Peer2Peer Finance News November 2020 by Alternative Credit Investor

FUNDINGSECURE IN FEE DISPUTE

NEW RULES

Property special report supported by

Administration extended for three years

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Have the FCA’s efforts been successful?

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ISSUE 50 | NOVEMBER 2020

IFISA inflows set to decline this tax year due to CBILS and Covid-19 INNOVATIVE Finance ISA (IFISA) inflows are likely to be markedly smaller this tax year, as some of the biggest providers close off to new investors. Funding Circle and LendingCrowd, which both have IFISA products, temporarily closed to retail investment when they began lending under the coronavirus business interruption loan scheme (CBILS). “We’re expecting new inflow to be lower than previous years due to lending currently being focused on CBILS,” a LendingCrowd spokesperson told Peer2Peer Finance News. As of April 2020, when

Funding Circle paused lending for retail investors, around £470m had been lent through its IFISA product cumulatively. Funding Circle declined to comment on this tax year’s IFISA intake. Meanwhile, RateSetter, which was previously the largest IFISA provider, is expected to see a drop in

IFISA inflows since the platform closed its doors to new retail investment earlier this year. Existing investors can still invest in the platform’s P2P loans using the IFISA wrapper. But following Metro Bank’s acquisition of the platform in September, the challenger bank will be

the sole funder of any new consumer loans through RateSetter. RateSetter declined to comment. Other platforms have already reported a fall in IFISA inflows due to the impact of the pandemic. In August, Money&Co’s chief executive Nicola >> 4 Horlick said its

Practical advice for P2P platforms grantthornton.co.uk

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Green Park House, 15 Stratton St, Mayfair, London W1J 8LQ info@royalcrescentpublishing.co.uk EDITORIAL Suzie Neuwirth Editor-in-Chief suzie@p2pfinancenews.co.uk Kathryn Gaw Contributing Editor kathryn@p2pfinancenews.co.uk Marc Shoffman Senior Reporter marc@p2pfinancenews.co.uk Michael Lloyd Senior Reporter michael@p2pfinancenews.co.uk 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.

t appears that a pandemic was all it took for M&A activity in the peer-to-peer lending sector to come to fruition. The industry had seen little consolidation – aside from a few platform closures – until this year, when we have seen two substantial deals take place. RateSetter has been acquired by Metro Bank, while Lending Works has been bought up by alternative investment manager Intriva Capital. While the RateSetter deal appears to have been sparked off by the Covid-induced downturn, I understand that the Lending Works transaction was already underway before the pandemic hit. Now that the industry has whet its appetite, who could be next? Starling Bank’s chief executive Anne Boden recently revealed that the challenger bank will “probably” acquire a lending platform within the next year or two (see our news story on page 5), most likely in the small- and medium-sized enterprise space. Considering that Starling already has relationships with two P2P lenders – Funding Circle and Zopa – it seems highly likely that Boden and her team are eyeing the sector for other opportunities. As well as marking an exciting next step in the evolution of the P2P industry, I think the increasing interest from banks and investment managers underlines the validity of the sector within the wider financial services landscape. Here at P2PFN, we’re certainly keeping our eyes and ears open for hints of the next deal…

SUZIE NEUWIRTH EDITOR-IN-CHIEF

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NEWS

cont. from page 1 IFISA had attracted around five per cent of the volumes this tax year that it took in the previous tax year. “I think it’s a combination of two things, some investors preferred cash and when the stock market crashed others invested in stocks and shares because they thought it would recover,” Horlick said. “Covid-19’s hit our IFISA inflows – I don’t know what happened to others.” Several other platforms paused all investment during the crisis, which is also likely to have impacted IFISA inflows. JustUs and Crowd2Fund

both closed to new investment earlier in the year but reopened to new money in September. Lending Works has been closed for all new investments since April and Octopus Choice stopped all transactions in March. However, there are some green shoots, as other platforms enter the IFISA market. P2P property lending platform Invest & Fund has reported huge demand from new investors for its IFISA, which was launched in June, and Leap Lending launched its own tax wrapper in July. FutureBricks and

Lendwise are also planning to launch their own IFISAs. The IFISA market is believed to have broken the £1bn barrier in the 2019/2020 tax year, according to data from The Investing and Saving Alliance (Tisa). The total amount invested in the IFISA tax wrapper, based on figures from its own members, reached £1.14bn by February 2020, with still a few months to go before the tax year ends. P2P lending members of Tisa include Zopa and RateSetter. No further statistics have been published

from Tisa members since the pandemic hit the UK. In contrast, the latest HMRC data released in June – based on ISA manager returns for the 2018/2019 tax year – shows £328m was invested in IFISAs from 38,000 accounts. This is up from £277m invested in the 2017/2018 tax year but there were 49,000 account openings during that year. The figures take the total invested in IFISAs to £641m across 92,000 accounts. HMRC is still claiming the subscription figures are unreliable though due to a low level of data.

Funding Circle sees surge of new borrowers via CBILS TWO THIRDS of the borrowers accessing Funding Circle loans via the coronavirus business interruption loan scheme (CBILS) are new to the platform, its UK managing director has revealed. Lisa Jacobs (pictured) also said that the peer-topeer lending platform has already lent more than £800m to UK businesses under CBILS. At the start of the year, Jacobs said that “it was a bit of a rollercoaster”, but Funding Circle has gone on to become the

fifth largest CBILS lender, largely thanks to a raft of new borrowers. “We’ve had about two thirds of businesses over this period who are new to Funding Circle, and a lot of them have actually been new to online lending overall,” she said at the LendIt Fintech Europe 2020 virtual conference. “Some of the feedback that we’re getting from some of those businesses is that they’ve started an application elsewhere – they may have started an application with a bank and they’ve not heard

back so they’ve looked at alternatives.” Jacobs also refused to rule out a return to retail investing next year. The platform paused retail lending in March 2019 to focus on delivering governmentbacked loan schemes. “We do believe in smaller investors being able to access the same attractive returns that institutions can,” Jacobs said. “As we start to think about next year we’ll make sure that we’re thinking about what the retail proposition might

look like then.” Jacobs admitted that a lot of Funding Circle’s retail investors have been disappointed that they were unable to continue to lend, but she added that they have been “very understanding” overall.

