. “It’s certainly not all doom and gloom for the P2P sector,” says Duff & Phelps’ Geoff Bouchier (pictured, left), managing director, London restructuring advisory practice. “A month ago, it was a bit uncertain how the marketplace would adapt and deal with the pandemic, but it’s pleasing to see market participants responding and adjusting as necessary. The P2P sector seems to be rather robust in that way.” Duff & Phelps is the world’s leading independent valuation advisor, so it is comforting that both Bouchier and his colleague Mark Turner (pictured, right), managing director in the firm’s compliance and regulatory consulting practice, can see the value in P2P lending at this time. Having worked with a number of UK-based P2P platforms, they are well aware of the risks and challenges facing the sector and the increased regulatory focus and oversight. But they also see how P2P platforms can benefit from current market conditions. “Like other specialist finance providers, P2P platforms are currently in a period of adjustment and are adapting to the current situation which will last for some time,” says Bouchier. “It may result in increased costs because of that transition.

“But it could also be a good time for platforms to raise both additional equity and lender capital – from retail and/or institutional investors. The coronavirus has caused a significant reduction in equity market values and therefore investors are considering where to allocate capital to earn a decent return. P2P is still a very interesting and attractive investment for these investors.” It is expected that P2P platforms will see an increase in loan applications from small business borrowers as the crisis continues. That will increase further for P2P platforms who have received British Business Bank CBILS lender approval. But it is important that P2P platforms “don’t become a lender of last resort and increase their risk of bad debt or loan impairment,” Bouchier adds. “Shortly prior to the pandemic, the regulator signalled its increased focus on this sector, particularly around dusting off and updating existing wind-down plans, and it is expected that this will be

closely monitored throughout the pandemic and after,” says Turner. Neither Turner nor Bouchier expects the coronavirus pandemic to lead to widespread consolidation in the P2P sector, although they point out that those with depleted capital reserves may be in for a bumpy ride. “If a platform is facing a short-term liquidity problem, but the track record is there and the viability of the platform remains, then there should be no need to trigger a winddown,” says Bouchier. For those platforms worried about having to implement their wind-down plans, Turner and Bouchier have some advice: review your financial performance and future projections; consider raising additional capital or delaying capital redemptions; communicate with your stakeholders; and seek professional advice. As a multi-discipline advisory practice, Duff & Phelps is already working with several platforms on a variety of matters, from valuations and fundraising to advice on regulatory matters and assistance with borrower defaults and loan enforcement recoveries. As the full economic impact of the pandemic is still unknown, platforms should stay in close contact with their professional advisors to ensure they receive the support and any necessary assistance so they can survive, and thrive, in 2020.

NEWS

Property valuations worry investors ahead of Collateral update A DROP in property valuations could result in lower-value distributions being paid out to investors of defunct peer-to-peer lender Collateral. Collateral’s administrator BDO will publish its latest liquidation report at the end of June. However, investors have expressed concern that the Covid-19 pandemic could drive down the value of any outstanding property sales. According to BDO’s last liquidation report – which was released on 23 December 2019 – enforcement action has

been taken on 14 property loans with a combined value of more than £5m. Four of these loans relate to development projects worth more than £4.4m. These include a development loan for an eco village in South Lanarkshire, which does not appear to have been completed; as well as a loan on a development site in Burnley, Lancashire; a loan on a property development in Great Harwood; and a £1.4m loan against an incomplete property development in Darwen, Blackburn, which has been described as

an “eyesore” by local councillors. At the time of writing, BDO was unable to provide an update on the recovery status of these loans, but told Peer2Peer Finance News that “the liquidators’ report remains on track to be published by the end of June and will be posted to Companies House.” The Covid-19 pandemic and the subsequent lockdown has meant that many construction sites have been forced to down tools, while most property sales have been paused. There have been fears that this may slow down any

recoveries process or result in lower valuations on properties and sites. Collateral went into administration in January 2018, and investors have yet to receive any distributions from the administration process, two-and-a-half years on. Earlier this year, the administrators for another collapsed P2P lender, Lendy, told investors that the administration process had been extended by three years due to the impact of the pandemic. BDO declined to give a timescale for the completion of Collateral’s administration process.

Elfin to launch industry’s first P2P credit card PEER-TO-PEER lender Elfin Market is preparing to launch the industry’s first physical credit card later this year. The Elfin Card will be linked with the platform’s existing credit facility – the Elfin Purse – allowing borrowers to make transactions and withdrawals on the go. “We believe the launch of the Elfin Card will be a game-changer for all our customers, both borrowers and lenders,” said Lakshithe Wagalath, co-founder and chief operating officer at Elfin Market. “The Elfin Card will enable borrowers

to make payments directly from their Elfin Purse and make their experience just as userfriendly as with a regular credit card, but much cheaper. Among the numerous cards released by fintech companies in the recent past, the Elfin Card will stand out as it actually provides

credit to the cardholder, and not debit. “To the best of our knowledge, it will actually be the first payment card released by a P2P lending platform in the UK.” Like the Elfin Purse, the Elfin Card will come with a representative APR of 5.8 per cent, although the actual rate will depend on

various factors such as the borrower’s credit rating. “We believe that the credit card market has been too expensive and unfair for too long towards borrowers,” added Wagalath. “Recent innovations in the credit card market have essentially focused on making borrowers’ experience more userfriendly, but we believe it is the right time to also disrupt the pricing structure of this market and offer an affordable and fair alternative to traditional credit cards.” For more on Elfin Market, go to page 25.

