Peer2Peer Finance News April 2019 by Alternative Credit Investor

>> 7

HOT PROPERTY

New IFISAs backed by bricks and mortar

Read our special report on property investing supported by

WHAT’S NEXT?

Zopa’s P2P chief Natasha Wear talks to P2PFN

>> 10

>> 18

ISSUE 31 | APRIL 2019

P2P transparency under threat after investors flout privacy agreements THE HIGH levels of transparency vaunted by the peer-to-peer lending industry could be under threat as platforms warn that investors are sharing too much information about bad debts. Several P2P investor forums have launched in recent years, creating a community where users can discuss their portfolio. This can often involve detailed discussions about defaulted loans, with investors sharing communication from platforms about the recovery process. But P2P platforms say that these investors are not only breaching their terms and conditions or privacy notices but potentially derailing their efforts in recovering funds. This issue only impacts platforms offering a manual lending option. Firms that purely offer auto-invest products – including the ‘big three’ – are unaffected, as investors do not know which specific borrowers are receiving their funds. “Where there is a

borrower that is trying to sell or refinance a loan to redeem the existing lenders, the sort of comments that can be placed on these forums could cause the potential buyer or refinance lender to pull out,” said an executive at a P2P platform that offers a manual lending option. “The only people being hurt are the borrower and the existing lenders. “They have just caused their own issue. ”We know as soon as we send out an update, we will see it posted within minutes on one of the forums.

“The potential consequence is that we stop giving out updates or turn into a purely autolend platform with no information being sent to lenders.” Recent issues regarding bad debts at platforms Lendy and Crowdstacker have been covered in the press and attracted attention on the forums. Both firms have said they are restricted in what they can say publicly because of the legal process they are going through in recovering funds. Stuart Law, chief executive of Assetz Capital, which offers a manual lending option,

said that he sees forums as a good thing but highlighted that there is a difference between transparency and rumours. “If somebody causes gossip that is bad for the borrowers and bad for all the other investors,” he said. “You can’t take away the transparency and openness of a forum or P2P lending, but there is a risk that platforms disclose less or tighten up on information to protect borrowers.” He warned that investors may be putting themselves at risk of legal action if they post malicious or defamatory information on websites. Sophie Pearce, managing director of MoneyThing, also said that she recognised the benefits of forums despite the risks. “Many of the contributors are extremely knowledgeable and experienced and their wisdom can be very valuable to platforms as well as lenders,” she said. >> 4 “Some have

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

@p2pfinancenews

www.facebook.com/p2pfinancenews

EDITOR’S LETTER

Published by Royal Crescent Publishing

WeWork, 2 Eastbourne Terrace, Paddington, London, W2 6LG info@royalcrescentpublishing.co.uk EDITORIAL Suzie Neuwirth Editor-in-Chief suzie@p2pfinancenews.co.uk +44 (0) 7966 180299 Kathryn Gaw Contributing Editor kathryn@p2pfinancenews.co.uk Marc Shoffman Senior Reporter marc@p2pfinancenews.co.uk Andrew Saunders Features Writer Danielle Levy Features Writer Hannah Smith Reporter PRODUCTION Tim Parker Art Director COMMERCIAL Craig Levick Director of Sales and Marketing craig@p2pfinancenews.co.uk

hat a difference a year makes! As we head into the tail-end of ISA season, it’s been great to see how much more attention the Innovative Finance ISA (IFISA) has had in the mainstream press compared to last year. It seems that the public is finally waking up to the opportunities presented by the peer-to-peer lending industry. Here at Peer2Peer Finance News, we have also produced far more in-depth coverage on the tax wrapper than in previous years. There are more players in the market than ever before, greater inflows, and an increasingly solid argument to invest in IFISAs thanks to the volatile stock market and painfully low savings rates. What’s important now is to keep the momentum going after ISA season. After all, there are evergreen benefits to investing in this industry that will continue long after 5 April. SUZIE NEUWIRTH EDITOR-IN-CHIEF

Tehmeena Khan Sales and Marketing Support tehmeena@p2pfinancenews.co.uk SUBSCRIPTIONS AND DISTRIBUTION info@p2pfinancenews.co.uk Find our website at www.p2pfinancenews.co.uk Printed by 4-Print Limited ©No part of this publication may be reproduced without written permission from the publishers. Peer2Peer Finance News has been prepared solely for informational purposes, and is not a solicitation of an offer to buy or sell any peer-to-peer finance product, or any other security, product, service or investment. This publication does not purport to contain all relevant information which you may need to take into account before making a decision on any finance or investment matter. The opinions expressed in this publication do not constitute investment advice and independent advice should be sought where appropriate. Neither the information in this publication, nor any opinion contained in this publication constitutes a solicitation or offer to provide any investment advice or service.

Have you signed up to our e-newsletters yet? You can receive P2P news straight to your inbox five days a week, or sign up for our once-a-week version that comes out on Wednesdays. Go to www.p2pfinancenews.co.uk for more information.

NEWS

cont. from page 1 specialist subject knowledge and some go to extraordinary lengths to research a particular topic. “Forums are not without their limitations, however. “There is a danger though that a few voices are more vociferous than others and not always used constructively, nor are they necessarily well-informed, which is helpful to no one.” Neil Faulkner, founder of P2P analysis firm 4th Way, said forums are useful but he often sees incorrect information being shared. “Free speech aside, investors already have a legal duty not to publicly reveal information that will help identify individual borrowers,” he said. “This is what they signed up to through the terms and conditions when they registered to invest through each platform. “This is especially relevant when the borrower or platform is taking measures to get a poorly performing loan or bad debt back on track. “There are cases when the borrower's reputation can suffer, leading to loss of confidence from its suppliers or customers, and lower prospects of that loan turning out for the good. Borrowers can also suffer embarrassment or competitive disadvantages when its

financial arrangements are bandied around in public. “If platforms want to prevent broader discussion of investors' experiences and opinions with a wider-reaching non-disclosure agreement, they will find it difficult to both justify and enforce. “Customers of any business can, and always will, share their experiences.” Additionally, a consumer group is warning that forums could create a “digital panic” around the health of a firm. “At the height of the last banking collapse, it was inconceivable that there would be a run on a bank. Yet when queues began forming around branches of Northern Rock, the reality of what was happening kicked in,” said Martyn James, spokesperson for Resolver, which helps investors complain about financial firms.