NEWS

Starling Bank eyes acquisition to grow SME lending

STARLING Bank will “probably” acquire a lending platform within the next year or two, its chief executive has revealed, as the challenger bank seeks to grow its small- and medium-sized enterprise (SME) loan originations. Speaking at the LendIt Fintech Europe 2020 virtual conference in October, chief executive Anne Boden (pictured) said that Starling Bank is rapidly expanding the SME side of its business and SME loans now make up the largest segment of its overall book. “We’ve grown very fast,”

she said. “And despite the fact that we’re growing our own originations, we’re always going to look out for something to acquire and we will probably acquire something in the next year or two.” She also pointed out that Starling has approximately £3.6bn of

deposit funding at the moment, thanks to this growing customer base. “We do our own lending and we’re doing government-backed lending but also funding other organisations both in the non-bank sector and in the peer-to-peer sector,” she said.

“And in those sectors there’s a real absence of funding at present. But we have an appetite for that and we have very slick processes to actually work with these organisations, provide them with funding, take those assets onto our books and then together we can serve the market more effectively. “You have stress in the P2P market, but as a bank that has access to funding and government schemes and liquidity, that is a huge advantage.” Starling already has existing partnerships with P2P lenders Funding Circle and Zopa.

Great recession was “the making of Zopa”, says founder THE 2008 financial crisis was the making of Zopa, the peer-to-peer lender’s co-founder Giles Andrews has claimed. Andrews helped launch Zopa in 2004 and became chief executive in 2007, overseeing the growth of the platform during the financial crash when mainstream savings rates declined and bank lending reduced. He became chairman in 2015. “I describe the financial crisis as the making of Zopa,” Andrews said while chairing a panel at the LendIt Fintech Europe 2020 conference last month.

“We did some of the best lending we have ever done. “It is too early to say if [the pandemic] represents the same opportunity.” He was joined on the panel by representatives of institutional backers including Alison Harwood, head of the London branch for Varengold Bank and Pedro Coelho, chief executive of Banco BNI Europa. Both Varengold and Banco BNI Europa have previously invested in P2P lenders. “There is a huge opportunity for the

industry to show what digitised origination methods can do,” Harwood said. “Those who can show they have better access to more current data when applying their credit scoring methodologies have a real natural advantage over others who cannot.” Coelho said the pandemic has created both an opportunity and a threat for alternative lenders. “These fintechs are able to gather more clients as they are more digital, enabling clients to get credit without accessing banks that need more

physical contacts,” he said. “The threat is that… everyone needs to rebalance their credit model to allow for some difficulties that clients may face. “Some business industries have been heavily affected and consumers have lost their jobs. “Lenders will need to have a good look at their existing portfolios to see the impact of payment holidays and if borrowers will pay once they are over. “It is an important test for established platforms and an opportunity for those who can adjust more quickly.”

NEWS

Lending Works chief urges lenders to adopt open banking LENDING Works chief executive Nick Harding has said that lenders need to innovate quickly during the pandemic and look at other credit data sources such as open banking. He said that Lending Works borrowers representing around 80 per cent of the platform’s portfolio took up the option of a payment deferral at the peak of the crisis but that is now down to almost half. Harding said that firms need to adapt quickly to survive Covid-19. “This will be a long crisis and the aftereffects

will always lag behind the reality of what’s happening in society and that’s an example of why open banking can be very powerful,” he said at LendIt Fintech Europe 2020 last month. “We’re at the end of the beginning for payment deferrals and I believe the next 12 months will be very challenging for firms that can’t innovate quickly or don’t look at other credit data sources. “And high street banks will have lots of problems, they have traditionally been slow to adapt.” Harding’s peer-to-

peer consumer lending platform already utilises open banking – the data sharing initiative that mandates high street banks to share anonymised customer data with approved third parties. “Open banking will be adopted much more quickly, and significantly, more firms will use it because of Covid-19 and then customers will be more comfortable with it,” Harding said at the conference. “More of our major partners have, or are, adopting open banking.”

Lending Works was acquired by alternative investment manager Intriva Capital in July and Harding said that the firm will invest significant resources into the lender. “You need to try and drag positives out of any situation and we’ve certainly been able to do so,” he said. “We’re building products on open banking and all in all, it’s a terrible thing to say, but it’s been a good crisis for us and we’re ending the year better than how we started which is pretty incredible.”

Mintos mulls second attempt to enter UK market MINTOS is monitoring the outcome of Brexit negotiations to see if there is an opportunity to try and enter the UK market again. The Latvia-based peerto-peer lending marketplace had a regulatory application rejected by the Financial Conduct Authority (FCA) last year. The City watchdog said at the time that Mintos had “not provided sufficient evidence to demonstrate that it will adequately capitalise its business” and had not shown that its head office would be based in the UK, in line with regulatory requirements.

“Three of the key areas where the firm’s policies and procedures are inadequate relate to creditworthiness assessments, arrears handling and winding down the firm’s business,” the FCA said at the time. Since then, Mintos, which facilitates lending

between investors and loan originators from around the world on its platform, has applied for an investment firm licence in Latvia, which would bring it in line with most of these requirements. Martins Sulte, chief executive of Mintos, said

having this licence could then allow the platform to passport its services into the UK depending on the outcome of Brexit negotiations. “An investment firm licence will give us a better chance of providing services in the UK, but that depends also on what is decided about passporting after Brexit,” he told Peer2Peer Finance News. There is no target date for trying to re-enter the UK market. Sulte said Mintos is also hoping to launch a debit card for its customers next year once it gains its electronic money institution licence.