PROMOTED CONTENT

Learn from the crowd, don’t follow the crowd Carl Davies, chief operating officer at The House Crowd, explains why investors should trust peer-to-peer property loans in the current climate

ANY PEOPLE LOOK to the spectacular past failures in the peerto-peer lending industry as a way of dissuading others from investing in it. But it is specifically because of these failures that the industry should now be looked at by serious investors. But be careful: it is important to look at the underlying assets in which your funds are invested. Not every P2P loan is the same. P2P is a methodology that can be applied to many different situations. The current lockdown is unsettling. Many investors wisely feel they need to hold cash in such uncertain times. However, once their rainy-day buffer of three to six months has been accumulated, many investors would still like to invest in property. The question is how this can be done relatively safely in the current climate. How can risk be mitigated whilst returns are maximised? Investing in P2P property loans, previously the sole domain of high-net-worth investors, could be the answer. Seven to 10 per cent per annum target rates are possible by investing in bridging and development loans to experienced developers. These loans offer investors a first charge on the asset being financed, so the investor can (via the services of the platform) sell the property and recover capital and interest in the unlikely event the borrower fails to repay the loan. The beauty of such loans is that, unlike a bank which only protects

up to £85,000 of your funds, the only limiting factor on the protection of your funds is the value of the projects you are invested in. Previously, the entry ticket for such investments was several hundred thousand pounds from one high-net-worth individual, who had to have in-depth knowledge of the property development market and the ability to do their own due diligence on the projects. Now with the power of the crowd and the expertise in underwriting, securitising, monitoring and repossession held within a few P2P platforms such as The House Crowd, investors can enjoy inflation-busting returns of up to 10 per cent from as little as £1,000 invested from six to 24 months. “So, what’s the catch?” I hear you say. Like anything in life that has any value, you need to put a bit of effort into finding

those platforms that you feel comfortable with and understand both their model and the risks. However, new investors to the sector can benefit from those early pioneers who have helped to shape a very different industry today compared to the Wild West days of 2012-2013. Some pioneers won, some lost and some are still waiting. The Financial Conduct Authority has introduced tougher rules for the sector and those platforms that still exist offer a sophisticated approach – institutional grade in the case of The House Crowd – and a riskmitigated investment opportunity. Of course, there still are risks; not every project hits its profit target and some are delayed beyond their intended term. Accurate valuations, realistic loan-to-value ratios and a robust exit plan are key. But a diversified portfolio should deliver impressive results.

PROFILE

Building new opportunities Simple Crowdfunding’s Atuksha Poonwassie talks to Marc Shoffman about funding property developments during a pandemic…

TUKSHA POONWASSIE co-founded Simple Crowdfunding in 2013, aiming to make property investment accessible to everyone while helping property developers address the housing shortage in the UK. The platform facilitates both equity and debt investments and its loanbook is now approaching £9m. Although the coronavirus pandemic has slowed activity in the property market, Simple Crowdfunding has still managed to fund projects during lockdown. It has even used its network to help donate to charitable causes, all while coping with the regulatory changes and challenges which are emerging from the Financial Conduct Authority (FCA). The property market is not moving as fast as some had hoped following the so-called Boris bounce after the General Election at the end of 2019. However, Poonwassie, who is also a director of the UK Crowdfunding Association, is confident that there are plenty of positives to build on. Marc Shoffman: How have you addressed the challenges of funding projects during the lockdown? Atuksha Poonwassie: We have had a lot more requests coming in for finance. There are challenges, as we see developers looking to raise between £10m and £12m but that is a bit too large for the retail-focused community we have. The market from an investor

standpoint is still active but people are investing a bit less, which makes doing a larger fundraise a challenge. We are working with other types of investors such as high-net-worth individuals and institutions who may be able to provide funding. Valuations are also proving a challenge. In a typical project you will go to the site for the valuation but current restrictions limit that. Our current projects had their most recent valuations conducted in February or March. However, values may have gone down since then and we are adjusting that internally to accommodate for it. All our P2P loans have been paid back. On the equity side, we have some projects running late because sites have either shut down or been reduced, or because sites have completed but sales are delayed. One of our sites was two weeks away from completion but it was being run by two doctors who have now gone back to the front line to help with the coronavirus crisis. MS: How has the pandemic

