Peer2Peer Finance News May 2020 by Alternative Credit Investor

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ADMINISTRATION DELAYS

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Investors in the dark about recoveries

CHAMPIONING THE SECTOR

Consumer lending special report

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Innovate Finance’s Charlotte Croswell talks to P2PFN

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ISSUE 44 | MAY 2020

It’s time for the government to back our industry! RY ST

BACK

UR IND

Peer2Peer Finance News has issued a rallying call for the industry to be utilised amid the coronavirus pandemic, as peer-topeer lenders urge the government to recognise the vital role platforms can play in deploying muchneeded funds to small- and medium-sized enterprises (SMEs) and housebuilders. The ongoing pandemic and prospect of a prolonged lockdown has put greater urgency on this issue, with many small firms and housebuilders struggling to stay afloat as the economy nosedives. Peer2Peer Finance News is therefore calling on the government to back our industry and use P2P platforms more within the coronavirus business interruption loan scheme (CBILS), and other state

and Bank of England schemes, to support the UK economy. Several P2P lenders have applied for accreditation for CBILS but Funding Circle was the only such firm approved at the time of going to press. Platform bosses have urged the British Business Bank to speed up the accreditation process for CBILS, arguing that their technology offerings and good customer service make the industry better placed than banks to provide this funding as well as state support

through other schemes. There have also been calls for the Bank of England’s Term Funding Scheme – a measure to channel funds to SMEs at cheaper rates – to be opened up to nonbank lenders. Stephen Haddrill, director general of the Finance & Leasing Association (FLA), last month called for the scheme to be extended “as a matter of urgency”. A RateSetter spokesperson has also called for the government to give P2P platforms access to the

Term Funding Scheme, adding that while the government is listening, it tends to look to the banks first, “which can be behind the times in certain areas.” The Bank of England declined to comment on extending the Term Funding Scheme to nonbank lenders. The scheme is currently only open to members of the Sterling Monetary Framework (SMF). However, it is understood that the Bank will be consulting late in the year about eligibility for some aspects of the >> 4 SMF and P2P

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.

EDITOR’S LETTER

Published by Royal Crescent Publishing

WeWork, 2 Eastbourne Terrace, Paddington, London, W2 6LG info@royalcrescentpublishing.co.uk EDITORIAL Suzie Neuwirth Editor-in-Chief suzie@p2pfinancenews.co.uk +44 (0) 7966 180299 Kathryn Gaw Contributing Editor kathryn@p2pfinancenews.co.uk Marc Shoffman Senior Reporter marc@p2pfinancenews.co.uk 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.

eer2Peer Finance News doesn’t need to convince our highly engaged audience of peer-to-peer industry stakeholders about the vital role the sector plays in supporting the UK economy. But does the government need a little more convincing? For years, investors have been making inflation-busting returns while funding much-needed loans to small firms and housebuilders via P2P platforms. With slick technology, efficient underwriting processes and customer service that puts the banks to shame, it’s about time that the industry was incorporated more fully into government-backed funding schemes. P2PFN’s campaign (see front page story) calls on the government to back our industry, by utilising P2P platforms more as a funding channel. You should also make sure to read our interview with Innovate Finance chief Charlotte Croswell on page 10. It's clear that she's very supportive of alternative lenders being fully recognised as a vital part of the financial ecosystem. You’ll be hearing a lot more from us on this issue in the coming months, so make sure to keep reading the website and the magazine. If you have any feedback or questions about our campaign, please feel free to email me directly 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 lenders are encouraged to get in touch if they have views on how they might be able to support the scheme. City superwoman Nicola Horlick, founder of Money&Co, has backed our campaign and said more platforms should be accredited under CBILS. “The emphasis seems to be on banks,” she told Peer2Peer Finance News. “We have capital to deploy and if there was a government guarantee we could divert it to helping viable small businesses. “We would only want to lend to viable businesses that have a real future after the pandemic.” Mike Bristow, chief executive of P2P property lender CrowdProperty, said the online lending sector has built a “highly

efficient and highly effective distribution and underwriting/ credit management infrastructure to lend to consumers, small businesses and the property sector.” “This is a real opportunity for the government to leverage this fintech innovation for the good of the economy, especially given the strategic, world-leading position of the alternative finance and fintech sectors in the UK,” he added. “Housebuilding is critical for the economy – both right now given that it can be economically productive as the building and construction sector is sanctioned to continue if it can do so safely, and as we inevitably look to build our way out of this major economic challenge.”

This was echoed by Brian Bartaby, chief executive of Proplend. “P2P lending platforms were designed to deploy funds where the banks struggled, this is exactly what they were designed for,” he said. “The government has actively encouraged financial services innovation, the Financial Conduct Authority has created a robust regulatory framework, the UK is home to some of the most inventive fintechs in the world, it’s now time for the government to mobilise them.” A British Business Bank spokesperson said the government-backed lender supports diversity and choice for businesses and is very supportive of the P2P lending industry's growth.

The spokesperson also said that the bank is fast-tracking the accreditation process for CBILS and is keen to get more lenders approved. “Amongst other British Business Bank programmes, marketplace lenders can apply for the Bank’s ENABLE Guarantee Scheme, which is designed to encourage additional lending to SMEs and has previously been used to support smaller housebuilders in finding the finance they need,” the spokesperson said. “CBILS provides financial support to smaller businesses in virtually all sectors that are losing revenue and seeing their cashflow disrupted, as a result of the coronavirus outbreak, including those in the housebuilding sector.”

WHICH GOVERNMENT-BACKED FUNDING CHANNELS ARE CURRENTLY OPEN TO P2P LENDERS?