NEWS

FundingSecure administration held up by pandemic and fee dispute THE ONE-YEAR anniversary of FundingSecure’s collapse has been marked by an extension to its administration, alongside court proceedings over a fee technically owed to the company from each loan. Appointed administrator CG&Co had a three-year extension until October 2023 approved last month after it argued that the pandemic was delaying recovery and realisation attempts. Court proceedings also started in October, regarding a five per cent redemption fee owed to the peer-to-peer pawnbroker on each loan, which is mentioned in its terms and conditions.

Investors have argued that they were not aware of this and others say it had been waived on various occasions. Documents from CG&Co show it has sought legal opinion from three independent solicitors

who say the fee is correctly levied and payable. The issue will now be decided by the high court in Manchester. Evidence from each side on why the fee should or shouldn’t be paid is due by the end of

this month and a legal direction will be issued 28 days after. FundingSecure entered administration in October 2019 after being overcome by litigation surrounding inappropriate allocation of investor money and a separate claim regarding fraud on a portfolio of art loans. CG&Co identified several issues with how the platform was run including client money failures and loans being mis-labelled as performing when they were in default. An update from CG&Co in May 2020 said £11.9m has been recovered so far, out of total investments of £67.5m.

UK P2P lenders likely to hold off on public listings UK PEER-TO-PEER lenders are unlikely to embark on stock market flotations in the near future, industry analysts claim. Funding Circle is the only P2P lender to have gone public, having listed in October 2018, and despite platforms such as RateSetter, Zopa and Assetz Capital all expressing intentions to list, no concrete plans have materialised. Assetz Capital said in June that an initial public offering (IPO)

continues to be evaluated as a “future step” while Zopa is rumoured to be considering a public listing but has declined to comment on plans. RateSetter had long expressed its ambitions to float but this year’s acquisition by Metro Bank makes an IPO highly unlikely. “It is unlikely that we will see any P2P lender forge ahead with IPO plans in the near to medium-term,” said John Cronin, analyst at brokerage Goodbody.

“The appetite among public equity market investors is likely to be heavily suppressed given the challenges faced by the sector.” Nic Conner, research consultant for business finance experts Rangewell, suggested that a cautious approach could be a good thing as it means a P2P lender will be able to show that it can survive the current economic cycle. “With the FTSE 100 at its lowest valuation since 1988, a slower route to

listing is not a bad thing for the platforms either,” he said. “I’m sure we will see more platforms hitting the open markets one day, but it won't be any time soon, or with the mega valuations of the past. “That said, future investors will be reassured the valuation of a newly listed P2P lender is based on a proven business model, after being tested by one of the largest economic downturns in history.”

GOOD GOVERNANCE. TRANSPARENCY. TRUST. Some things can’t be bought, sold or traded. Duff & Phelps and Kroll help clients protect, restore and maximise these ideals and mitigate risk. As peer-to-peer platforms find themselves navigating a new reality, addressing issues from financial stress and regulatory compliance to valuations and fundraising, our multi-disciplinary team of experts can help you assess and manage the risks to your business and address your most complex challenges. Our services include: •

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JOINT VENTURE

Platforms warned over HMRC arrangements Paul Smith, managing director in Duff & Phelps’ Manchester office, and part of the global restructuring advisory practice, explains the secrets to dealing with HMRC

ENDERS AND BUSINESS owners should act now to avoid tax challenges amid a surge of forbearance measures. Paul Smith, managing director in Duff & Phelps’ Manchester office, and part of the firm’s global restructuring advisory practice, has warned that some small- and medium-sized enterprises (SMEs) are likely experiencing a false sense of liquidity that may end once HMRC stops offering payment breaks. “I would say there's a false sense of liquidity in certain businesses and that when they actually look to balance the books, there could well be a gap,” says Smith. “These businesses will realise that they haven't made loan payments to the bank, they haven't paid rent to their landlords, and there’s also so much uncertainty about the government support that's been provided.” Smith has been on the front lines of the SME response to the Covid-19 crisis since the start. Initially, Duff & Phelps was focused on a stabilisation exercise with many of its clients. This involved reaching out to key stakeholders and creditors and seeking forbearance from HMRC. “In many cases, we’ve been able to agree deferrals of tax liabilities for a number of months, so that is one less thing for people to worry about,” says Smith. “We’ve also worked with businesses to negotiate with landlords, suppliers and lenders where repayment holidays were needed.”

The next phase for Duff & Phelps was to take a new look at these businesses and figure out what they need to move forward. “We look to put in place realistic, robust plans that the business can adhere to going forward, because the last thing we want to do with any stakeholder is reach an agreement then renege on it because that isn't good for the client,” says Smith. “We’ve been providing options analysis and guiding clients through it all.” Duff & Phelps has seen the average amount of HMRC debt among its clients increase during the Covid-19 period. In order to help its SME clients manage this debt, Duff & Phelps has been working closely with HMRC, leveraging its lengthy experience and strong relationship with the tax office. “We have a strong relationship with HMRC at all levels,” says Smith. “We understand the enforcement process, how debts are collected by HMRC and more importantly, we know what a solid proposal looks like. “We pride ourselves not only on

the number of arrangements that we actually get through and the length of those arrangements, but also the number of jobs that we have helped safeguard. “That's the metric by which we measure ourselves.” Since the pandemic began, Duff & Phelps’ tax arrears solutions team has saved approximately 2,000 jobs. By comparison, for the whole of 2019, the team safeguarded approximately 1,700 jobs. “We have the relationship with the lenders, the landlords and the asset providers,” says Smith. “We can effectively marshal and bring together the restructuring plan.” This involves arranging longer repayment terms with HMRC via Time-To-Pay arrangements, and galvanising stakeholder support, as well as offering advice and even an equity match service for its SME clients. Seven months into the pandemic and with no end in sight to the economic turmoil, SMEs and lenders would do well to heed Smith’s advice and bring in the experts now, to save money and jobs in the future.