affected Simple Crowdfunding? AP: We have had a double hit. We had the election and the challenges facing the country at the end of last year and then the market started picking up. There were a number of projects in the pipeline in January and you could tell there was a lot of interest and then coronavirus hit. The challenge we have is we don’t know how long this will go on for. We are in property and that is more volatile from a market standpoint. We did have plans to launch new products that we are still working on in the background but now is not the time to launch. MS: Is there more that P2P lenders could be doing? AP: It would be nice for more P2P lenders to be able to offer the government support schemes. Meanwhile, several lenders are putting efforts in elsewhere to help those in need. We are supporting a charity called Go Dharmic, providing food and personal protective equipment to those who need it. MS: What is the current mood among investors? AP: Investor inflows have slowed. For the first few weeks of the pandemic people were trying to find their feet and make sense of what was happening. Filling up an ISA was the last thing on many people’s mind. That gave us an opportunity to

PROFILE

explore and get our head around what needs to happen. We have been reaching out to our communities and tapping into our contacts, providing logistical support and communication. The appetite has changed. There seems to be an increased appetite for P2P investments compared with equity, as you have fixed returns with a secured asset. MS: How have you been coping with the new FCA P2P regulations? AP: We welcomed the changes on appropriateness tests and marketing restrictions from last year. We are in a different position because we offered equity and P2P so had already taken the view that we would categorise all investors regardless of which type of investment they were making. It wasn’t a substantial change for us.

Ultimately P2P lending is investing. Being able to provide investment opportunities to everybody in an environment they understand is a good thing to be doing. MS: Is there anything the FCA could do better? AP: Having sensible regulation is a good thing. The communications pushed out in terms of the risk profile of Innovative Finance ISAs haven't been helpful. There have been conversations through my involvement with the UK Crowdfunding Association on this. MS: What would a recovery look like? AP: If we had an indication of when we could get out of this, then it becomes easier to plan. We don’t have that insight yet and there are lots of theories about what

life will look like after lockdown. I know larger homebuilders are back on site as projects will continue. Some of the sites we have are open and are maintaining social distancing. There will be shortages of certain stock though and we don’t know the impact of disruption to goods coming from overseas. There is a sale cycle that may be delayed. People are looking at ways around this such as virtual reality tours or walk-throughs. Some valuers will go back on site. There also needs to be a discussion on the financial aspects, such as whether developments will need to be downvalued. There is work being done to prevent that happening. From an alternative lender standpoint, and especially P2P, it is an opportunity if other lenders become tighter in terms of criteria.

Expertise where you need it Whatever direction the pendulum swings At Quantuma we provide a comprehensive range of advisory services to assist peer-to-peer lenders in: - Platform Management - Portfolio Management From business as usual scenarios, to stressed and distressed situations our team are able to advise.

Our team Frank Wessely Partner

 +44 (0)7770 210628  frank.wessely@quantuma.com

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Frank Ofonagoro

Sarah Balsom

Director

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SPONSORED CONTENT

Managing your platform through the pandemic Frank Ofonagoro, director, advisory & restructuring at Quantuma, outlines the key concerns for every platform in this trying time.

“H

OW LONG WILL lockdown last?” “How can we support our portfolio of customers?” “How do we maintain investor confidence?” “And can we, and our customers, take advantage of UK government initiatives?” These are the all-too-familiar questions posed and discussed around many a peer-to-peer platform boardroom table in recent weeks. How a P2P platform addresses these questions will largely depend on the general profile of its borrower base and the financial position of the platform itself (that is, its ability to withstand the impact of Covid-19, at least in the short- to medium-term). We consider that most of the P2P platforms out there are likely to fall into three broad areas: 1. Operational hibernation Your platform has been critically affected by Covid-19 and you have been unable to obtain coronavirus business interruption loan scheme (CBILS) accreditation (or similar). You may be experiencing challenges which have prompted you, as a board, to assess the strategic options available to your business. It may be that your platform was fundamentally sound pre Covid-19, yet highly geared towards property lending. With many development projects mothballed, investors have little choice but to accept an unknown and potentially prolonged period of hibernation, for as long as lockdown ensues. In this scenario,

the existing liquidity of the platform may be key to its survival. 2. Exploring exit options If your platform was fundamentally sound, with a viable business model pre Covid-19, now may be the time for you to opportunistically explore the prospects of an early exit. Conversely, if there were concerns regarding the viability of your platform pre Covid-19, the current climate may have exacerbated those signs of distress. In these circumstances, if your platform is unable to access government-backed initiatives such as CBILS, you may be considering exit options such as a share sale or a managed wind-down. Where a share sale is considered this is obviously not without its challenges given the current economic environment, and prospective sellers will likely have to accept a lower valuation than previously contemplated. However, some platform owners may see value in realising remaining equity value earlier than their original exit horizon pre Covid-19.