“When people hear rumours that a business is in trouble, they hit the internet. And if those SEO wizards have got their forums to the top of the Google rankings, that's the first thing people will see if they go online. This is how digital panics begin. “Having an online moan about a business is all well and good, but if you're locked in to an investment or lending strategy and your money isn't easily accessible, you might want to avoid saying anything too negative about a business – as it could become a real-life problem.” P2P investors had mixed responses to platforms’ concerns about disclosure. “Convenient of the platforms to give that as a reason for a terrible rate of recovery,” one investor told Peer2Peer Finance News via email. “I think it lacks credibility to suggest that finance professionals, who

undoubtedly perform their own extensive due diligence, would be deterred by lenders’ comments on public forums or elsewhere,” said another. “Loans that attract a lot of adverse comments are typically those where lenders consider the platform’s handling of the loan to be deficient in some way. “If platforms seek to limit such comments, one should ask whether the platform is really seeking to remove criticism of their own procedures. I would probably reduce my manual lending if platforms seek to reduce information available significantly or to suppress discussion.” However, another investor agreed with the platforms. “Unless you are very knowledgeable about a particular company's recovery process (and inevitably very few – if any – investors will be) it is foolhardy to be talking about them on forums,” the investor said. “I can certainly see why platforms are claiming (probably quite rightly) that it is hindering the recovery process. “I would much rather platforms kept a guard on the information and got a better return for their investors; just giving them regular outline updates on progress.”

NEWS

Platforms call for time extension to Open Banking consents PEER-TO-PEER lenders are calling for a change to Open Banking rules to make it easier to access borrowers’ financial data for the duration of a loan term. Under the current framework of the data-sharing initiative, borrowers can grant alternative lenders access to their banking data but must reapprove the permissions every 90 days. This may cause an issue for lenders who want to monitor a borrower’s financial situation over the longer term. For example, P2P business lender Growth Street uses Open Banking to assess potential borrowers and

to help monitor their ongoing cashflow and financial strength, which may be problematic if data access is refused during a long-term loan. Greg Carter, chief executive of Growth Street, said Open Banking had made the process easier for borrowers but called the three-month reapproval requirement an unnecessary burden. “We do plan to request that the Open Banking Implementation Entity extends the maximum connection length from 90 days to indefinite,” he told Peer2Peer Finance News. “The expiry of connections after 90

days means a potentially higher risk that a borrower could lose access to their facility – for example, if data loss results in our credit teams reducing or even removing the facility. “We believe businesses should be given the choice to give permanent consent to third parties to access their data that can be revoked at a time of their choosing, and not be forced to reconnect every 90 days.” These views were echoed by Brian Bartaby, chief executive of P2P property lender Proplend. “If we are looking at loans where terms can be up to five years, we are

unlikely to be able to get borrowers to refresh their Open Banking permission every 90 days, or 20 times during the life of the loan,” he said. Carlos Figueredo, the former head of data standards at the Open Banking Implementation Initiative, said the time limit was introduced to give customers a safety net but acknowledged there are disadvantages. “It does create an issue for lenders as the user may be unavailable at the time that reapproval is need,” he said. “A lender may end up having to recall a loan. This does need to be looked at.”

Zopa developing P2P tech to improve diversification of funds ZOPA is working to enable greater diversification of investors’ funds, the new head of its peer-topeer lending business has revealed. Natasha Wear (pictured), who was promoted from head of investment products in February, told Peer2Peer Finance News that the P2P giant is developing its technology so that investors’ money will

be split into smaller segments, which will then be channelled into a greater number of loans. The system currently splits investors’ money into £10 chunks which are then allocated to different loans in order to spread the risk of any defaults. “A general rule of investing is that more diversification is better,” she said. “So we are looking to go to

£3 chunks by the end of the year and ideally down to £1 chunks at

some point after that.” The change requires Zopa to be able to support up to 300 million of the new, smaller microloans, more than three times as many as it currently does. “You have to keep investing in the tech because as soon as you stop you will be behind,” added Wear. Read the full interview with Wear on page 10.

NEWS

Online lending sector gears up for more IPOs lenders looking to make their stock market debut. “Lending Club’s share price has tanked from around $25 (£19) to $3, there are corporate governance issues there and loan impairment rates have risen,” he said. “It has not been a successful investment so far; the financial performance has not come through.” IPO activity in the UK has been muted so far this year, Mould said, with uncertainty around Brexit a key factor, but he said any IPO will do well if the story is good enough. “If the investment case is strong enough and the valuation is sensible then things can fly, no matter the timing,” he added. Chris Beauchamp, chief market analyst at IG, said that investors may have

was mulling an IPO, said that the firm was seeking a minimum valuation of £500m. AJ Bell’s investment director Russ Mould said company fundamentals will always be what drives a stock market valuation, and investors will be looking at whether LendInvest makes a profit and generates cash before deciding if its IPO is worth backing. He noted that Lending Club’s 2014 US listing could be seen as a cautionary tale for online

unrealistic expectations about the growth trajectory of a newly-listed business. “A business IPO-ing to raise more cash is going to go through a period of necessary growth and high spending and that is going to hurt earnings,” he said. “The worry is that a lot of those companies that enjoyed initial growth are now going to have to slow down to some degree and that’s partially the reaction they had to Funding Circle. People assumed that there would be impressive growth immediately afterwards and had too rosy expectations of what you get from an IPO. Rather than a long-term stake in the business, they were hoping for a quick pop on the news.”