PROPERTY

Survival of the fittest Peer-to-peer property lenders are facing their biggest test to date. Michael Lloyd reports…

HE PHRASE ‘SURVIVAL of the fittest’ has never been more pertinent than right now. The Covid-19 crisis has caused challenges for companies in a variety of sectors, including peer-topeer property lending platforms. The pandemic has led to liquidity issues, difficulties with funding and the temporary closure of the property market, which is still struggling in some areas despite a gradual recovery. P2P property lending platforms have all this to contend with and

some will have to adapt to survive, whether it be via consolidation or restructuring, or by looking elsewhere for new funding options. The property market has witnessed a boom since lockdown restrictions were lifted, but Covid-19 has left its mark. Valuers are being understandably cautious on bridging and development projects and this is generally a tough period for property lenders, with several either exiting or retracting from the market. Mortgage valuations are slow, loan-to-values (LTVs) are

reducing, and valuations are often downgraded, making timely redemptions more difficult. “Recovery is also hampered by the moratorium on eviction notices,” says Carl Davies, chief operating officer at The House Crowd. “Equally, investors are showing more caution as the effects of the pandemic are as yet unclear.” And even if the market is improving, this may be at a cost of future growth. According to HMRC, residential property transactions rose by 15.6 per cent month-on-

PROPERTY

month in August, boosted by the stamp duty holiday and pent-up demand from the nationwide lockdown earlier in the year. “Are people deciding now to save on stamp duty and is that eating into future potential transaction volume or is that reflective of low transaction volumes over recent years?” Mike Bristow, chief executive of CrowdProperty, speculates. “And furthermore, there are immense challenges of unemployment and how will that play out over the next few months.” Meanwhile, the commercial market has encountered different challenges, with some parts performing well and others – such as office space – struggling. “Logistics, dairy, supermarkets, convenience stores and pharmacies are doing well,” says Brian Bartaby, chief executive of P2P commercial property lender Proplend. “We have a varied loanbook across lots of asset classes.” Some P2P property platforms have reported a slowdown of late, which can be attributed to Covid-19. Atuksha Poonwassie, co-founder and managing director of Simple Crowdfunding, says “business is a little slow” at the platform and her team has been reviewing its loans. “We still have lots of interest and

projects we’re doing,” she says. “We’re not funding the whole development, it’s taking longer funding parts of it. We’re double checking the runway. “It’s taking a longer time to get projects funded because we’re currently not providing an underwriting facility.” At present, a huge question for platforms is liquidity and how wellcapitalised they are. Simply put, if platforms are not well-capitalised then any slowdown

“ If reserves are slim then the cliff edge is quite close

”

in activity means they will have to eat into their reserves. “If reserves are slim then the cliff edge is quite close,” says The House Crowd’s Davies. “Hence the Financial Conduct Authority’s focus on capital adequacy and strengthened governance.” Low capitalised, non-profitable platforms might decide to leave the sector while others may have very low costs or are so new that they were expecting to make losses for years to come anyway. For

them, 2020 will merely slow their start-up phase. Meanwhile, larger P2P property lenders include a mix of firms that are already profitable as well as those that are not, and those that are not still need to seek capital from investors in their own businesses until they have stabilised. “With an unprecedented 20 per cent plus crash in the economy in the first six months – the worst recession in 300 years according to the Bank of England – it seems likely that downsizing will occur at some platforms and winding down at some others,” says Neil Faulkner, managing director at P2P analyst 4th Way. “If closures occur, more of them will be small platforms – but that is to be expected anyway because there are more of them.” However, Filip Karadaghi, chief executive at buy-to-let and bridging lender LandlordInvest, believes there is no correlation between the size and finances of a company and claims that what matters is how well a platform is run. Last month, his platform broke even for 2020 without charging any additional fees, after spotting an opportunity to offer second charge lending to developers that have received loans under the coronavirus business interruption loan scheme (CBILS).

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PROPERTY

He now predicts a small profit for the year. “There’s no correlation between size and finance,” Karadaghi says. “There seem to be lots of companies solely focused on growth and a crisis actually shows who’s sustainable and who’s not. “We’re very efficient, have never relied on raising money externally to fuel our growth and we’re focused on solid growth rather than high growth. At some point we’ll switch to high growth.” Despite the size of a platform, being well-capitalised is essential and prepares businesses for unprecedented situations. Another lockdown, for instance, would mean that redemptions would become very difficult, as underlying borrowers cannot refinance or sell their underlying assets. This could have serious implications for P2P platforms which do not have adequate liquidity to survive. A lack of diversification could lead to platforms falling by the wayside. Several have already stopped lending and if a lender is not well-capitalised, it is harder to

must adapt to the crisis, undergo partnerships or consolidations, and diversify their funding lines. Platforms with a mixture of funding sources, such as retail, family offices, high-net-worth and institutional investors are better placed than those which rely on only a few sources of funding. “Diversification is key in times like now,” says Yann Murciano, chief

“ There seems to be lots of companies solely

focused on growth and a crisis actually shows who’s sustainable and who’s not bring money in. “A number of lenders have paused lending and not just less capitalised ones, many well-capitalised lenders have too,” says Stuart Law, chief executive of Assetz Capital. “I think a number of lenders won’t work well through the current conditions.” Therefore, some platforms