3. Business as usual Conversely, your platform may be weathering the impact of the crisis. You may have achieved CBILS accreditation and have successfully adapted your operations to continue to operate within the current environment. For these platforms, the strategic focus will likely have turned to providing funding to new customers where appropriate, but primarily supporting existing customers. In this regard, robust management of the portfolio of new and existing customers will be paramount to future success. Whatever your current circumstance, within Quantuma LLP, we have the expertise and sector-specific experience to help you to react, respond and prepare for the challenges ahead. For those platforms experiencing an element of distress in the current economic climate, we can help you to assess the strategic options available to your business. We can play an active part in stakeholder management, as well as providing robust advice to directors individually. For platforms that have successfully adapted to the current crisis and are operating in a close to ‘business-as-usual’ manner, we’d recommend taking additional steps to closely manage your portfolio of clients throughout the lifecycle of their funding. We offer a broad range of business advisory services, including corporate finance for acquisitive clients within your portfolio, through to restructuring advice for those clients at risk of default.

MITIGATING RISK

Dangerous waters Michael Lloyd explores risk mitigation strategies in the sector, which are being

put to the test due to the unprecedented challenges of the Covid-19 crisis

LL INVESTMENTS COME with a degree of risk – it’s simply unavoidable. But the Covid-19 pandemic has presented a completely new form of risk that no one could have anticipated. The peer-to-peer lending community has been – by necessity – extremely familiar with risk management processes. Between provision funds, security, secondary markets, credit checks and investor marketing restrictions, P2P has been a hotbed for innovation and risk mitigation. Now all of these plans are being put to the test.

“One thing that you always need to think about when managing risk is what’s the worst that can happen?” says Mike Bristow, chief executive of CrowdProperty. It turns out the worst that can happen is that the economy grinds to a halt, property projects are placed on hold, investors rush to withdraw their money amid an uncertain economic environment, and payment holidays are offered to borrowers to avoid an unwelcome spike in default rates. However, like any other lenders, P2P platforms have to manage risk and protect their investors,

and the UK’s platforms are aligned on this core value. “Mitigating risk is making sure interest is paid and the loan is redeemed,” says Brian Bartaby, founder and chief executive of Proplend. “Fundamentally it comes down to who you are borrowing and lending money to and how you get the money back.” Risk management systems differ from platform to platform, but many firms in the sector diversify investors’ funds to mitigate risk. The idea is that by automatically diversifying each investment across dozens, if not hundreds, of loans,

MITIGATING RISK

the occasional default will impact an investor’s portfolio by merely reducing their projected returns slightly, rather than placing their capital at risk. The world’s oldest P2P lender, Zopa, cites diversification alongside a prudent credit risk policy as ways of protecting its investors in the event of a downturn. “Zopa has operated for 15 years, delivering positive returns for our investor community even through the 2007-2008 financial crisis,” says Natasha Wear, chief executive of P2P at Zopa. “We use the performance of our loans throughout that period to shape our thinking and overlay a range of macro-economic data sources to inform our modelling. “Our approach to risk and underwriting loans has always been to take a long-term view, building resilience into our products in the knowledge that the economy can face periods of pressure.” Another ‘big three’ P2P firm, RateSetter, pioneered the provision fund model, which diversifies every investor’s risk across the whole loan portfolio, acting as a safety net against bad debts. “Full risk mitigation would mean not actually lending at all,” says Michael Hoare, chief credit officer at RateSetter. “And if there was an undisputed best way to mitigate risk, then everyone would use it with no variety. “Investments like P2P seek to deliver value to investors in exchange for accepting an element of risk. We believe that the provision fund model is a very efficient and effective way to manage risk.” Lending Works similarly offers a ‘shield’, while Assetz Capital has already proven the value of its

“ Full risk mitigation

would mean not actually lending at all

”

provision fund, when some of it was used to refund its wind energy investors last year. Underwriting expertise, effective use of data and stringent due diligence on potential borrowers are also cited frequently by platforms as ways of mitigating risk. “The single most important thing is expertise in the asset class because wherever capital is coming from, you need to know the asset class you’re lending against,” Bristow explains. “We deliver that across the funding team which has 75 years of investment experience and have been in the shoes of the borrowers so know all the risks associated with property. “We have a 57-step due diligence

process which we go through for every project. In our view it’s not sufficient to set up a P2P platform if you’re just a tech expert, you need to be an asset class expert.” Platforms’ secondary markets can act as a risk mitigator, as they give investors a degree of liquidity in an otherwise illiquid asset class. Business lender Rebuildingsociety uses a buy-back guarantee which guarantees that if a secondary market loan is late by more than 60 days, it will be bought back by the lender who sold it to them. “A lot of highly risk-averse lenders will buy loans with this buy-back guarantee,” says Daniel Rajkumar, managing director of Rebuildingsociety. “The benefit is it’s up to the lender how much of their portfolio they want to guarantee. It’s pretty efficient and automated.” For many platforms in the P2P sector, security is intrinsic to mitigating risk. This collateral most commonly takes the form of