FUNDING CIRCLE'S SHARE PRICE PERFORMANCE SINCE IPO (Source: Yahoo Finance)

500 450 400 350 300 250

2019-03-11

2019-03-18

2019-02-25

2019-03-04

2019-02-11

2019-02-18

2019-02-04

2019-01-21

2019-01-28

2019-01-14

2019-01-07

2018-12-19

2018-12-28

2018-12-12

2018-11-28

2018-12-05

2018-11-21

2018-11-14

2018-11-07

2018-10-31

2018-10-17

2018-10-24

2018-10-10

200 2018-10-03

ONLINE property lender LendInvest last month confirmed that it is considering an initial public offering (IPO) as one of “a range of strategic options for the business”. The former peer-to-peer lender – which withdrew its P2P regulatory application after it stopped accepting retail money via its platform – joins RateSetter and Zopa in the IPO rumour mill, which has gathered pace since Funding Circle’s £300m flotation last year. Zopa’s chief executive Jaidev Janardana told CNBC last December that he could see an IPO being possible in the future as its capital requirements grow, while RateSetter’s chief executive Rhydian Lewis previously confirmed that he sees a public listing as “a natural step” for the business. LendInvest has already raised more than £30m in a pre-IPO funding round, but what sort of reception could it get if it listed in the current market environment? Funding Circle listed on the London Stock Exchange to great fanfare last October, but its shares fell by up to a quarter on its first day of full trading and they have been volatile since then. Sky News, which first reported that LendInvest

NEWS

New IFISA launches highlight popularity of property-backed P2P loans A SLEW of new propertybacked Innovative Finance ISA (IFISA) launches has underlined the growing popularity of peer-to-peer property lending. These include Property Partner’s property development IFISA, Propio’s development and refurbishment IFISA, and Loanpad’s propertybacked ‘hybrid’ IFISA. In March, Money&Co helped one of its borrowers – Grounds Investment – to bring to market a property-backed IFISA which provides

loans for residential developments in major German cities. Meanwhile, the recently-launched Westway IFISA aims to solve the problem of the under-served supported housing sector by offering an alternative source of funding for developers,

while targeting 8.5 per cent in annual returns for investors. The growth of the P2P property market has coincided with a slowing in the traditional lending market, as well as an ongoing shortage of housing across the UK. This has encouraged

borrowers to seek out alternatives to the banks, while investors are attracted to the assetbacked returns which can be made within the taxfree IFISA wrapper. “Traditionally, property development projects of this scale have been funded by banks and institutional investors,” said a Westway spokesperson. “But our IFISA offers smaller private investors the opportunity to invest in large-scale projects in the UK housing market.”

P2PFA data does not reflect ThinCats’ total loanbook THE LATEST release of Peer-to-Peer Finance Association (P2PFA) data has shone a light on the diversity of P2P lenders’ business models. Peer2Peer Finance News was informed last month that ThinCats’ overall loanbook is understated by the P2PFA due to the way its loans are allocated to retail and institutional investors. Most of the P2PFA’s members, including Funding Circle, Landbay and Zopa, let retail and institutional lenders fund loans through their P2P platform. But ThinCats enables institutional investors to fund some loans

separately from its P2P platform. A spokesperson for the West Midlands-based business lender said the platform operates three strands of lending: retail; a mix of retail and institutional; and purely institutional. Only the first two strands go through its P2P platform, with the rest of the funds understood to be channelled to businesses via ThinCats’ parent company ESF Capital. The spokesperson added that this sometimes means institutional investors access different loans than their retail counterparts, but insisted there is no priority given. Only the money coming

through its P2P platform is submitted to the P2PFA. This means the data ThinCats presents to the P2PFA – reported as £310m of lending at the end of 2018 – is lower than its actual overall loanbook as it only includes funding from retail investors. A P2PFA spokesperson confirmed that its data only contains lending volumes that come directly through P2P platforms. “Looking at alternative finance through the lens of P2P can actually be quite misleading,” Ravi Anand, managing director of ThinCats, said. “It is better to think of the sector as comprising a number of lending

markets, be that SME, property or consumer; before segmenting further by size of loan. From here, it is possible to gain a truer understanding of the extent to which alternative finance has penetrated a given market. “In our market, which is small- and mediumsized enterprises (SMEs) looking to borrow between £500,000 and £15m, there is £15bn of known demand, as well as a further £5bn to £10bn of unsatisfied demand. “Alternative finance could easily be five to 10 per cent of this, or in monetary terms, anywhere up to £2.5bn – and that is only in the SME lending market.”

Earn up to

£250

cashback

Enjoy up to

5.00% pa

With our fixed rate bonds backed by UK residential property Do something interesting with your money

Contact Us: 0800 888 60001 | www.wellesley.co.uk Your capital is at risk and interest payments are not guaranteed. Investmentis not covered by the Financial Services Compensation Scheme. The information contained in this advert which relates to Wellesley Property Mini-Bonds, issued by Wellesley Finance Plc has been approved as a ﬁnancial promotion for UK publication by BDO LLP, 55 Baker Street, London W1U 7EU (FRN: 229378) which is authorised by the Financial Conduct Authority to conduct investment business. * If you invest £3,000 or more for a minimum period of 2 years you will receive £100 cashback, if you invest £7,000 or more for a minimum period of 2 years you will receive £250 cashback, which will be credited to you holding account within 72 hours of committing funds. T & Cs apply.