”

executive of Blend Network. “Platforms like ourselves that have a very diversified lender base are in a much better position.” Retail lending itself is also very diversified and often proves better in a crisis than institutions who may pull out due to market uncertainty. Lee Birkett, founder of JustUs, knows all too well of the dangers

of relying solely on institutional backing – having experienced this in a previous business. “Retail is the backbone of P2P,” he says. “Private investors provide liquidity. Those reliant on institutional funding can become stuck if their funding dries up.” Another way to mitigate problems is to restructure to avoid administration. Alternative property development lender and former P2P platform Wellesley Finance has opted to restructure via a company voluntary arrangement, or CVA. The platform is planning a restructure after facing liquidity issues due to the coronavirus and a changing regulatory environment that made it more difficult to raise funding through the issue of listed bonds on Euronext Dublin. Creditors have backed Wellesley’s CVA proposal, which will support a restructure where the property lender will no longer be open to retail investors.

PROPERTY

Andrew Turnbull, director of Wellesley Finance, recently told Peer2Peer Finance News that the platform will be “much smaller”, creating a “much more simple, straightforward, less expensive business to run”. Turnbull predicts more alternative finance property lenders will consider restructures. “My general view is that Covid-19 and regulatory changes within the market are bringing heavy costs to

this sector to review their business models and adapt to survive. “We expect that many platforms will be undertaking reviews of their business models and financial position to ensure that they can ride out the market disruptions caused by Covid-19,” says Geoff Bouchier, managing director, restructuring advisory at Duff & Phelps. “In our experience, the sooner such steps are taken then the greater prospect of a successful restructure

“ It seems likely that downsizing will occur at some platforms and winding down at some others

running these businesses,” he says. “There are greater headwinds than tailwinds. “We clearly have demonstrated there is an alternative to an administration. “If another platform is in a similar position, they will be watching what has been done and will be considering a better outcome to the grim alternative of entering administration.” Similarly, business advisory group Duff & Phelps, which has been advising Wellesley throughout this time, expects more companies in

”

taking place and the threat of any insolvency avoided.” However, some platforms may not require this as they have already benefited from the housing market bump. The annual growth rate of house prices climbed to 2.6 per cent in August, according to Zoopla, as demand continues to outweigh supply. And some platforms are busier than ever. Development finance has been identified as a key opportunity by platforms as, despite the pandemic, there remains a shortage of housing.

Furthermore, lower valuations can create an opportunity for property P2P lending platforms, which can provide the additional finance borrowers need. “The market hasn’t recovered, we’re still getting more opportunities come through because of it,” says Simple Crowdfunding’s Poonwassie. “Additional finance is needed to be found because if LTVs are lower, the chances are that people are needing to find another layer of finance. “For us that means we’re getting more enquiries come through because there are additional bits of finance to find and things are taking quite a long time to progress.” P2P property lending platforms have been forced to deal with a market that is sluggish in some areas and improving in others. Diversification, consolidation and restructuring are all on the table for platforms struggling to adapt to the new normal. But there are also opportunities available, whether it be providing additional finance to developers that require it during this time, or second charge loans to housebuilders that have received coronavirus business interruption loans. The pandemic has put P2P property lenders to the test, and only the most agile and robust players will survive.

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JOINT VENTURE

Selling your platform or portfolio? Read this first… Andy Charters, restructuring partner and insolvency practitioner at Grant Thornton, explains what platforms need to do before considering a sale

HE PEER-TO-PEER lending market has had to weather a difficult climate in 2020 – with a pandemic, multiple lockdowns, and changing regulations affecting every facet of the business. According to Andy Charters, restructuring partner and insolvency practitioner at Grant Thornton, more and more platforms have been using this time to review their options and consider a sale. “You might opt for a sale of the business, to run off the loanbook, or a sale of a particular loan portfolio,” he says. “Each one of those three different options will have different triggers. It depends on the current ownership of the platform, and whether the current owner has an appetite for continued investment in the sector. Or perhaps the platform has grown successfully and the current owners want to monetize their investment. “So there are some really positive reasons why you would want to sell a platform.” Whether mulling a sale, a partial wind-down or a restructuring, two factors stand out for Grant Thornton: access to good data, and decision making. “It’s really hard at the moment to make decisions for any

business,” says Charters. “But actually, being decisive is really important in the face of strong external market pressures. “Acting decisively doesn't mean acting recklessly or making rash decisions. It is critical to base your decisions on high quality data. That quality of data allows you to make the quick decisions required in the face of unexpected pressures with a greater degree of confidence.” Having a good cache of data means that when an unexpected event – for example, a pandemic

– occurs, platforms can make informed decisions quickly and can ensure stakeholders can buy in to those decisions. An analysis of the data might mean that a loanbook can be sold for a higher price, before external factors cause defaults to rise and devalue the entire platform. “For sales of a business or disposals of loanbooks, data is so important,” adds Charters. “I wouldn't underestimate the importance of getting your house in order before you go to market. This might sound like quite basic advice, but we've certainly seen across all sectors that the data is not always as good as management think it is. And people who are looking to buy these types of assets will be data hungry.” Good data will enable timely decision making. “Businesses often find themselves running out of options,” Charters warns. “Those who don't grasp the nettle won’t start to engage with problems until they have already developed.” Charters calls this the “corporate decline curve”. “The more you move down the decline curve, the less options you have,” he says. “Having an external perspective that can provide advice and challenge can be valuable to a board and a management team struggling through this environment. Speaking to people who have managed through crises before can provide management teams with valuable extra insight.” As the pandemic continues to squeeze the economy for the foreseeable future, more platform sales are inevitable. But taking early action can result in a positive outcome for platform owners.