MITIGATING RISK

property and firms are quick to point out their low loan-to-value ratios and careful underwriting processes. Other types of security can also be used as collateral against loans, such as the assets of a business. “The only way to protect investors is by lending on a secured basis,” says Nicola Horlick, chief executive of P2P business lender Money&Co. “If your loans are unsecured you can’t mitigate risk because it’s completely open to losing your money. In terms of mitigating risks, the only way is having proper security.” David Bradley-Ward, chief executive of asset-backed P2P lender Ablrate, explains that his platform layers the security as much as it can to mitigate risks. This can include direct security over the asset, cross collateral securitisation from another asset and personal or corporate guarantees. “We keep asking for as much security as we can until someone says no,” he adds. However, Covid-19 has tested even the most robust securities. The property market has suffered from the lockdown, temporarily stalling construction, while property viewings and valuations are subject to strict social distancing measures. This is likely to lead to slower growth in the property sector, and maybe even a short-term drop in property valuations. Meanwhile, small- and mediumsized enterprise lending to hospitality businesses will be hit harder than most, as will any lender which has exposure to the beleaguered travel industry. These major market shocks have pulled the issue of security into

“

The only way is having proper security

”

focus and really highlights the need for risk mitigation to go further than just offering secured loans. Inevitably, platforms have had to scale back their interest rates and tighten up their lending criteria in response to the economic uncertainty caused by the pandemic. But there is still a sense that the well-

run platforms and their investors are going to be just fine. “We have acted swiftly in response to the crisis to make further, significant changes to our credit policy, including taking the temporary steps to only lend to new customers in our lower risk markets, in order to both protect investors and take a responsible approach towards borrowers at this time,” says Zopa’s Wear. Bristow highlights that P2P platforms are very good at using data to improve, saying that the industry has “built good, efficient,

MITIGATING RISK

“ This could be the

moment that really puts P2P investing on the map

”

nimble businesses that can react to situations quicker than traditional lenders.” However, he adds the important caveat that “there will be an increase in defaults and some platforms will be more exposed to the economic cycle than we are.” While P2P platforms are seeing their risk mitigation processes tested in real time, some will inevitably fare better than others, and their success stories will influence the risk management strategies of the future. “It’s in everybody’s interest for

the sector to emerge from the crisis with its credibility intact,” says Mark Turner, managing director, regulatory consulting at business advisory firm Duff & Phelps. “If there are failures in this sector as a result of the crisis, wind-down plans will be put into effect. If the regulator sees orderly wind-downs, this will be looked on positively by the Financial Conduct Authority across the sector.” Turner believes the P2P industry is well-placed to mitigate risks due to its close relationships with borrowers, and the fact that the

sector’s risk management has improved over time. For example, platforms have hired experienced non-executives who can spot where change is needed. “I think where the P2P sector has done well is that as it’s evolved its governance structure has grown up, with greater checks for risks,” he says. “As the sector grows, you’ll see businesses have become quite established. “They’ve learnt, sometimes through experience or mistakes, and that learning is now feeding through and making the sector better and more efficient at managing risk.” Overall, the consensus among stakeholders is that while some platforms may struggle in the short term, those which have safeguarded risk management will mitigate the waves from Covid-19’s risky waters and come out of the crisis stronger than ever before. “Platforms that come through this period having continued to deliver returns above cash will have earned a great record, and this could be the moment that really puts P2P investing on the map,” says RateSetter’s Hoare. With a myriad of risk mitigation options available to them, and innovation always on their minds, there is little doubt that the P2P industry will come through this crisis with an even stronger risk management outlook – one that can withstand even the most unexpected storm.

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JOINT VENTURE

How to keep building homes during a pandemic The property market has re-opened for business, but what does this mean for Wellesley’s property portfolio? Andrew Turnbull, Wellesley’s co-founder and director, explains

HE PROPERTY MARKET is a vital part of the UK economy, but when the coronavirus pandemic hit, construction sites across the UK went quiet. While this has obviously presented a huge challenge for property developers and propertybacked lenders, Wellesley was able to act quickly to ensure that its projects could continue as safely and effectively as possible. “Development sites that are controlled by our borrowers are tightly controlled areas, and this is always the case for health and safety reasons,” explains Andrew Turnbull, co-founder and director of Wellesley. “We have asked all of our developers to advise us what health and safety measures they, or their main contractors, have implemented and we have been satisfied with the responses.” This is a testament to the in-depth due diligence that is performed by the platform long before the first brick is laid. Turnbull adds that Wellesley will only back reputable developers who behave responsibly. “We like to build long-term relationships with our borrowers and aim to work on multiple developments over the years which means that for both parties it is worth taking the time to understand each other’s business and to build up trust,” he says. “For Wellesley this is possible as we are only working with between 20 to 30 borrowers.”