There are a number of governmentbacked channels to support smalland medium-sized enterprises (SMEs) and housebuilders. Some are already open to peer-to-peer lenders, and some are facing mounting pressure to extend their eligibility criteria. The British Business Bank (BBB) works with a vast range of lenders, including a number of P2P platforms, in a number of ways. As well as direct funding lines, it also offers several schemes which P2P lenders can apply for. The state development lender’s

latest measure to support SMEs is the coronavirus business interruption loan scheme (CBILS), which provides an 80 per cent government guarantee on loans. P2P lenders are eligible to apply for accreditation to the BBB to participate in CBILS. The BBB also offers the ENABLE Guarantee Scheme. Available to some P2P lenders, this years-old scheme was extended last year to allow asset-based lending providers to sign up and offer support to smaller housebuilders and

SMEs. It is administered by the BBB and like CBILS, lenders are offered a government guarantee to encourage them to lend to as many businesses as possible. Meanwhile, the Bank of England oversees the Term Funding Scheme for SMEs, which is currently not open to P2P lenders. The Term Funding Scheme was originally launched in 2016, but a modified version was unveiled earlier this year, with the aim of channelling up to £100bn of low-cost funding to SMEs in need.

NEWS

Secondary market freezes could invite questions from the regulator PLATFORMS closing their secondary markets to protect investors should be prepared to justify this to the regulator after the pandemic, industry stakeholders have claimed. Covid-19 has caused a substantial minority of investors to try and sell their P2P loans, creating liquidity issues across the industry. Growth Street has restricted investor withdrawals, Octopus Choice has stopped all transactions, Funding Circle and JustUs have suspended their secondary markets and Lending Works has paused all lending activities for at least 90 days. “I think firms should be ready to answer questions from the Financial Conduct Authority (FCA),” said Mark Turner,

managing director, regulatory consulting at Duff & Phelps. “I think it’s important for any firm to learn from stress events but equally I don’t think every business needs to change their business model because of these events.” If platforms can prove that they closed their secondary markets for the right reasons, having the best interest of customers in mind, the FCA is less likely to challenge those situations, he said.

A number of P2P firms have not frozen their secondary markets however, including assetbacked lender Ablrate. Chief executive David Bradley-Ward revealed to Peer2Peer Finance News that they have seen investors flock to use their secondary market because of a lack of liquidity on some other platforms. “I think the regulator will, and probably should, look at liquidity issues after Covid-19,” he said. “I think in normal

times the way platforms have worked is fine, but we’re now in exceptional circumstances which you can’t legislate and plan for. “I think when people start to look at their businesses after and throughout this time, they’ll realise they need more flexibility in their model. “There are some tremendously clever people on these platforms, and they will adjust accordingly. “I’m not sure saying ‘under normal market conditions’ with regards to secondary markets will be good enough after this.” Rebuildingsociety, Money&Co and CapitalRise have also kept their secondary markets open, as have RateSetter, Zopa and LandlordInvest.

Pandemic inspires P2P innovations CORONAVIRUS has inspired some peer-topeer lending platforms to introduce new innovations, such as virtual property tours and a retooling of existing products. The House Crowd, which specialises in property development lending, has revealed that it is generating new leads through social

media for potential buyers by offering a virtual 360-degree tour of its properties as well as a homebuyers guide. “This is to generate leads and interest in the site and get people involved in the sales process so that when this situation has ended and people are ready to buy property again, we will have a database of people there who are looking to

buy properties,” said Frazer Fearnhead, founder and chief executive of The House Crowd. “Inevitably the pandemic will slow things down, but we can still work in the background generating relationships and fielding enquiries.” Meanwhile, business lender Crowd2Fund has repurposed its revenue loan product for the

coronavirus era. The loan was initially created for seasonal businesses and allows borrowers to make smaller payments in the low season, and larger payments during peak operating months. It is now being offered to pandemic-stricken businesses which need finance but are struggling with uneven cashflow until lockdown restrictions are lifted.

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JOINT VENTURE

Opportunities amid the crisis Reginald Larry-Cole, founder and chief executive of Buy2LetCars, explains why his car leasing investment firm is not peer-to-peer lending; it’s people funding people

UY2LETCARS is not a peer-to-peer platform. It is “peer-to business-topeer”, with Buy2LetCars acting as the middleman between lessees who need cars, and investors who want inflation-beating returns. This is an important distinction for founder and chief executive Reginald Larry-Cole to make. Founded by Larry-Cole in the wake of the financial crisis, the aim of Buy2LetCars has always been to simplify the car leasing process by helping key and essential workers who otherwise could not access mainstream leasing companies, even though they are gainfully employed with a proven disposable income. They do this by offering lessees a market-leading solution which is itself funded by UK-wide investors. These key workers represent an underserved yet robust segment of the population, says Larry-Cole. Their employment is secure, even during a financial crisis or a global pandemic; but a blip on their file could exclude them from some of the more mainstream car leasing deals. They are – in Larry-Cole’s words – “in that financial monotone zone”, and that makes them highly attractive lessees. “If the banks don’t loan you money it’s because a computer has decided you do not meet their criteria,” he explains. “Where we differ is that we use both computer and manual underwriting to assess affordability and need.

“Our cars operate like a pay-asyou-go mobile phone. Each car has a device in it that links to the start-up of the car. If you don’t pay your bill, it gives you a few days warning, saying that your account is in arrears, please call your lease provider. If you don’t pay, the next time you turn off your ignition, the car will simply not start again.” This device is completely safe to use, and it ensures that the car cannot be driven after a missed payment. “Our incentive is not to put someone into one of our cars just because they have a credit challenge,” says Larry-Cole. “We turn down a lot more applications than we give. We do everything we can from day one to put the right person in the right car. “Ultimately, we want that person to see out the lease. If their

circumstances change long term, we will have that car back within 14 days, and during those 14 days we know it won’t have been driven. We get it back, get it checked and get it back into a good revenue situation.” Buy2LetCars has followed this formula for eight years, with a zero per cent default rate to its funders and returns which range from seven to 11 per cent IRR. Their funders have rated the business five stars on both Trustpilot and Google. These funders are “anyone with the required capital who is fed up with low interest rates and would benefit from a fixed monthly return over a fixed term,” Larry-Cole explains. Since the coronavirus pandemic began, Larry-Cole has seen an influx of enquiries from NHS staff and other key workers who need access to reliable vehicles so that they can remain safe during their commute and continue to provide front-line services. High lessee demand means there are plenty of new and ongoing opportunities for investors who have been frustrated by low savings rates and stock market volatility. “We can help you grow your money,” says Larry-Cole. “Just as we have done over the last eight years. But you would also be helping today’s essential workers to go about their business. “Buy2LetCars is car leasing funded by people for people.”