JOINT VENTURE

Why we’re moving into listed bonds Following Wellesley’s departure from peer-to-peer in 2017, the business has recently announced that it intends to move away from mini-bonds, with its sole focus being on fully-regulated, listed bonds. Andrew Turnbull, managing director at Wellesley, explains why

HINGS ARE CHANGING at Wellesley. Over the past five years, the alternative lender has made a point of being ahead of the curve. It was the first peerto-peer lender to create its own bond back in 2014, and it was the first to offer a listed bond (in 2015). In 2017, Wellesley stopped offering P2P lending investments focussing on bonds and now it is choosing to refine its bond offering to focus solely on fullyregulated, listed bonds. “If you look at the evolution of the alternative finance market, there has been a lot of movement and that's not unusual in a young growing industry,” says Andrew Turnbull, managing director at Wellesley. “We've been slowly moving towards this.” In mid-February 2019, Wellesley won the additional permissions required to be able to offer and hold listed bonds directly on its platform for its customers. “We don't think there's anything wrong with the P2P industry at all,” explains Turnbull. “However, in the context of being a residential development lender, we took the view that bonds were a better product for our investors. Since leaving the P2P industry our business plan has been to migrate towards offering fully-regulated, listed bonds because, frankly, we think they give consumers a higher degree of protection than

mini-bonds. In being able to offer a fully-regulated, standardised, listed, exchange-tradable product as a fully-authorised firm, it puts our customers in the best possible position.” These bonds will be offered to investors at the same rates of return that Wellesley’s customers are already familiar with, and Turnbull says that there will be no difference in terms of the underlying investment strategy. “This is more about the framework in which we offer it and the fact that it is a fully-regulated instrument rather than a dramatic change in our credit policy or

“ It’s designed to be a really straightforward investment

”

underlying approach to risk,” he says. “We found that our customers want the reliability of knowing when the bond starts, what date it is repayable, and what frequency their interest is going to be paid. And that's something that's quite difficult with P2P lending.” Next on the horizon, Wellesley plans to enable trading on its listed bonds, and Turnbull confirms that the firm will soon appoint a market maker to stream live prices on the bonds. This move will add liquidity for investors, who will be able to exit their investments through trading on the exchange. In response to user feedback, Wellesley is also simplifying its investment process, so investors can make listed bond purchases directly via the Wellesley website and hold them within a stocks and shares ISA wrapper, without having to open an account with a third-party stockbroker. This is a development which is expected shortly ahead of the listed bond launch in the new tax year. “It’s designed to be a really straightforward investment,” adds Turnbull. “We think our customers will be very happy with the new direction of our business. All of Wellesley’s customers will soon be able to switch their existing mini-bond investments into a like-for-like, regulated, listed bond for no charge and will receive the same rate.”

PROFILE

Keeping one step ahead

What’s the next move for the world’s oldest peer-to-peer lending business? Zopa’s new P2P chief Natasha Wear talks to Andrew Saunders about growing the P2P division alongside the bank, keeping on top of tech and the feelgood rebrand…

OW THAT ZOPA IS being reborn as a bank, will that mean less focus on its established peer-to-peer lending business and more on growing its glamorous new savings and credit card products instead? It’s a question many of the platform’s retail investors have been asking themselves since the platform’s banking licence was granted back in December. And the person arguably best placed to answer it is Zopa’s newly-appointed P2P chief executive Natasha Wear. In a word, no, says Wear. P2P made the platform what it is and Zopa will be keeping the faith with its established customers whilst at the same time broadening its appeal to a whole range of new ones. “We are still really excited about the P2P opportunity,” she states. “We believe there is still a big opportunity to grow as P2P sits right in the middle of savings and stocks and shares in terms of risk and return and is a great alternative to the incumbents. The returns we offer are inflation beating, but you don’t have the same volatility that you have seen in the stock market in 2018 for example.” The plan is that rather than competing for management time and investment, the two parts of the business will actually feed off one another and create a new whole that

is more than the sum of its parts. “Zopa is the first company that will have a bank and a P2P business alongside each other,” Wear says. “We hope our P2P investors will

be the first customers for our new savings product – we built that product with them in mind as it was something they were asking for. We will focus on what we always have –

PROFILE

our existing customers and making sure that we have the best products for them first.” Consequently, Wear and her 30-strong team are hard at work making sure the P2P offering keeps developing. “We’re really investing in our P2P tech platform, that’s the focus for now,” she comments. “Then we will be looking at the un-met needs of UK consumers in terms of savings and investments, and how we can take some of the underlying characteristics of the P2P asset class and better meet those needs.” In due course, she says, that will likely mean some new P2P products – or new versions of existing products. She won’t be drawn on details but drops a few hints as to what her broad intentions are. “We’re looking at a number of

“

We are still really excited about the P2P opportunity

”

avenues - it will essentially be about how we help customers achieve their financial goals,” she explains. “How we support people with a mediumterm horizon who are looking to build up an investment habit.” Those new products won’t arrive for a while, but in the meantime improvements to Zopa’s autodiversification technology are on the cards. The system currently splits investors’ money into £10 chunks which are then allocated to different loans in order to spread the risk of any defaults between multiple lenders. So the 300,000 or

so active borrowers on the platform actually generate around 70 million diversified ‘microloans’. It works well but it could work better, Wear says. “A general rule of investing is that more diversification is better,” she asserts. “So we are looking to go to £3 chunks by the end of the year and ideally down to £1 chunks at some point after that.” As is so often the case, what is simple in principle becomes more complex in practice – the change requires the platform to be able to support up to 300 million of the new, smaller microloans, more than three times as many as it currently does. “Zopa’s been around for 14 years, the models we have in our system are built on tech that use classic database structures,” Wear explains. “Now we want to move to more

PROFILE

event-driven data models that are more supportive of that scale.” Investors will also be able to manage their Zopa accounts on the firm’s mobile app later this year, another incremental improvement that has required substantial work behind the scenes. “Things like payment journeys have to change when you are mobile first,” she says. “We have been investing in new bank technologies but also in P2P.” It’s particularly important for Zopa to keep on top of tech – as the most mature P2P business around it has more historic data on loan performance and credit risk than rivals, but it’s also potentially at greater risk of being disrupted. “You have to keep investing in the tech because as soon as you stop you will be behind,” says Wear. “Zopa was launched two years before the first iPhone – everyone was using a desktop and so they were happy to wait five seconds for their loanbooks to load. Now everything has to be fast and seamless on mobiles.” Like many industry players, Zopa has also been focused on promoting its Innovative Finance ISA (IFISA) in the lead-up to the end of the tax year, as investors clamour to make the most of their tax-free allowance. Zopa has been making efforts to educate would-be customers on the pros and cons of the P2P tax wrapper. “Our existing customers are split pretty evenly between ISA and non-ISA investments,” Wear reveals. ‘Inflows [into the ISA] come predominantly from existing customers transferring historical balances, usually from cash ISAs. Those teaser rates that you get which very rapidly become less than one per cent.” What that means, she adds,