When the extra Covid-19 restrictions were introduced, Wellesley’s borrowers were able to quickly implement the new social distancing rules on their sites. While this meant that construction could continue to some extent, the process of completing these projects and bringing the properties to market has become slower. And despite the recent easing of restrictions, some delays are still expected. “Management of risk is our central priority here,” says Turnbull. “We will be working very closely with our developers over the coming months to mitigate the risks associated with delayed construction and sales. “The easing of restrictions will enable our borrowers to open their building sites if they had to close down and undoubtedly will assist them in bringing the timetable of construction back up to speed.” Of course, the restrictions mean that it has become more difficult for Wellesley to maintain its usual level

of on-site supervision. However, the team has continued to perform site visits to some of its developments, and regular video meetings have allowed the platform to keep a virtual eye on things. Furthermore, Wellesley’s loanbook is well-capitalised, and it is in a good position to be able to work closely with its borrowers to assess what changes need to be made, and to offer flexibility where needed. “Much of our loan monitoring and risk management measures are done first and foremost to protect Wellesley’s investors,” Turnbull says. “However, aside from the increased monitoring, Wellesley has a strong loanbook concentrated on medium sized but well capitalised developers producing two to three-bedroom flats and houses in the region of £300,000 in value. “This means in terms of the overall property market the loanbook is well placed. We conducted a stress test on our loanbook in February 2019 and this showed that even in difficult markets such as these, the loans should be resilient.” The pandemic will be over some day, and when it does, the demand for housing will still be there. The key challenge for finance providers will be to adjust to the changing climate and do all they can to support their borrowers and investors in the short term. This is a challenge that Wellesley is ready to meet head-on.

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JOINT VENTURE

A pandemic-proof strategy

Buy2LetCars’ founder and chief executive Reginald Larry-Cole and operations director Scott Martin explain how they managed to mitigate risk in their business from day one

HE CORONAVIRUS pandemic has forced many lenders to revisit their risk mitigation strategies. But at Buy2LetCars, no changes are required. In fact, their risk mitigation strategy could almost have been designed with the pandemic in mind. Their leasing arm only leases cars to key and essential workers who are unable to access mainstream credit. Any credit concerns are alleviated by a series of thorough manual checks, and a piece of technology which is fitted inside each car, preventing it from starting if the driver is late with their monthly payment. “We haven’t changed anything in our risk strategy since the pandemic began,” says the company’s chief executive and founder Reginald Larry-Cole. “The clients that we work with have all held on to their jobs – in fact, they’re needed more than ever.” Between March and April 2020, Buy2LetCars' leasing arm saw a massive 82 per cent increase in leasing applications, and LarryCole expects a similar increase to have occurred between April and May, as key and essential workers have been forced to adapt to a busier-than-ever working life without public transport. “We had to turn down the radius of our advertising because we were getting so many enquiries,” he adds. “We are so busy on the

leasing side right now because people are in lockdown, the dealerships are all closed, and anyone who needs a car is coming to us.” As a result of this, Larry-Cole and Buy2LetCars’ operations director Scott Martin have been helping out with the manual underwriting processes and speaking directly to customers. This has given them a unique insight into the customer experience, and Larry-Cole is proud to admit that their customer satisfaction scores are among the best in the business. At the time of writing, Buy2LetCars was rated ‘excellent’ by 97 per cent of reviews on Trustpilot. The remaining three per cent of its clients rated the business as ‘great’.

For Larry-Cole and Martin, these scores are proof that their business is succeeding – not only in financial terms, but on a social level as well. “We don’t do cars to impress the Joneses,” says Larry-Cole. “We do city cars and family hatchbacks – cars that will get people to and from work. “Our objective is to give you a second chance to take care of yourself, your family and your job.” Of course, the company’s investor community is also taken care of. Investors can lend £7,000 or more, with target returns of between seven per cent and 11 per cent IRR. By fitting each car with a GPS system and a starter interrupt device, there is no need for costly recoveries processes if the borrower doesn’t keep up with payments. Buy2LetCars always knows where the car is, how many miles are on the clock, and whether or not the driver is in arrears. But while these devices add an extra security blanket, the majority of the company’s risk mitigation is performed before any car keys are handed over. By conducting manual checks on every potential borrower – including proof that they are employed in an essential position – Buy2LetCars has created a business that truly works for everyone involved. If you are in any doubt, just check the reviews.