NEWS

P2P administrations face delays due to Covid-19

INVESTORS in collapsed peer-to-peer lending platforms have been left in the dark about the timeline for recovering their funds amid the coronavirus outbreak. The pandemic has caused the effective closure of the property market, as surveyors cannot value properties and repossession proceedings are on hold. This is making it harder to recover funds from secured assets on collapsed platforms such as Collateral, Lendy and FundingSecure. P2P pawnbroker and property lender Collateral entered the liquidation phase, managed by BDO, in April 2019. There has

been little information disclosed, aside from a December update that said loan exposure was still being reconciled. Sources close to creditors said there have not been any updates about delays caused by the coronavirus outbreak but it is expected to be a factor. The next update has been promised in June 2020. Meanwhile, it emerged last month that P2P property lender Lendy’s administration process has been extended by three years. Administrator RSM cited delays linked to the coronavirus pandemic as one factor. P2P pawnbroking platform FundingSecure went into administration

in October 2019 and was due to provide an update last month. Insolvency experts have warned that investors and creditors will face a longer wait for recoveries. “Each administration is unique,” Geoff Bouchier, managing director, restructuring advisory at consultancy Duff & Phelps, said. “Property loanbooks already take time to realise in a stable market as you have to wait for loans to reach maturity and if they default you have to take legal action. “We are seeing increased delays and the process of getting legal agreements signed is slowing down. “There will have to be

acceptance that it will take longer in the current environment.” Frank Wessely, partner at business advisory firm Quantuma, added that administrators will not want to take the risk of selling properties below market value just to generate cash quickly, as it “would leave them open to criticism or even legal action by investors.” “Coronavirus will delay if not freeze recoveries completely,” Wessely said. “Investors will have to wait longer for repayment until the markets return to a level of normality and sales are achieved. “Of course, no-one knows when that may be.”

…while Property Pact sees launch put on ice

PEER-TO-PEER lender Property Pact has had its launch derailed by coronavirus but is still hopeful it can play its part in helping first-time buyers and homeowners climb onto and up the property ladder. The Financial Conduct Authority (FCA) regulated platform enables investors to fund mortgage deposits for would-be homebuyers. Its founder, Errol Woodhouse, said the platform spent much of last year bringing mortgage lenders on

board who were satisfied with allowing P2P-funded deposits, as long as borrowers still meet the affordability criteria. “There had been lots of conversations with the FCA and we had done a lot of work on restructuring the website and finding mortgage lenders that were willing to work with us,” Woodhouse told Peer2Peer Finance News. “Then coronavirus kicked off. “We were going for a relaunch in the next six

months, now I am still hopeful but we don’t know when it will be.” Property Pact had been talking to institutional investors about funding large tranches of money

for deposits, he added. Most P2P property lenders have avoided funding residential mortgages due to their long loan terms, but Property Pact focuses on funding the deposit. Essentially borrowers end up with a Property Pact loan to repay on their deposit, alongside the actual mortgage. Investors have a restriction – or equivalent of a second charge – that means they can take legal action in the case of any defaults.

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Bridging the chasm

Carl Davies, chief operating officer at The House Crowd, explains why secured property loans can help investors ride out the Covid-19 storm

“U

nprecedented” seems somewhat of an understatement for what is currently happening to the economy. The governmentimposed lockdown is intended to save lives and reduce the burden on our NHS. It is all about “flattening the curve”. But in doing this we have also created an ‘economic chasm’ and for once it is not property that is the root cause. On the contrary, this is time for property – and property investments – to come to the aid of beleaguered investors and bridge the chasm that other asset classes might struggle to achieve. How? We are in the middle of a recession that will not see a return to any semblance of normality until at least September 2020. Universal Credit claims have risen by over one million in the last few weeks, even with the furlough provisions in place. Demand will be hit in the short term and ratings agency Fitch has downgraded UK debt to AA-. However, Fitch also estimates that growth next year (2021) will bounce back to three per cent, if the UK can begin to unwind the measures to tackle the health crisis in the second half of 2020. So, the fundamentals that excited us all after the election of December 2019 still remain. At The House Crowd, we saw new borrower enquiries for both bridging and development loans accelerate significantly in late 2019 and early 2020. Since the lockdown, developers being the

speculators they are, are cautiously optimistic about the opportunities ahead. So much so that enquiries have risen steadily through late March and early April, somewhat counterintuitively. When we come out of the other side of this crisis, there will still be a housing shortage. Demand will still exceed supply. When this happens the laws of economics still prevail. In a recent survey, realtors Knight Frank said that although many house sales will be lost this year, it expects the upturn seen in early 2020 to continue, with volumes next year expected to be 18 per cent above the level seen in 2019. Gross development values on current projects should therefore hold firm and – providing valuations were prudent and based on today’s numbers – projects in progress now should still sell at the planned prices. If peer-to-peer investors and borrowers work together and recognise that delays are inevitable and projects are not penalised, securitised debt

products in property will perform in line with expectations. Should any developers unfortunately fall by the wayside, then lenders can either step in and finish the projects or sell them on, therefore safeguarding investors’ capital. This absence of a safety cushion, together with the more volatile and liquid nature of global equity markets, meant that investors in these assets have been severely hit. Hopefully, many investors were well diversified. It is not only current projects that should be secure but also future projects. As long as they are well curated with realistic valuations and a clear credible exit strategy, run by experienced developers with an excellent track record and carefully monitored by experienced lenders, then they should provide excellent secure returns for investors in senior debt. This return can be even better if they are wrapped within an Innovative Finance ISA and returns compounded. It may be possible to P2P property lending to then fill the chasm, not just bridge it.