“ You have to keep investing in the tech because as soon as you stop you will be behind” is that while the ISA is a great alternative for investors with a mid-term, mid-risk appetite, it still depends on a supply of customers who are familiar with the nature of P2P loans. “It’s been an interesting area of growth for our existing customers who understand P2P and are now able to use the tax-free wrapper,” she

explains. “But in its own right it is not going to be the thing that drives huge volume.’ One of the clear bottlenecks in the ISA transfer market, she adds, is the transfer process itself whose reliance on wet signatures is a throwback to the cheque era and puts people off. “The wet signature bit is a hurdle for customers,” Wear

PROFILE

“ We don’t rest on our laurels”

says. “We try to make it as quick as we can on our side but it’s an area we should be encouraging a more seamless experience in.” Wear was previously head of investment products at Zopa and has been promoted to P2P chief executive as part of a raft of management changes, including the appointment of ex-Virgin Management boss Gordon McCallum as chairman and three new non-executive directors. Cofounder Giles Andrews will step down as chairman but retains a place on the board.

Her new job is, she says, very much an extension of her old one. “The P2P role leverages my existing role – it’s growing my remit rather than doing something completely new,” she explains. Before she joined Zopa in 2015 she spent five years as a strategy consultant. What was the biggest surprise moving from the world of corporate consulting to Zopa’s more entrepreneurial culture? Probably the unpredictability, Wear says. “You come to work thinking that this is going to be your focus for the day, then something happens and your focus is somewhere else. Reflecting on myself four years ago, that would have caused a certain amount of stress. But I like it now, it’s just more real. It would be boring to go back.” Alongside these top team changes, the platform also has a new strapline – ‘The feelgood money company’. What’s behind the change? “It’s an articulation of what we’ve always done,” Wear comments. “We offer simple and fair financial products that put people in control. I think it’s just the first time that we’ve managed to find a single word – feelgood – that we can all stand behind.” Looking ahead, Brexit woes, slowing economic growth and rising personal insolvencies are potential headwinds for most lenders, but Wear is confident about Zopa’s outlook. “We are dependent on the UK economy so we need to pay close

attention to anything that causes uncertainty,” she explains. “One interesting trend we have seen is customers [of other lenders] looking around. Halfway through a loan term they start looking around for consolidation options. There is better education in the market about what rates you can get, which is great for consumers.” With incomes typically 50 per cent higher than the national average, Zopa’s customers are perhaps reasonably well insulated from chilly economic winds. And even if factors such as rising levels of personal insolvencies start to feed through to the lending market, she thinks that Zopa is better placed than many traditional lenders both to make good credit decisions and respond quickly to any threats that do emerge. “We have a strong risk analytics team, so we are confident that we are analysing the data in the right way and making good decisions against it,” Wear asserts. “And on the execution side our tech platform means that we can react more quickly than incumbents. We tightened our credit policy on the same day as the Brexit vote happened. A large company might take three months on that decision and execution.” So just because Zopa is becoming a bank, it doesn’t mean that it will start to behave like one – or at least not like the self-serving high street archetype that so many consumers still put up with. “The really strong values are one of the reasons I joined Zopa,” says Wear. “We put existing customers first, we don’t rest on our laurels, and we’re always looking to move the market on.”

We’re building the world’s best investment platform for entrepreneurs. Join us. We are a new breed of P2P platform, with a sophisticated proposition and backed by revolutionary technology that is fundamentally different from our competitors. Crowd2Fund has grown at least 317% year-onyear for the past 3 years, and aims to lend £40 million over the next 12 months to maintain this trajectory. Approximately £4 million has been invested into the growth of the platform thus far, while costs have remained reasonably consistent. In order to continue this rapid growth, investment is required. Pre register your investment at: investment.crowd2fund.com Investment is EIS eligible.

Past performance and forecasts are not reliable indicators of future results. Tax treatment of any of the investment offers will depend on the individual circumstances of each investor and may be subject to change in the future.

JOINT VENTURE

Think bigger Global fintech alignment is essential for economic growth and prosperity, says Chris Hancock, chief executive of Crowd2Fund

EER-TO-PEER LENDING was established in the UK, but it has gone on to become a major global fintech movement. And according to Chris Hancock, chief executive of P2P platform Crowd2Fund, the UK could now lead the way in promoting the global progression of fintech and financial innovation. “Having worked in tech all my life and in finance for a lot of it, I have absolutely no doubt that the way forward is financial innovation,” says Hancock. “If people want capitalism, capital is required and P2P lending can provide it.” The regulators seem to agree. Last year, the Financial Conduct Authority (FCA) proposed the creation of a Global Financial Innovation Network (GFIN) – an alliance between 11 international financial regulators, with a joint remit to encourage financial innovation across the world. GFIN is still in its test phase, but one thing has already become clear – the main issue for fintech companies with global ambitions is cross-border regulation. “It’s absolutely critical globally that we work together with all markets if we want to see progress in a collaborative way,” says Hancock. “And that’s what the GFIN is all about – it’s about getting multiple markets together in this new era to align

the regulations, a once in a generation opportunity.” Crowd2Fund has already made a foray into the Australian market, becoming the first UK firm to use the Fintech Bridge. Hancock hopes that this will mark the beginning of a global expansion for the firm and other fintech companies within a GFIN market. “I believe the UK is still doing really well when it comes to financial innovation,” says Hancock. “There is an opportunity to take a lead globally in collaboration with US and EU markets.” By raising the global fintech standards and bringing these regulations into alignment,

Hancock hopes that it will become easier for fintech firms – large and small – to trade between different markets which present a great opportunity for Crowd2Fund and other like-minded firms. Crowd2Fund is now looking for a global investor to help deploy the proven technology across the 11 GFIN markets. “P2P lending is just a highly efficient way of being able to deploy capital and earn a higher interest rate for people who want to take a little bit of risk,” says Hancock. “Even in a potentially slower economy which is what we’ve been in for 12 months, it’s still a proven strategy. “If you compare it against the FTSE, for example – if you’d invested in the FTSE you’d be approximately 10 per cent down over the past year, whereas if you compare that against the performance of Crowd2Fund’s loans, you would be between five and 10 per cent up.” P2P lending has a lot to offer interest-seeking investors, and by making this technology available on a global scale, investors and borrowers alike will be able to increase their pool of opportunities and build a global profile in the process. Crowd2Fund is determined to do its part in bringing the benefits of financial innovation to the masses, sooner rather than later.