PROFILE

Coming out of the crisis

Mike Carter, head of platform lending at the 36H Group, talks to Marc Shoffman about his view of the peer-to-peer lending sector and the work of the new industry trade body

IKE CARTER STARTED his career as a chartered accountant and now faces the task of balancing the needs of some of the UK’s largest peer-topeer lenders in his new role at the newly formed 36H Group, which sits within fintech trade body Innovate Finance. The 36H Group replaced the now-defunct Peer-to-Peer Finance Association in January. Carter, who is also executive chairman of The Money Platform, was appointed in April as the group’s head of platform lending. He brings an investment banking background to the role, having worked for Deutsche Bank and Lehman Brothers but he also has plenty of experience helping emerging and challenger financial institutions. He worked on the initial public offering for OneSavings Bank and supported private share placements for Metro Bank. Carter, a new entrant to this year’s Peer2Peer Finance News Power50 list who went straight into the top 10, explains the role of the 36H Group amid the pandemic, and why both a trade body and P2P lending is still important to all types of investors. Marc Shoffman: What attracted you to the P2P lending sector? Mike Carter: I have worked with

alternative finance companies doing advisory work and have lent via these platforms so I have known the sector for a long time. When the 36H Group was launched I had the right experience and strategic outlook to help the sector move forward to its next phase. MS: What are your plans for the 36H Group? MC: This was redefined for us when the coronavirus crisis hit in March. Our focus has been around the government coronavirus emergency financing schemes and getting members into those programmes. MS: Why is it needed? MC: We are focusing on regulatory and policy matters and promoting the benefits of the sector across wider stakeholders. Trade bodies vary enormously according to their budget and their firepower. We are not looking to get to granular details of looking at every policy document but we want to provide more high level leadership around policy. Its driven by the members and what they want to get out of it. MS: Why do you think the Treasury was so slow to use alternative lenders in its loan schemes? MC: They may find it easier to

talk to banks, so non-bank lenders have to shout a bit louder to get their case heard. A large number of non-bank lenders have now been authorised by the British Business Bank and their use in the schemes has been recognised. The data shows they participate very strongly when they are put in the schemes. A number have been accredited and Innovate Finance took the lead on getting non-bank lenders involved. We have a lot more punch by being able to team up with bigger firms through Innovate Finance and we also have leaders of our own such as Funding Circle, which was the first out the door to show what the sector could do with the coronavirus business interruption loans. It is good we have some of the biggest players in the fintech sector sitting within 36H that can provide leadership. The 36H Group is providing insight into what the next phase could be once the emergency lending schemes end. MS: How have you found the Financial Conduct Authority’s (FCA) attitude to the sector? MC: We have dialogue with the FCA on ongoing industry issues. Discussions are currently dominated by Covid-19. I expect at some point the FCA will carry out a postimplementation review of the new regulations that were introduced last year. When that happens our lenders will be keen to provide a lot of feedback but that is obviously not a priority right now.

PROFILE

expect to build their investment book at the same time as expanding institutional funding. Institutional funding will grow faster as it is growing from scratch. MS: Have P2P lenders coped well with withdrawal requests? MC: The crisis has probably highlighted that some investors didn’t realise how long it would take to get money out. The products have always been clearly explained: investor access to their funds is based on the ability to sell loans to other investors. This is all in the terms and conditions.

MS: How have P2P lending platforms been affected by new marketing restrictions and appropriateness tests? MC: There were concerns in the run up to the introduction of the new regulations that it would cut off supply but that hasn’t been the case at all. Most platforms welcome the change as they would rather deal with the right kind of investors for the product. Anecdotally, it hasn’t dented retail investment demand. MS: Is there still room for retail investors in P2P lending?

MC: There is definitely still space for retail. If you speak with most platforms they will say diversifying with institutional funding is an important side to building a robust business. There is an education process to have after the crisis to bring the whole market up to speed. Originally P2P lending was a loan on one side and borrower on the other, the next phase is building a more diversified business with P2P at the core. For example, Funding Circle runs its P2P business alongside securitisations. It’s a natural progression. Post crisis, platforms would

MS: Is P2P lending as competitive as it used to be? MC: If you look at data available up to the start of the crisis, P2P was growing steadily with a positive return less volatile than equities. There are commentors who put it in the high risk bracket which is unfair. The Bank of England is getting ready for negative interest rates so savings rates will be low compared with P2P lending. The businesses that are diversifying and expanding in this sector are taking the P2P ethos with them. When you see products such as Zopa launching a credit card, its P2P culture is giving it the mindset of how to approach and treat a customer. There is no reason to think the sector has to stay narrowly as P2P. You can take the ethos and technology approach to serve customers and redesign products to make them better. I have had conversations with potential new entrants and existing businesses wanting to enter P2P. As we come out of the crisis we still start to see more entering the market.

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Supporting women in finance

AMPBELL & FLETCHER Recruitment is extremely proud to have signed the Women in Finance Charter, which supports the progression of women into senior roles in the financial services sector. We managed to catch up with Metro Bank’s Hannah-Louise Smith about the challenges of being a woman in the finance and banking industry. CFR: Tell us about your life in the finance and banking industry so far. HLS: I worked at Merrill Lynch in Chicago as part of my year in industry during university, which gave me a taste for banking. I then joined RBS Commercial as a portfolio manager, just before the financial crisis of 2008. I went on to work in a number of financial markets and business development roles at Lloyds Bank, before setting up a national deposits business development team. I then joined Metro Bank, where I reported to managing director Mark Stokes at c-suite level and enjoyed the opportunity to build business development, relationship and cash management teams. I regularly attended the executive committee’s meetings to update on trading performance and strategic initiatives. This fast paced, dynamic environment was challenging but also very exciting and enjoyable! CFR: Have you ever felt that your career progression was being hampered by being a woman? What key challenges have you faced? HLS: One of the biggest challenges

CFR: What is the one most important thing you have learned over your career? HLS: Work really hard and make your boss look good! Relationships are key and you’ll find those sponsors along the way who will help you progress when the time is right.

facing women in banking is ourselves! I’ve always found women tend to be confidence players – that’s reflecting on myself and my teams, as I’ve supported their talent and progression. It’s not a bad thing at all to be humble, on the contrary, but a little more confidence to ask for that job or that pay rise would help us to help ourselves. Imposter syndrome creeps in and we second guess ourselves. If we look at a job specification, we focus on what we haven’t done before. Men, in my experience, tend to look at what they can do and go into an interview with confidence. This is where role models and sponsors come in. I wouldn’t say I had many female role models in the banking industry but I’ve certainly had fabulous friends, mentors and sponsors who have helped me to become a better me!