PROFILE

Championing the sector

Innovate Finance chief Charlotte Croswell talks to Andrew Saunders about the new 36H Group and the role peer-to-peer lenders can play in the pandemic

HEN FINTECH industry body Innovate Finance took over from the Peer-to-Peer Finance Association (P2PFA) as the trade organisation for peer-to-peer lenders back in January, the last thing that was on chief executive Charlotte Crosswell’s mind was the prospect of having a global pandemic to deal with. Rather than battling with the impact of Covid-19 on her members and the wider economy, Crosswell’s plan was to spend the first few months of the year getting to grips with the needs of the 36H Group, as the P2P sub-group within Innovate Finance is known, before rolling out a shiny new strategy and a membership drive to get more of the famously diverse and independently-minded P2P sector on board. “We were doing quite well, mapping out not only the immediate policy concerns but also the longer-term ones. Now we will have to start again with quite a lot of it,” she says, ruefully. But the best laid schemes o’ mice and men gang aft a-glay, as the poet Robert Burns wrote. Instead Crosswell has found herself

at saving the nation’s smalland medium-sized enterprises (SMEs) from collapse. Using government funds provided by the British Business Bank, CBILS

“ I think it’s important to see P2P as part of the wider alternative sector”

immersed in advising on the coronavirus business interruption loan scheme (CBILS) – the government-backed scheme aimed

loans are largely being distributed via traditional high street banks and established lenders, because only those with government-endorsed

accredited lender status can provide CBILS loans. But Crosswell says that P2P platforms, alternative lenders and the fintech sector as a whole also have a vital role to play, because their reach extends into parts of the SME landscape that traditional banks simply don’t serve any more. “What we’ve been focussing on is the role the sector can play in placing the loans as quickly as possible,” Crosswell states. “I am working with over 40 nonbank lenders at present – they are lending to the real economy,

PROFILE

a lot of it outside London, and the relationships they have with SMEs are often the only lending relationships those SMEs have.” While she recognises the scheme has been set up quickly and in difficult circumstances, she is keen to see more alternative lenders involved as it matures. “There’s been a herculean effort to get this set up quickly, but the banks still don’t have much spare capacity,” she comments.

Starling Bank and Oakwood were the first challenger banks to receive accredited status, followed shortly by Funding Circle, the first and (at the time of writing) the only P2P platform to have announced that it is taking part in the scheme. But while there are other P2Ps going through the accreditation process, it’s not a route that will suit everyone, says Crosswell, because of the associated liquidity

“ The last thing we want is to compound the problem by stopping the origination of new loans

“What they are telling me is that that they are either prioritising existing customers, or only issuing loans to existing customers.” That’s unfair on the 500,000 or so small businesses which have chosen alternative lenders over banks, she says, but it’s also missing a trick on the whole point of the scheme – to get loans in place quickly so that as many viable businesses as possible have the funds they need to weather the storm. “What we’ve been highlighting is that [alternative lenders] could facilitate these loans more quickly, because they have the technology to scale up, they have the data analytics and machine learning algorithms and they have the relationships with their SME customers,” she explains. Speed is important, she adds, because small businesses do not typically have large cash reserves to fall back on. And speed is one of the USPs of many alternative lenders – so what are the prospects of more of them, and more P2P platforms in particular, being able to join the scheme? A small number have already been accredited –

”

requirements. 80 per cent of the credit risk on every CBILS loan is underwritten by the government, but the lender has to have enough liquidity to take on the remaining 20 per cent. And some platforms are in a better position to take that risk than others. “Who has access to liquidity, the ability to get the loans out quickly, and the appetite from their investors to do that? Platforms that have raised funds recently may be in a better position, and I’m

aware of others who are in talks with their investors to say if we had access to the scheme, could we put more investment there?” There is also an emerging issue which could inadvertently damage the P2P sector, she warns. SMEs which receive a CBILS loan are often required to take payment holidays from any existing loans they have with other lenders, including P2P and alternative lenders. “That’s unfair on all the fintechs which have filled a muchneeded gap in SME financing as it has been withdrawn on the high street,” she says. “We have been very vocal in regulatory discussions on the risk of forbearance – the sector needs to be supported and protected.” When she is not championing the interests of the whole fintech sector, Crosswell chairs the 36H Group – so called because membership is open to any firm regulated under article 36H of the Financial Services and Markets Act, 2000, which covers all platform lenders. Officially launched on 13 January, backed by inaugural members Zopa, Funding Circle, RateSetter, Lending Works and CrowdProperty,

PROFILE

the accompanying press release stated that the 36H Group’s aim is to “focus on policy and regulatory matters, and to focus on the benefits the sector is delivering”. One of the primary differences between it and its predecessor, the P2PFA, is that once the responsibility for regulation of the sector was passed to the Financial Conduct Authority there was no longer a need for a self-regulatory body. “Without that change we would have been more reluctant to take it on,” says Crosswell. “I think that the key challenge the P2PFA had was being accepted as a membership association whilst also having to regulate that membership.” And despite the coronavirus chaos, plans are progressing to build a more representative membership and to start providing platform lenders with the kind of wide-ranging policy support and smart networking that Innovate Finance has become known for across the fintech community more generally. Efforts that will be spearheaded by freshly-hired head of platform lending, Mike Carter, currently chairman of The Money Platform. “He knows the sector inside out,” she says. Whilst some may fear that P2P might lose its specific

with as many others as possible is key to her approach. “I think it’s important to see P2P as part of the wider alternative sector rather than as something standalone,” she says. “Industry bodies, especially smaller ones, always struggle with impact. It’s pretty difficult to have impact when you’re only representing five or 10 companies. “But I can call on UK Finance, I can call on the Confederation of British Industry, and we can work out where the common areas are. That shows my members we have the weight of argument there when we need it. You have to show value to the membership, but ultimately people will only want to join if you are being effective for the wider ecosystem.” Crosswell’s first job was in equity sales at Goldman Sachs but she has spent most of her career in “market infrastructure”, including stints at the London Stock Exchange, and at Nasdaq where she ran the entire non-US business. “I did 50 initial public offerings out of China in one year,” she says. “I spent my life on a plane.” Looking for a more varied and less travel-heavy role, but one that still involved using tech to “make better markets”, she joined Innovate Finance as chief executive in August 2017.