With our Self-Select ISA, you are able to choose exactly which loans you want to put your money into. Our Secured-Portfolio ISA offers a more hands-off approach, where we create your portfolio for you.

Loans secured on UK Property

*Capital at Risk. No FSCS protection. ISA Rules apply.

JOINT VENTURE

Capturing cash in the ISA market Paul Sonabend, executive chairman of Relendex, explains the huge potential of cash ISA conversions into the property-backed IFISA market

HE INNOVATIVE Finance ISA (IFISA) has unquestionably revolutionised the peer-to-peer lending space. But the challenges still remain. According to the most recentlypublished HMRC data, just £290m was transferred into IFISA accounts in the tax year 2017/18, compared to a cumulative total of £270bn sitting in cash ISAs. This is despite the fact that the average return on cash ISAs last year was less than one per cent. Every IFISA manager wants to bring in more money, ideally through transfers out of lowearning cash ISAs. But Relendex is taking a more methodical approach than most. Earlier this year, the P2P platform carried out a survey to gauge the level of ISA awareness amongst the general public. The survey found that almost

“ P2P lending allows

the public to come and invest in the same assets as the wealthy

”

half (48 per cent) of the people surveyed had never moved their ISA money, while the people who had moved their ISA savings and investments did so an average of once every five years. It is these

static ISA investors who Relendex wants to win over. “Something like 10 per cent of ISA money is moved in one year,” says Paul Sonabend, executive chairman of Relendex. “So that leaves about £250bn that will not have moved this year. “This means there is a very large sum of savings that is essentially falling in real value, with returns that are less than inflation. “So the first thing we want to do is to explain that there are alternatives and get the IFISA message out there – that we are simply offering retail investors the chance to invest in the kind of things wealthy people have been able to invest in for a very long time.” This is a key message that Sonabend is trying to get across

to would-be IFISA investors who are suspicious of the ‘too good to be true’ combination of high returns and low risk. “For a very long time, wealthy individuals have been able to make double-digit returns by investing in bridging loans and property,” says Sonabend. “What P2P lending does is allow the general public to come and invest in the same assets as the wealthy because we fractionalise those assets. Whether you put £1m on our platform or £2,500, you will get the same return.” However, as many P2P lenders have found, getting this message out can be challenging. Relendex’s research also found that just eight per cent of the UK population had heard of an IFISA – although to put this in context, five per cent also said that they had heard of a fictitious ‘Drawdown ISA’. But this just means that there is much more scope for growth, says Sonabend. “We don’t need all £270bn of cash ISA money to move into our sector to make a substantial difference,” he adds. “If 10 per cent of that moved into our sector and of that 10 per cent, a fifth of it was in the property area, we'd be talking about £5bn coming in to bridging and development through property IFISAs. “Communicating this is a work in progress, but we are very optimistic about what the future holds.”

PROPERTY

Lay of the land The property market is facing uncertain times, but this is when peer-to-peer lenders can prove their mettle, as Marc Shoffman reports

ROPERTY LENDING IS one of the most diverse areas of peer-to-peer lending. Platforms are offering everything from property development loans, to bridging facilities and buy-to-let mortgages, while there are even some P2P lenders considering entry into owner-occupied residential mortgages. The property market has faced some challenges in recent years. Extra stamp duty charges on additional properties have been introduced, several buy-to-let tax perks have been rolled back and Brexit uncertainty has weighed on demand, particularly in London and the South East. This has caused sales and house prices to slow, with investors,

property professionals and homeowners alike displaying caution amid an uncertain macroeconomic climate. It is the ‘B’ word that now presents the most immediate challenge, both for P2P property lenders and the wider market, due to the risk of an economic downturn as a result of leaving the EU. Predictions of the Brexit fallout have ranged from the Bank of England warning of a drastic 30 per cent drop in house prices to more temperate warnings of price growth slowing and purchases and development stalling. Estate agents such as Savills have warned that many buyers and sellers are holding back due to Brexit, which can affect price

growth and transactions, while a survey by the Royal Chartered Institute of Chartered Surveyors last month found members rank Brexit uncertainty as the biggest challenge facing the market. Despite market jitters, the UK is faced with a chronic housing shortage, which creates a need for development and investment. This is where many P2P property lenders see an opportunity. “First and foremost, there is chronic housing undersupply in the UK,” explains Mike Bristow, chief executive of CrowdProperty. “We are building far fewer than the 300,000 homes the government estimates we need to satisfy demand growth. “Furthermore, the government

PROPERTY

identifies small- and medium-sized developers developing smaller parcels of land as a crucial part of the solution, as larger parcels of land are built out and become scarcer by definition. “Traditional lending institutions either won't lend or make it very hard to borrow for small property professionals.” Of course, P2P platforms will not be immune to uncertainty and an economic downturn. Alternative finance research firm Intelligent Partnership predicts there could be consolidation in the P2P property sector. “If the pundits are correct,

an audience. “P2P property platforms allow investors to gain exposure to property investment without the need to purchase a property themselves.” P2P lenders highlight that the impact will vary depending on where money is being lent. “I think that we will see a tale of two markets in P2P property lending, in the same manner that we have a two-speed property market in the UK – London versus the rest of the country,” explains Roxana Mohammadian-Molina, chief strategy officer at P2P