CFR: Do you feel the greater clarity and understanding of gender inequality, thanks to initiatives such as the Women in Finance Charter, have helped? HLS: Absolutely, these networks are really helpful for us to educate ourselves and support other women. Women should help each other and in the words of [two-time Olympic gold medallist] Abby Wambach in her Wolfpack speech, “Be the wolf and champion each other!” CFR: What is your piece of advice for women looking to be successful in finance or banking? HLS: Work hard and don’t be afraid of letting people know what you have achieved (even better if others sing your praises instead!), build relationships and champion other women. Campbell & Fletcher Recruitment is passionate about supporting women to fulfil their potential in the workplace. In addition to the Women in Finance Charter, it has chosen to support the charity SmartWorks (www.smartworks.org.uk), which assists women from a range of different backgrounds and age groups back into employment.

REGULATION

The devil is in the detail

Stricter rules for the peer-to-peer lending sector were introduced last December, but have they had their desired effect? Michael Lloyd investigates…

ITH THE COVID-19 outbreak and the subsequent national lockdown this year, it is easy to forget that it has only been 11 months since a raft of new regulations for the peer-to-peer lending industry were introduced. Arguably, the current economic environment means that rules governing how platforms operate – and how they wind down – are more important than ever. In a ‘normal’ year, we would be looking back at the impact of these

rules and asking if there was room for improvement. But this is 2020, so the regulations have already been tested again and again thanks to an unprecedented economic crisis. And according to most industry stakeholders, despite initial frustration at the speed and scope of the regulations, they have already proved to be a success. On 9 December 2019, the Financial Conduct Authority (FCA) outlined its tougher regulations for the sector, including the requirements for more

detailed wind-down plans and appropriateness tests for investors. The regulator also introduced the so-called 10 per cent rule – mandating everyday investors to put no more than 10 per cent of their portfolio in P2P loans. Industry onlookers generally agree that the appropriateness tests have made the risks clearer to investors, allowing them to make much more informed decisions on where and how to invest. “The rules were introduced to improve and standardise

REGULATION

best practice,” says Kylie-Jo Greeff, compliance manager at Rebuildingsociety. “I think they have worked to make platforms more aware of what is required of them and I think by and large most platforms have added more protection and information for consumer investors.” In particular, the appropriateness test has been singled out as making the biggest difference to platform engagement. Rishi Zaveri, co-founder and chief executive of Lendwise, says that over the past year, he has seen some consumers confused by his platform’s test, which shows that P2P is not right for them. “It clearly tells you they shouldn't be investing in P2P,” he says. “If it stops unsuspecting people who really aren’t able to understand the essentials from investing in P2P, it’s not a bad thing.” He goes onto say that wind-down rules are more important than ever in the current Covid-19 induced high-stress environment. “The wind-down rules are important for anyone dealing with retail money,” Zaveri says.

“I think Covid-19 has reminded everyone that something can come out of the blue and it’s important to have a plan to deal with the unexpected. Forcing everyone to have a plan, so that if they need to close they can wind down in an orderly manner, is good.” However, it is no secret that some platforms were initially

“ Barriers to entry

shouldn’t be too low. Not everyone should start to lend and advertise

”

unsure about December’s rules, and not everyone believes that the regulations have been a net good for the industry, one year on. Stuart Law, chief executive of Assetz Capital, says that even though the rules have ensured most platforms operate a well-run ship, he hasn’t seen any evidence of people being challenged on how

well they have implemented the regulations. “For us it’s a significant difference,” he says. “But I can’t see how other platforms have worked and the impact on the industry is not very visible.” There have even been some suggestions that the FCA should conduct a follow-up exercise to see how well the new regulatory framework has worked and should publish their findings to give guidance and reassurance to the sector. Mike Bristow, chief executive of CrowdProperty, supports the new rules but believes that the FCA could go further in enforcing what data platforms have to disclose. “I think it’s good to have increased regulation in the sector and I think it’s upped operating practices on average across all platforms which can only be a good thing,” he says. “But I think the regulation could go further and might do in the future. “I don’t think data transparency is sufficient in the sector – some platforms do it well, some don’t. I think that it’s important to building trust and confidence in P2P so

REGULATION

investors can make better informed decisions.” One of December’s rules involved marketing restrictions which mean that P2P platforms can now only market to high-networth or qualified investors and can no longer do so to restricted retail investors. Although platforms agree that fair, clear marketing under these rules protects investors, they were initially split on whether December’s regulation, including these communication restrictions and the appropriateness test, would lead to a fall in the number of P2P investors in the sector. But a year on, and the investor landscape has been transformed – perhaps permanently. As a result of the government-backed loan schemes and liquidity concerns among some platforms, more institutional money has been flowing into P2P of late. This has changed the focus of the industry somewhat, and led to less of a reliance on new retail money. “I think there is less retail involvement now, but there are a lot fewer platforms that people trust,” says Law. Bristow disagrees, and says there may not necessarily be fewer retail investors in P2P as the sector is experiencing a growth phase. “Maybe the growth rate is slightly slower as a result of marketing restrictions but that’s not our only acquisition channel,” he says.