“ Industry bodies, especially smaller ones, always struggle with impact”

representation within Innovate Finance, Crosswell says that the majority of issues facing the sector – around talent, funding and regulation for example – are shared by other lenders and also by the wider fintech community. Being able to make common cause

As well as trying to mitigate the effects of coronavirus on the SME community, Crosswell is also grappling with the impact on Innovate Finance’s own business, not least on the events side. Its annual Global Summit, scheduled for 20-21 April, had to be cancelled,

but it managed to turn another calendar highlight in the same month, UK Fintech Week, into a virtual event. One week of live sessions became three weeks of online seminars, spread out so that delegates could fit them in to their daily routines more easily. The content was also rapidly reformulated. “We’ve tailored it all to reflect the current position, and the response has been great,” Croswell says. “People are quite happy to give 45 mins of their time to a session – we had 500 people dialling in in the first week.” What are her views on the prospects for the sector to survive and even thrive as we eventually emerge from the coronavirus lockdown crisis? “There are opportunities, but there is also significant risk,” she asserts. “As in every crisis, there will be businesses that succeed, who can show that their business model is really robust, and those which unfortunately cannot. We see that across the whole SME landscape too – some will use the crisis as a growth opportunity, while for others 2020 will simply be about survival.” The critical point that the government and regulators should bear in mind, she adds, is making sure that the sector remains healthy enough to play its part in restarting the economy as quickly as possible when the time comes. “I do believe the economy will bounce back quite quickly but we don’t yet know when that will be,” Croswell comments. “The last thing we want is to compound the problem by stopping the origination of new loans, because we will need P2P and non-bank lenders to keep doing what they do, and to be part of the solution as we emerge from this crisis.”

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Preparing for the global economic recovery Crowd2Fund explains how fintechs are well placed to support UK businesses at this challenging time

HE FINTECH SECTOR will play a critical part in the global economic recovery. To prepare for what may be the most challenging economic recovery effort the United Kingdom and the globe has ever faced, we must mobilise our capability now. Based on the recent government announcement from the Chancellor Rishi Sunak, we believe fintech will be a core part of releasing the £1.25bn Future Fund allocated to financial relief for innovative and fast-growing British businesses. This capital investment aims to ensure that the jobs of tomorrow will be both protected and created, just as innovation has powered the British economy for centuries. A combination of government stimulus programmes and technology will accelerate the UK fintech sector into warp speed. Vast sums of capital will be mobilised for innovative businesses – creating jobs, prosperity, and amazing new products for consumers. At Crowd2Fund, we believe we will emerge from this crisis with a much fairer capitalist system. It is great news and a promising endorsement for the sector to see fintech platforms being utilised to deploy emergency coronavirus business interruption scheme capital from HM Treasury – opening the door to further collaboration between the government and fintech platforms like Crowd2Fund. Crowd2Fund was one of the first platforms to be approved for the Innovative Finance ISA in 2016,

which has generated millions in private investment capital for British entrepreneurs and tax-free returns for private investors. Crowd2Fund will be applying to the British Business Bank to be a key pillar in this £1.25bn relief scheme for start-ups, as we are one of the only platforms that provide both debt and equity options for investors and entrepreneurs. Since our inception seven years ago, we always believed that a combination of flexible funding options is best suited to today’s agile business needs. The platform has already started converting existing loans to the more flexible revenue loans, giving businesses relief, and mitigating against potential losses for investors during this extremely challenging time for everyone. Under the new Future Fund scheme, loans will effectively be secured against company equity; this will likely change the profile of the listed businesses to earlier stage businesses that qualify for the revenue loan. As always, a business will still be able to reduce the cost of credit

through offering a reward and receive a discount on fees for bringing their own community of investors to the platform. Crucially, the government will provide additional, much-needed liquidity for innovative businesses, with an unprecedented 50 per cent match funding. “The convertible loan is a brilliant idea from Chancellor Sunak, as it helps manage potential losses,” said Chris Hancock, founder and chief executive of Crowd2Fund. “As loans are secured with company equity at a fair valuation, debt crowdfund capital is much more suitable for a broader audience than equity crowdfunding, giving businesses and investors a clear structure for repayment. “For this loan, business will need to be revenue generating, and be able to demonstrate growing revenues. We plan to have a modified credit policy and system prepared for this over the next few weeks and will be giving the platform a full health check prior to launching this new product. “Crowd2Fund is stepping up to meet the challenges of the current crisis and is using our time wisely to prepare for the economic recovery effort of a lifetime. We must all work in collaboration; not simply to preserve the pre-crisis economy, but to modify our agile fintech capabilities for the dramatically changing landscape. “We will take this bold leap forwards in protecting and promoting the future of our country together.”

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JOINT VENTURE

When trust matters

Luke Madden, managing director of the Wellesley Group, explains how Wellesley’s coronavirus response is all about trust

N TIMES OF CRISIS, there is nothing more important than trust. Covid-19 has put this trust to the test across the economy: we trust our key workers to keep us safe, our government to keep us informed, and our finance companies to safeguard our investments and to assist borrowers in managing the crisis. Alternative lender Wellesley has spent years building up trust among its customer base. It has done this by listening to investor concerns and borrower requests, by making changes to the platform where appropriate, by conducting stress tests, and by investing in its relationships. “You always try to be prepared for every eventuality as far as possible,” says Luke Madden, managing director of the Wellesley Group. “Last year we did an independent stress test on our loanbook to see what the results would be – and the results were very pleasing. That ratified our lending strategy and informed some of our decision making going forward. “Trust is clearly very important in any business, and more so with investments and lending. “As part of this, our investors will want to know how we’re dealing with our borrowers and that relationship plays a very big part.” Like all property-focused lenders, Wellesley has had to contend with the temporary

closure of a number of construction sites. Due to social distancing rules, progress is slower on those sites which have remained open. Furthermore, some of the platform’s completed projects which would normally be in the sales process in the open market are seeing delays. Notwithstanding this, many have pre-sales agreed which means that the completion transactions are not inhibited. “We’ve agreed to work with our borrowers where circumstances dictate that some of their output

may be reduced so that they can adhere to social distancing measures,” explains Madden. “They may not have as many people on site or if they are on site, they’re working differently than what they usually would be at this stage. “We will look to manage the loans for the longer term which requires that we are fair and understanding with our borrowers, however at the same time ensuring that our investors’ interests are best served.” Wellesley has already minimised the potential harm to investors by maintaining relatively low loanto-values on its properties. This creates a “reasonably sized buffer”, Madden says. “Looking to the future we will have to take a long-term view because there will be some shortterm volatility,” he adds. “Some reports have predicted a fall in house prices in 2020 but we are hopeful that they will bounce back in 2021.” The challenge for Wellesley is to maintain the trust of its users even as this short-term uncertainty continues. “What we’re trying to do is take the appropriate measures to safeguard the interests of all our investors not just today but over the whole investment term,” adds Madden. “And that’s built on having strong, transparent relationships with both investors and borrowers.”