SIPPs

Pensions and P2P

Peer-to-peer lending platforms are making progress in tapping into the immense opportunities presented by the self-invested personal pensions market. Michael Lloyd reports

EER-TO-PEER LENDING platforms have been trying to tap into the self-invested personal pension (SIPP) market for several years. And finally – despite myriad challenges – progress is starting to be made. Over the past year, platforms such as Octopus Choice and The House Crowd have begun to offer SIPP options, joining a dynamic handful of SIPP-ready P2P lenders including CrowdProperty, Folk2Folk, Sourced

Capital, Ablrate, RateSetter, Proplend and Money&Co. ‘Big three’ P2P lender RateSetter currently partners with SIPP administrator Morgan Lloyd and reports that investments held within SIPPs have performed exactly the same as other RateSetter investments, albeit while benefitting from the tax-free benefits of the SIPP wrapper. “We have been a pioneer in offering the SIPP option to

investors,” says Peter Behrens, chief commercial officer of RateSetter. “The consistent and stable characteristics of this asset class means it is becoming a more common part of people’s diversified investment portfolios, and it is natural that this should also extend to SIPP portfolios too.” A SIPP is a personal pension tax wrapper which people can pay into and use to manage their investments. The concept was first

SIPPs

introduced in 1989, before being reformed in the Finance Act of 2004, which officially became law in April 2006. But it wasn’t until 2016 that P2P lenders were finally admitted into the scheme. That means that for 27 years, pension savers associated SIPPs with investment funds, stocks

managing director of Folk2Folk. “This makes them an attractive alternative to the stock market.” Several platforms have highlighted the fact that with the current stock market volatility caused by macroeconomic conditions, P2P presents an alternative investment asset class for SIPP investors.

“ Having P2P as part of a SIPP is a great investment option”

and shares products, and property earnings. If they wanted to tempt pension savers away from these well-established norms, P2P lenders were going to have their work cut out for them. “Having P2P as part of a SIPP is a great investment option,” says Nicola Horlick, chief executive of Money&Co. “It’s a very good secured income stream that’s perfect for pensions.” The SIPP market is growing at a rapid pace, presenting a great opportunity for P2P platforms. “If you look back to Financial Conduct Authority (FCA) data from 2015, under 700,000 SIPPs were sold in the UK,” says Tom Selby, a senior analyst at investment platform AJ Bell. “This figure is now at the 950,000 mark and it seems inevitable the one million mark will be breached in the near future.” Secondly, when you combine the tax-saving benefits of a SIPP with the relatively stable and inflation-beating returns of P2P lending, pension savers have the opportunity to supercharge their pension savings. “P2P SIPPs convey huge tax benefits for the investor, including higher rates of return and secured investments,” says Roy Warren,

Stephen Moss, founder and managing director of Sourced Capital, says there has been an increase in the number of SIPP providers adding P2P to their list of available investments and this has happened over time as confidence in P2P investment has grown. “SIPP providers are starting to understand that there are generally great returns to be made but returns that come with security in place,” he says. And while the coronavirus pandemic has certainly slowed the progress of innovation across the

“We believe this will be supportive of existing P2P offerings in the same way that offering an Innovative Finance ISA (IFISA) increases the sources of capital within their portfolio that an investor can include in P2P,” says David Genn, chief executive of Goji. P2P has therefore made some progress into the SIPP market, but it faces many challenges, not least convincing SIPP administrators to accept P2P investments. But while new product launches are always welcome, there is a larger issue at hand. P2P is classed as a non-standard investment by the FCA, and in 2016, the City regulator introduced tighter capital adequacy rules for SIPP providers, stating that all asset types must be categorised by SIPP providers as either standard or nonstandard. This increased the capital SIPP operators were required to hold in their businesses. Brian Bennis, founder of SIPPclub, which provides free guidance and access to advice on self-invested pensions, believes the P2P SIPP market came to a virtual

“ P2P SIPPs convey huge tax benefits for the investor, including higher rates of return and secured investments

financial landscape, the P2P sector is still pressing forward with its SIPP expansion plans. Direct lending investment platform and technology provider Goji Investments will add a SIPP capability to its platform in the third quarter of this year, providing approved platforms with the ability to give their lenders the opportunity to invest via a SIPP.

”

standstill with the introduction of these rules as they made it more expensive for SIPP providers to allow non-standard assets like P2P in their SIPPs. “Essentially, the costs imposed on SIPP operators need to revert to former levels,” Bennis says. “And advisers need to be comfortable advising on P2P.” Brian Bartaby, founder and chief