“ I believe the dip in the UK property market is exaggerated”

residential property is likely to dip somewhat post-Brexit,” explains John Schaffer of Intelligent Partnership. “I imagine the amount of property-focused P2P platforms will consolidate somewhat. “However, Bank of England Governor Mark Carney’s prediction of a 30 per cent dip in the UK property market may be a little exaggerated. “People like to invest in assets they understand, and real estate investment will continue to have

property development lender Blend Network. “On the one hand, P2P property platforms with a London focus will inevitably feel the pain as the market enters into a period of protracted slowdown. “On the other hand, P2P property platforms who look beyond London will be able to capitalise on the ongoing strong demand and shortage of supply for more affordable homes. “The UK suffers from a structural

lack of affordable houses and this will not change, with or without Brexit, with or without a deal.” CrowdProperty’s Bristow agrees that “geographic diversification” is an important strategy. “This spreads market risk as different geographic markets are driven by different micro and macro factors at different times, but this also naturally spreads the types of projects we offer in terms of stock, demographics, tenures and exit strategy,” he says. “Institutional investors have a deep understanding of the different property debt risk-adjusted returns, but I believe that the majority of retail investors assume that all property lending involves the same level of risk. It doesn’t.” Schaffer of Intelligent Partnership adds that the risk profile of different P2P loans can vary significantly. “A bridging loan is likely to have more risk attached to it than a buyto-let project, even if the tax regime surrounding buy-to-let has become less favourable of late,” he says. “Bridging loans, in particular, are likely to have greater risk attached to them in a downturn, as property assets may be difficult to sell.” Property will not be the only area of P2P to suffer if there is a downturn, as consumer and business lending could also be hit

Together we build a better future Peer-to-peer lending is not covered by the FSCS and capital is at risk.

PROPERTY

by a lack of confidence. In fact, property lenders may come out looking better than their rivals as they provide an underlying security that everyone understands. Mohammadian-Molina says having property as security against the loan gives lenders comfort and peace of mind in the case that things go wrong. “The platform will be able to step in and exercise its first-charge rights in order to try and recover lenders’ money,” she explains “This obviously isn’t the case with consumer loans or even small business loans that may be secured against a debenture on the business, but if the business goes bust having a debenture doesn’t mean much. “In a market with uncertainties like we are seeing right now due to Brexit, investors are looking for safe haven assets and investments, and property P2P loans offer fixed returns on loans secured against property.” There is, however, always the risk that the underlying assets can’t be sold. “No lending is ‘as safe as houses’,” says Brian Bartaby, chief executive of P2P property lender Proplend. “Securing a loan with a property only goes some way to reduce some of that investment risk, in that the proceeds of a sale will go towards loan redemption and a low loan-to-value (LTV) means there is more of a cushion in times of recession. “An empty property with no income may struggle to sell in a recession but an income-producing property should be easier to sell. “Take, for example, a commercial property with stable lease rental income. If the property value falls, the income yield rises. In the

“ We will see a tale

of two markets in P2P property lending

”

current long-term, low-interestrate environment, this yield increase will be attractive to fixed income investors.” Some types of property lending may be lower risk than others. P2P buy-to-let lender Landbay says its type of loans may be less affected by a downturn as there is less reliance on having to sell an asset. “If there is a material fall in house prices, which one assume goes in hand with a downturn, anything in property sales is likely to fare worse,” John Goodall, chief executive of Landbay, says. “If properties become harder to sell, the risk of default increases.

“If you are lending in an area like buy-to-let, the sort of lending you are doing is not reliant on sale, we are reliant on demand for a rental property. “If you look at recent data, fewer people will buy in a downturn and demand for renting increases.” Goodall adds that it is “dangerous” for investors to lump all property lending together as a single asset class, which may become more apparent in a downturn. Due diligence is key, both at a platform and investor level. This will be different depending on the platform and type of security. Bartaby says investors should look

PROPERTY

understanding of the actual project and the exit strategy. “Obviously lenders themselves might not have time to do all of this, so they need to make sure the platform they choose to invest with does all these steps as part of their underwriting process,” she says. However, good understanding of a project or LTV may offer little

liquidity with property P2P loans.” Beyond checking the underwriting and LTVs, Bristow says there is no substitute for track record and expertise. “For a marketplace platform to list lending opportunities to investors, it’s not as simple as originating loans,” he explains. “It’s assessing those loans expertly

“ If properties become harder to sell, the risk of default increases”

at how sustainable the repayments seem for a borrower, while Mohammadian-Molina says the LTV a lender takes in development lending is important, as is an

comfort to investors if the asset cannot be sold. “If the property market completely crashes, then LTVs will matter little,” Schaffer adds. “However, I believe the dip in the UK property market is exaggerated. “With LTVs, it’s important to scrutinise whether an independent body has assessed what the LTV rate actually is.” Investors can, of course, prepare themselves for dips in returns and the wider P2P market. “Investors should aim to have good diversification in their portfolio of loans, by region, type of lending and type of property,” Schaffer says. “Liquidity is also a consideration. There is potentially less flexible

and making excellent underwriting decisions in advance of listing them on the platform. “Expertise, security, track record and many of the other factors must come together to ensure high-quality lending opportunities are presented. “Building a long-term, trusted brand through excellence is how a long-term, sustainable business is created, serving the interests of all parties involved – lenders, borrowers and the shareholders of the platform.” This is a sentiment backed by other platforms. In uncertain times, specialists may become more important in the property market as investors need to separate the wheat from the chaff.

Together we build a better future Peer-to-peer lending is not covered by the FSCS and capital is at risk.

Together we build a better future WHAT MAKES US DIFFERENT

Up to 8% p.a. first-charge secured returns

Tax-free with and SSAS pensions, with no fees

Expertly curated, quality property projects

Stress-free with

100% capital and interest payback track record Transparent, Brismo verified performance Fully independent platform

Peer-to-peer lending is not covered by the FSCS and capital is at risk. Past performance is not a guarantee of future performance. Tax rules are dependent on individual circumstances and are subject to change.