CONSUMER LENDING

Personal risk

The peer-to-peer consumer lending market is facing fresh new challenges amid the pandemic, but this could be its chance to prove its mettle, as Michael Lloyd reports

ONSUMER LENDING is at the very heart of the peer-to-peer sector, enabling individuals to lend to other individuals. The worldâ&#x20AC;&#x2122;s oldest P2P

lender, Zopa, launched in 2005 offering personal loans, funded by regular people. However, the sector is facing unprecedented challenges. The Cov-

id-19 pandemic has had a devastating impact on the worldâ&#x20AC;&#x2122;s economy and the unavoidable recession is set to hit consumers as well. The Financial Conduct Author-

CONSUMER LENDING

ity (FCA) implemented new rules last month requiring personal loan providers to offer a payment freeze for borrowers affected by the pandemic. Notably, P2P lenders are exempt from the new rules, as the City watchdog said that P2P regulated credit agreements are not covered by the guidance. “Enormous numbers of people are facing at least a 20 per cent drop in their income – and many are facing much more,” states Sarah Coles, personal finance analyst at Hargreaves Lansdown. “There’s every chance that people with previously excellent credit records will default. “As a result, the FCA has proposed changes to personal loans, which will encourage banks to freeze payments for

have an impact on the stated target returns. “However, as it’s not their money on loan, it’s more difficult for P2P providers to offer ‘forbearance’. It

“ There’s every chance that people with

”

previously excellent credit records will default three months. If people are still struggling to make payments at that point, banks have been told to offer ‘forbearance’ – freezing interest and accepting reduced or paused payments. “Some P2P lenders are offering help to borrowers, which could

means there’s a risk that there may be less flexibility, so as borrowers hit difficult times, there could be a sharp rise in defaults which could threaten both returns and the original capital.” Although they are exempt from the new rules, some P2P

consumer lenders have already been offering payment holidays to struggling borrowers. Meanwhile, Lending Works last month stopped all new retail investor signups, all new loan issuances and all investments from new or existing customers for at least 90 days. “Due to the current state of uncertainty, it has become extremely difficult to effectively assess customers’ creditworthiness and affordability,” Lending Works said in a note to investors announcing the changes. “This has clearly placed an unsustainable strain on the platform.” And ‘big three’ lender RateSetter

CONSUMER LENDING

has told Peer2Peer Finance News that it is “materially reducing” new consumer lending amid the pandemic. “We are focussing on delivering liquidity for our investors and this has included materially reducing new lending, while ensuring fair outcomes for our borrowers,” said RateSetter’s head of consumer finance Anna Decoudu. Even before the pandemic hit, consumer lending was – and still is – a highly competitive market, which is reflected in comparatively low interest rates for investors compared to other segments of lending such as property. “There are a lot of other consumer lenders that serve that market well, so the competition is more severe already in that channel,” comments John Cronin, analyst at stockbroker Goodbody. His comments are echoed by Andrew Holgate, chief executive of fintech consultancy Equitivo. “Why target three per cent unsecured when in property you can be getting seven per cent plus, with the security of a nice asset?” he says. As a result, there are a relatively small number of P2P consumer lenders, including Zopa, RateSetter, Lending Works and newer entrant Elfin Market, which provides revolving credit akin to a credit card. This is in stark contrast to the P2P property space, where there are dozens of platforms. However, P2P consumer lending has some benefits over other areas of the personal loans market, according to Neil Faulkner, founder of P2P ratings and research firm 4th Way. “Consumer lending credit-loss rates can be three to five per cent per annum at the more prime end, during reasonable market

“

P2P consumer lending has a strong role to play in the finance ecosystem

”

conditions,” he says. “Payday consumer lending can have loss rates of 10 to 50 per cent per annum.” RateSetter’s Decoudu argues that it is still an attractive market for the right players. “The UK consumer lending industry is competitive, so delivering at scale and with

efficiency is key,” she comments. “With a strong product, excellent customer service, and flawless execution, the consumer lending market is a strong one to be in.” That aforementioned scale and efficiency is helped by automation. P2P consumer lending tends to be a more automated process than business or property lending, due to the size and volume of the loans. “Automation is facilitated by a commoditised product, readily available and reliable credit data and the efficiencies of lending at scale,” Decoudu continues. “As a result, customers benefit from consistency, speed and value.” This helps P2P consumer lenders

CONSUMER LENDING

“ There will be

failures…I think that will make the strong players stronger over time

”

to compete better on price, adds Mansour Bouaziz, chief executive and co-founder of Elfin Market. “Most borrower applications from P2P consumer lending platforms receive a fully automated decision,

which is less often the case for business or property loans as far as I’m aware,” says Bouaziz. “There are some benefits to automation, the first one being that it keeps P2P consumer lending platforms leaner and so contributes to making them cheaper than their more traditional high street competitors.” Despite market challenges, there are real opportunities for P2P consumer lending as the world battles through – and recovers from – such exceptional times. After all, the P2P industry really flourished in the aftermath of the 2008-9 financial crisis, when high street banks reined in their lending. Perhaps the pandemic could provide P2P lenders – and particularly consumer lenders – with the shot in the arm that they need to gain an even larger share of the market? Mike Carter, head of platform lending at fintech trade body Innovate Finance, recalls that the

large P2P players today benefited greatly from 2010 to 2015 when demand for loans outstripped supply following the last recession. He argues that this creates an opportunity for new P2P players in consumer lending to target profitable market segments once economic conditions improve. RateSetter’s Decoudu agrees. “Despite the current economic uncertainty in these unprecedented times, I am convinced P2P consumer lending has a strong role to play in the finance ecosystem, for both borrowers and investors,” she says. Legendary investor Warren Buffet famously said, “only when the tide goes out do you discover who's been swimming naked.” The tide is certainly going out and will lay bare the resilience of all companies, including P2P consumer lenders. “You’ll see a significant rise in default rates, which will bring out the strong players in the market,” comments Goodbody’s Cronin. “Unfortunately, there will be failures. I think that will make the strong players stronger over time. “However, I wouldn’t overplay the risk for all firms. It depends how long the economy is shut down for. I don’t think the whole market will fall away – some will survive.”