SIPPs

executive of Proplend, says the vast majority of SIPP administrators don’t work with P2P lending platforms and the challenge is getting them comfortable with P2P as a product. “A lot of this is to do with platform failures and bad press,” he says. RateSetter’s Behrens says that they would like to see P2P investments added to the FCA’s standard asset list. “The introduction of enhanced regulations in December 2019 means the P2P sector is regulated on a par with other mainstream investments, so this is now a perfectly rational thing to happen – it is the key that unlocks the P2P market to SIPP providers,” he continues. “We look forward to this happening, and it will open the way for P2P to become an important part of many people’s SIPP portfolios.” Mike Bristow, chief executive of CrowdProperty, compares this challenge from administrators to the long-standing frustrations around independent financial advisers (IFAs) being cautious about the sector. “It’s first and foremost awareness and recognition of it as a good investment class and some SIPP

pension companies think they don’t need to offer it as part of a portfolio,” he says. However, he adds that any progress that P2P has made into the SIPP market has been thanks to a groundswell of savvy retail investors moving their pension funds into companies that allow P2P investment. “It has definitely become a more popular option,” he adds. “SIPPs is a big market.” Other FCA rules have acted as obstacles for P2P’s progress within this sector too. The ‘connected parties’ rule means when investing in a SIPP, investors cannot lend to a ‘connected person’ like a spouse or close relative. This is difficult to guarantee if investing funds through a P2P platform that diversifies the investments across hundreds of different companies. And while most types of investment can be held within a SIPP, there is one notable exception – residential property. This can pose a challenge for certain propertybacked P2P platforms. According to David Bradley-Ward, chief executive of asset-backed P2P lender Ablrate, another crucial barrier for P2P SIPPs may be the

other tax-free wrapper that P2P investors can access – the IFISA. He notes that since IFISAs were introduced in April 2016, P2P investments within SIPPs have dropped in popularity simply because IFISAs are easier and cheaper to set up. “If people are going to be investing in a tax-efficient way, they will probably do so through IFISAs,” he says. Despite the challenges which are halting the pace of progress, Bristow says that SIPPs present a huge opportunity for both pension companies and individuals wanting to invest in P2P. He points out that pension companies have less of a fee barrier than IFAs face with standard P2P lending because they are already taking fees. Bristow also claims a rising number of investors want to invest part of their pension portfolio in P2P and this consumer demand will cause change as pension companies will be forced to allow customers that choose to, to lend part of their SIPP in P2P. “Otherwise they will lose customers,” he says. “The consumer demand for people with pensions to invest will drive the more progressive pension companies to allow P2P lending. “So, the future is very bright and will definitely favour the companies which allow this because people will move their pension pots into them.” The SIPP market presents challenges for P2P but this is an innovative sector which has become more confident in its ability to deliver strong returns for investors over the long term. Platforms have been banging on the door of the SIPP market from some time, and it’s time for the SIPP administrators to start letting them in.

JOINT VENTURE

A new kind of credit card Lakshithe Wagalath, co-founder and chief operating officer at Elfin Market, introduces the platform’s latest, innovative product launch

LFIN MARKET HAS A mission – to make credit cards more affordable for all, while allowing retail investors to access the UK’s £70bn credit card market. The platform has already disrupted the credit card market with the Elfin Purse – a unique service which offers a credit line to borrowers, who can then make withdrawals as needed, before repaying the money on a monthly schedule. Now, Elfin Market is set to make history by becoming the first peer-to-peer lender to launch a physical credit card later this year, along with an iOS and Androidready app. “We’re currently finalising the development and testing of both our mobile application and the Elfin Card,” says Lakshithe Wagalath, co-founder and chief operating officer at Elfin Market. “But we’ve decided to wait for the right moment to release them to the public. “At the moment, we are targeting a release in September 2020, but this can be earlier or later depending on the latest Covid-19related developments. “We believe the launch of the Elfin Card will be a game-changer for all our customers, both borrowers and lenders.” The Elfin Card can be used just like any credit card, with payments coming directly from the Elfin Purse. Borrowers will still be able

to make online withdrawals to their bank accounts if they wish, and the representative APR will be the same regardless of whether the withdrawal has been made via the online platform, the app, or the credit card. “Our goal is to make the Elfin Card the natural replacement for traditional credit cards which are costly and unfair,” says Wagalath, citing the 24.7 per cent average APR and hidden fees which are typical among most credit cards, as well as the artificially long repayment schedules which most borrowers are subject to. By contrast, Elfin charges a representative APR of 5.8 per

cent to its borrowers (although average APR over the platform is typically in the 10 – 12 per cent range), with a flexible repayment model that encourages borrowers to pay off their debts early. Additionally, the app will enable both borrowers and lenders to check their account and make transactions on the go. For investors, the benefits are equally clear. The UK’s credit card market is vast, yet largely inaccessible to retail investors. “The launch of the Elfin Card will enable lenders to gain exposure to credit card-type debt, as the money they invest on the platform will be lent to borrowers who will be using it in the same way they would use funds on their credit cards,” says Wagalath. “We believe this is significantly different to investments in other P2P lending platforms which, so far, give exposure to regular consumer loans or business loans.” Target returns for Elfin’s investors currently range from 3.8 per cent to 5.8 per cent, depending on the maturity of their investments, but so far the platform has been able to distribute between eight per cent and 12 per cent to investors, thanks to lower-than-expected defaults and arrears. With these new product launches, Elfin Market may be giving us a glimpse of the future of P2P lending.