“Lenders find us through word of mouth too.” The Senior Managers and Certification Regime (SMCR) also came into force in December, as part of the regulator’s drive to improve culture, governance and accountability within financial

“ Covid-19 has reminded everyone

that something can come out of the blue and it’s important to have a plan to deal with the unexpected

”

services firms. As the P2P industry is fully regulated by the FCA now, platforms have to ensure they comply with these new rules. While some believe it’s too early to tell the success of SMCR, the overwhelming majority of industry onlookers have welcomed the rules as a force for good, helping platforms articulate their management and governance processes. “SMCR has certainly been effective in focusing the minds of senior management within the industry,” says Jonathan Segal, partner and head of fintech and

REGULATION

“The compliance costs won’t help smaller firms trading on margins, raising money every year to survive, especially if they’re operating in the market for £50,000 loans to small- and medium-sized enterprises and unable to compete with the bounce back loan scheme,” says David Bradley-Ward, chief executive of Ablrate.

“ The regulation could go further and might do in the future

”

alternative finance at law firm Fox Williams. “We are yet to see many examples of the FCA using SMCR in enforcement action against senior managers and firms in the market, but in my opinion, this is just a matter of time.” When SMCR and the new regulations were introduced last year, there were fears that these new standards would create huge compliance bills for P2P lending platforms, pushing up the barriers to entry and causing smaller firms to leave the sector. But has this happened?

“If you’re not in the right business model you need to pivot and consider your options.” However, others have noted that it was already becoming more challenging for small players to operate in this space, even without the new regulations. And, once again, the impact is difficult to unpack. Who knows how many people have thought of launching a P2P platform but were deterred by compliance costs? “I think that there should be a fairly high barrier to entry and, in the past, maybe there hasn't been and that has meant that too many platforms were not of high enough quality,” says Bristow. “There is a regulatory and compliance responsibility for every platform and there’s a cost associated but it's a necessity to channel investor lending capital into lending capabilities. “Barriers to entry shouldn’t be too low. Not everyone should start to lend and advertise.” The regulatory landscape is changing quickly and it can be challenging for platforms to keep up, especially given the belief that

the regulator is looking more closely at the sector. Platforms have praised the regulator for meeting the difficult balance between protecting consumers and not stifling innovation. Industry onlookers believe the FCA is cautiously supportive of P2P, as it is a regulated sector it wants to see thrive. However, it was not long ago that the regulator came under fire from the industry for implying that all P2P investments are high risk. In February, the FCA ran a Google adverts campaign, which resulted in a Google search of the term ‘ISA’ leading to an FCA webpage entitled “high-return investments”. The regulator listed P2P as an example on the website, alongside other types of investments such as cryptoassets, mini-bonds and land banking. “To list P2P alongside land banking and other mostly unregulated sectors is utterly wrong and a bit scandalous because P2P is regulated,” says Law. “The FCA is doing a good job and is supportive of the industry but I think they're not enthusiastic about it.” Less than a year into the new rules – amid extraordinary macroeconomic circumstances – it is difficult to judge whether they have been a complete success, but feedback from platforms has been mostly positive. Stricter rules lead to greater governance and more confidence among customers. There may be fewer retail investors in the sector and higher barriers to entry, but that is not necessarily a bad thing. A consolidated industry with the highest quality players is what will ensure P2P’s future in the alternative investment landscape.

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.

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JOINT VENTURE

P2P needs more representation Frank Wessely, managing director in Quantuma’s restructuring and insolvency team, discusses the importance of trade body representation for P2P lenders

EER-TO-PEER LENDERS need sector-specific leadership in order to flourish during the coronavirus pandemic, Frank Wessely, managing director in Quantuma’s restructuring and insolvency team, believes. According to Wessely, a joined-up approach to P2P representation has never been more needed, in order to protect and champion P2P lending platforms during a time of economic turbulence. “P2P operates in its own particular way, providing valuable services to businesses and retail borrowers,” says Wessely. “It offers the opportunity for retail investors to gain a higher consistent rate of return than is otherwise available through most other institutions and products, and it is facing its own unique challenges. “There is so much turbulence in the economy and in the business world these days, I think that there is a void at the moment where the P2P sector requires a strong, visible face and voice promoting its cause.” Whilst there are trade champions that support a number of alternative lenders and crowdfunding platforms and they are doing good work, Wessely believes that with a singular voice for the entire P2P sector, more P2P platforms could become accredited to provide

government-backed lending in any future measures of support for business. “I think it's been a missed opportunity for the sector, and it raises a number of questions as to how the sector should react,” he says. “If the chancellor decides to reintroduce more comprehensive measures of financial support for businesses, it concerns me how the P2P sector is going to be able to be recognised and react to that, because it’s valuable as part of the financial industry jigsaw to enable

financial support to businesses.” Historically, it has been the responsibility of the platforms themselves to educate their investors and market their products within the strict guidelines set out by the regulator. This was challenging enough before the pandemic, but without a strong, singular voice speaking out on behalf of the sector, it has become a “very crowded and noisy marketplace”, Wessely says. He would like to see a trade body that can, amongst other things, develop a vision and strategic five-year plan for the P2P sector. This body would represent both the larger platforms, which are now operating primarily in the institutional space, and the smaller platforms which are still centered around traditional, retail-focused P2P lending. It would also act as a communication point for the retail and institutional investors who fund the P2P sector; ensuring that they are well-informed and familiar with the risks and benefits associated with P2P lending. “It would have a clear purpose and vision that members can buy into, demonstrating this externally as well, so that everyone can see that the sector has a clear direction and is operating on firm foundations,” says Wessely. “I think that would be a very positive message to put out.”