JOINT VENTURE

Play your cards right

Lakshithe Wagalath, co-founder and chief operating officer at Elfin Market, explains how his platform is revolutionising the credit card industry

HEN ELFIN MARKET launched in September 2019, it had one core aim – to provide a fair and affordable alternative to credit cards, using peer-to-peer lending. According to the latest data from the Bank of England, the average credit card interest rate in 2019 was 20.77 per cent, and that doesn’t include commission fees, late fees and additional costs such as balance transfers. For Lakshithe Wagalath, cofounder and chief operating officer, Elfin Market, this was not good enough. “Traditional credit cards are very costly and unfair products,” he says. “A lot of people are trapped in long repayment schedules. And we truly wanted to change that.” Along with co-founder and chief executive Mansour Bouaziz, Wagalath created Elfin Market. It uses P2P lending and technology to offer a much lower representative APR of 5.8 per cent inclusive of fees, while still offering the same borrowing capacity as a traditional credit card. “Our borrowers have complete freedom over what they do with the money,” says Wagalath. “They can access their credit lines as many times as they like within their credit limit, and they can make early repayments whenever they want. The money will be transferred to their bank account within seconds and they can use it as they wish. The only difference is that it is much,

much cheaper than traditional credit cards.” There are clear benefits for investors as well. Elfin’s lenders can earn between eight and 12 per cent through a highly diversified portfolio on the platform. “The minimum investment is £100,” explains Wagalath. “If you just invest that £100, it will be spread across a few hundred borrowers in the platform.” Diversification is just one way in which Elfin Market manages risk on behalf of its investors. The platform has a very strict credit risk management process, which results in more than 90 per cent of its credit applications being

rejected. Since the Covid-19 pandemic, these criteria have been tightened even further, including new affordability checks. However, even in the midst of a global pandemic and accompanying recession, Elfin Market is not losing sight of its key objective. The platform is still committed to making credit card facilities more accessible, affordable and flexible as possible. “With our borrowers, we want to be fair and helpful,” says Wagalath. “So we are happy to be able to offer a one- to three-month payment holiday to our borrowers in financial difficulty. That goes along with our message of fairness.” Before the end of the year, Elfin Market plans to release two new products – a mobile app which allows customers to check their account and make transactions on the go. The platform is also planning to launch a physical card called the Elfin Card. This will enable borrowers to make payments directly from their Elfin Purse. “We are different to other P2P platforms because we are not in the usual personal loans business,” says Wagalath. “We are in the revolving credit business. We are offering something which is flexible and much more similar to traditional credit cards than P2P lending.” As the country faces the possibility of another credit crunch, Elfin Market is finessing a service that is set to become more vital than ever before.

IFISA

Dark horse ISA season has been and gone with less fanfare than ever before. But amid the pandemic panic, stock market crashes and plummeting interest rates, there has been a quiet winner… Innovative Finance ISAs. Michael Lloyd reports

UST A YEAR AGO, Innovative Finance ISAs (IFISA) were suffering from a serious lack of name recognition. According to one survey, conducted by The House Crowd in early 2019, a massive 87 per cent of young adults had never heard of an IFISA. Six months earlier, a similar survey by Oaksmore ISA found that only six per cent of adults knew what an IFISA was. What a difference a global pandemic makes. As the 2020 ISA season began, Covid-19 arrived to tank the stock markets and push the Bank of England into reducing the base rate to a(nother) historic low of 0.1 per cent. This has had a knock-on impact on the value of stocks and shares ISA portfolios, and cash ISA savings. Suddenly, the idea of fixed returns in a tax-free wrapper seems like the answer to a lot of people’s portfolio problems. Amidst the economic uncertainty caused by the coronavirus

pandemic, platforms such as RateSetter, CrowdProperty and Rebuildingsociety have announced rising IFISA inflows this year. In fact, Rebuildingsociety is now predicting that even more IFISA business is set to come from directors’ loans. “People are not using their IFISA allowance but have invested in their business,” says Daniel Rajkumar, founder and chief executive of Rebuildingsociety. “Many have director loans in their company but don’t pay interest because it’s not tax efficient, but it can be if they wrap that around the ISA.” Rajkumar adds that the introduction of stringent new marketing restrictions last December have not had an impact on his platform’s IFISA inflows, further underlining the growing popularity of the product among retail investors. Under the new rules, platforms can only communicate ‘direct-offer financial promotions’ to high-net-

worth or sophisticated investors, those receiving regulated financial advice or restricted investors, meaning everyday investors who pledge to put no more than 10 per cent of their portfolio in peer-topeer lending. Rajkumar says this has no real effect as the industry has been around a while, which has led to a deep pool of sophisticated investors. Some platform executives have even stated that December’s regulations have been positive for P2P and IFISAs, by raising standards and confidence in the sector. With increased confidence in the market and current stock market volatility, insiders argue, there is a strong case for investors to diversify their portfolios in P2P and IFISAs. “This is a moment when this asset class can prove its worth in a diversified portfolio and demonstrating good outcomes can put P2P on the map,” says a RateSetter spokesperson. Meanwhile, Andrew Holgate,

IFISA

chief executive of fintech consultancy Equitivo, added that there is always a case for investors to diversify into IFISAs regardless of the economic times. “There is always a case for diversity,” he asserts. “Every lender should look to diversify as widely as possible. Even when you have a strong understanding of the risks of lending, diversity helps to minimise the risk of choosing the one bad investment. It shouldn't matter if the economic times are good or bad, diversify as much as you can.” As well as investors diversifying into IFISAs, there may also be a trend of money coming from stocks and shares towards IFISAs, at trend that has been witnessed by CrowdProperty and by Rebuildingsociety’s Rajkumar. However, there are still a few challenges for IFISA providers in the current market. Liquidity is an often-cited reason for investor caution, while the lack of Financial Services Compensation Scheme (FSCS) protection has made independent financial advisers (IFAs) reluctant to recommend IFISAs to their clients. And while IFISA inflows appear to be up overall, the likes of LendingCrowd, Ablrate and Money&Co have all seen a drop in IFISA inflows over the past few months. “Not only was the effect of bad press for the sector, market uncertainty, regulation and Covid-19 noticeable but many providers also decreased customer acquisition spend against this backdrop, which further impacted new gains,” a LendingCrowd spokesperson says. Money&Co’s chief executive, Nicola Horlick, attributes the platform’s decline in inflows to the

current climate being a worrying time for investors. “Investors are nervous about the economy, so I’ve been ensuring our loans have proper security and making it clear what that security is,” she says. “Investors have to be very careful and make sure they do their research and due diligence. “If you can identify platforms like us which have done their due diligence properly, IFISAs are a way of making a decent income.” However, Carl Davies, chief operating officer at The House Crowd, suspects that the ongoing pandemic affects all types of ISAs, not just IFISAs, adding that “uncertainty means people probably need to stay liquid.” The liquidity issue is not exactly news to P2P veterans. But due to the coronavirus crisis, investors want even more liquid investments because they want to know that they can access their cash quickly if they need it. As a result, many platforms have seen an increase in the amount of activity on their secondary markets, with many investors looking to sell their loans in a short space of time. “A lot of investors are pulling out of long-term investments to have more liquid accessible investments that generate an income and don’t take too long to diversify,” says Rajkumar. “I think a lot more people will be looking for alternatives and wanting their investments to earn an income if they are taking a risk, maybe those who weren’t comfortable with that in the past will start to become more comfortable with it.” David Bradley-Ward, chief executive of Ablrate, warns that the lack of the FSCS safety net could play into the idea of IFISAs being a riskier investment option. He argues

that interest rates have been low for so long that if anyone were to move savings around, they would have done it by now. Although there is more regulation and confidence in the industry now, the lack of IFA money continues to cause concern for IFISA providers, who believe that everyday investors are being deprived of the relatively stable returns that P2P lending can offer. Bradley-Ward puts the lack of IFA attention down to the fact that advisers don’t want to be in a position where they have to advise on individual loans, while Mike Bristow, founder and chief executive of CrowdProperty, says they don’t fully understand the market and its advantages. But despite the current challenging market and lack of IFA attention, platforms predict a bright future for IFISAs. Ant Beddows, chief financial officer of Propio, sees a huge opportunity for the sector to grow by providing much needed funding to small- and medium-sized businesses, helping in the recovery from Covid-19. On the investor side, The House Crowd’s Davies predicts a biggerthan-normal rush towards taxefficient products during next year’s ISA season, as people try to find ways of rebuilding the losses they suffered this year. The consensus is therefore that the sector will come out of this challenging time to reach the light at the end of the tunnel. “IFISAs are a great proposition so the future is very strong,” says Bristow. The 2020 ISA season is now behind us, but IFISA awareness is clearly growing. For a four-yearold investment product, that is no mean feat.

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JOINT VENTURE

The 5 rules for a successful development

Frazer Fearnhead, founder and chief executive of The House Crowd, explains the five key factors that add up to a successful property development

ROPERTY DEVELOPMENT can be full of risk, unless you know exactly what you are doing. Frazer Fearnhead, founder and chief executive of propertybacked lender The House Crowd and House Crowd Developments, its associated development arm, has revealed the five non-negotiable rules that add up to a successful development… 1. Buy land at the right price “If you don’t get the land at the right price, you will only make a profit if the market rises during the build,” says Fearnhead. “And that is highly speculative.” House Crowd Developments does a huge amount of research before purchasing land – Fearnhead’s team will survey the area, examine the build costs and other potential expenses such as finance, and speak to local estate agents to get a sense of the final value of the site. 2. Appoint the right team House Crowd Developments’ extended team includes planning consultants, contractors and award-winning architects as well as the in-house team of surveyors and underwriters. The expertise of everyone involved in the build is of paramount importance to Fearnhead, “especially when it comes to your contractors,” he says. “You need to check out their track record and reputation, their experience of this sort of development, how many other sites

you can to protect yourself from every eventuality.”

they are running, as well as their credit history and balance sheet.” 3. Thoroughly identify and mitigate risks Risk mitigation on property developments goes far beyond simple credit checks. Fearnhead remembers a site where contractors incurred more than £500,000 of unexpected costs because of problems with the ground. “The ground was so muddy – it literally turned into mudslides,” he says. “Luckily they were a big company so they could absorb the costs, but a smaller company may have gone under.” Likewise, Fearnhead says that its “mind boggling” how many days have been lost to bad weather. And then there is the coronavirus pandemic, which has shuttered many building sites and slowed work on the others. “You can’t predict the future, but you can prioritise the right thing and you can be aware of some underlying risks and be as well prepared as possible for acts of God even if you can’t predict them,” says Fearnhead. “You’ve just got to do what

4. Control expenses and manage budget The safest way to control costs is to make sure the contractor is on a fixed-price design and build contract, Fearnhead says. While this might cost a bit more than a flexible contract, it places the burden on the contractor then to deliver – and to incur any higher-than expected costs of materials which frequently change. It is also essential to have strict financial controls, says Fearnhead, adding that The House Crowd has a policy of doing fortnightly drawdowns which mean the developer must prove that any subcontractors have been paid before more money is released. 5. Know what the market wants and how much it is prepared to pay “There is no point in building a four-storey town house if your target market wants two-bed apartments,” says Fearnhead. “To find out what the market wants, you need to talk to the local estate agents who deal with property buyers day-in day-out.” It is also worth remembering that there could be 18 months to two years between the start of the construction and the first property sale, so it is important to be aware of any events which might impact the final sale price during this time. This is where risk management and appointing the right team will really pay off.