Directly FCA authorised and regulated Only property project member of the Peer-to-Peer Finance Association

????????????????????????????? JOINT VENTURE

Property focused

Mike Bristow, chief executive of CrowdProperty, explains why his platform is sticking to what it does best: quality property lending

‘A

S A COUNTRY, WE are not building enough homes,” says Mike Bristow, chief executive of property-backed peer-to-peer lending platform CrowdProperty. “We built our platform because we could see that there was pain in that market.” Bristow is right when he says that there is a housing shortage in the UK. According to a government white paper released in 2017, the country needs to be building 300,000 new homes every year. In reality, only around half of this target is being met. While this is bad news for first-time buyers, it represents a huge opportunity for P2P property lenders and investors alike. Demand for housing is only going to grow as the population increases, and there is a finite amount of land which is suitable for development. According to Bristow, a lot of this viable land is in the hands of

“ We felt there had to be a solution ”

small- and medium-sized enterprise (SME) property developers who just need speed and certainty of funding to get their projects off the ground. And he would know; CrowdProperty was founded by experienced property investors and developers who saw an opportunity for change. “For many years, we experienced huge frustrations with traditional

funding markets,” says Bristow. “We found all of these markets to be slow and cumbersome, and attitudes from traditional lenders towards SME property professionals were just not good enough. We felt there had to be a solution.” The solution was CrowdProperty. Established in 2013, it has been quietly building up a reputation for being a reliable and knowledgeable platform which only offers highquality loans to its lenders. When CrowdProperty listed its first loan in September 2014, it took 10 weeks to fund. Earlier this year, a project worth £456,000 was funded in 47 seconds. “Building a trusted brand takes years, and everything we do has to enhance that trust,” explains Bristow. “Our current success is all a function of four-and-a-half years of hard work building our systems,

our processes, and our track record. It’s about leveraging our expertise, making good lending choices and curating good projects, then offering those on our platform.” In a competitive marketplace, CrowdProperty has created an enviable track record with no losses, no late loans and a 100 per cent capital and interest payback track record for both. This is primarily down to the platform’s property expertise, says Bristow, as well as a responsible attitude towards risk and security, and building great relationships with lenders and borrowers. “Offering a better deal to borrowers means that we can be very competitive on rates with traditional lenders,” says Bristow. “That is the purpose of our strategy because that means we are lender of first resort, not a lender of last resort.” CrowdProperty’s long-term strategy is clearly paying off. The platform has achieved that rare feat of offering something valuable for both borrowers and lenders, while also supporting much needed house-building projects across the UK. This winning strategy is not going to change any time soon. “We're focused on what we do and we're getting better and better every day,” says Bristow. “You don't see Tiger Woods playing much tennis – we believe competitive advantage comes from doing the same thing better and better every day. And that's what we do.”

Nicole and Simon thought theyâ&#x20AC;&#x2122;d have to save forever for the perfect first home, but got there much faster with 7.2% pa* Kuflink can help you to build up your cash, brick by brick

01474 33 44 88 kuflink.co.uk

*Capital is at risk. Past performance does not guarantee future results. Kuflink Ltd is not covered by the FSCS. Registered Office: 21 West Street, Gravesend, Kent DA11 0BF (Registration Number 724890). Kuflink Ltd is authorised and regulated by the Financial Conduct Authority (FCA).

JOINT VENTURE

Off to a good start

Narinder Khattoare, chief executive of Kuflink, explains why IFISA investors have no time to lose

HE 2018/19 ISA SEASON was characterised by a certain level of frustration among savers and investors. Stock market volatility meant that the FTSE 100 ended 2018 at a 12.5 per cent loss; while low interest rates kept average cash ISA returns under one per cent for the vast majority of savers. This has presented a great opportunity for IFISA providers, who have been able to market their products as low-risk, fixed-rate investments which can enjoy all the benefits of the tax-free wrapper. At property-backed peer-topeer lender Kuflink, these benefits include tax-free returns of up to seven per cent per year through its five-year IFISA account, up to 6.1 per cent on its three-year product and up to five per cent on its oneyear ISA. And the sooner investors can start allocating their funds, the more money they stand to make. “The start of the tax year allows investors to search the market for their preferred investment opportunities and utilise their full tax year allowance,” says Narinder Khattoare, chief executive of Kuflink. “This will also enable investors to accrue tax-free interest for the full year and maximise their returns.” This is particularly true for those early-bird investors who allocate their funds right at the beginning of the tax year. According to Khattoare, Kuflink

sees the largest increase in new ISA accounts between February and April, as investors rush to use up their £20,000 ISA allowance before the end of the tax year. But the best returns will always be available to investors who have a plan for their cash beginning every year on 6 April. “By investing early, investors can also benefit from the effect of compound interest,” explains Khattoare. “If the IFISA is compounded then the interest earned can be a fair amount higher than simple interest. Lenders get that little bit more, and in this climate every little helps.” Kuflink’s IFISA has certainly proven popular with value-seeking investors over the past financial

year. Attracted by the platform’s zero-loss record, and the team’s property lending expertise, investors have contributed to the “encouraging growth” of Kuflink’s IFISA portfolio. But Khattoare hopes that the 2019/20 tax year is the year that IFISA investing will go mainstream. “We’re seeing encouraging growth in this space,” he says. “However, general awareness and education is needed as the average saver isn’t familiar with P2P, and many don’t even know that the IFISA product exists.” While Kuflink is doing all it can to promote its own IFISA and all the benefits it can bring, there is one change that Khattoare would like to see in the financial year ahead: multi-platform access. “It would be nice to see investors allowed to spread their annual IFISA allowance across a variety of platforms,” he says. “This would be a great move for savvy investors as they could then spread their risk across platforms and have greater access to different types of investments. “It would be hugely beneficial for savers to pick and choose from platforms that offer different rates, security, risk and terms, and would protect them from being overexposed in any one single sector.” Until this happens, Kuflink is determined to keep offering a choice of IFISAs to suit all investors.

COMPLIANCE

The letter of the law

Compliance is an essential component of the peer-to-peer lending sector, keeping platforms in check as they push at the boundaries of innovation. With new regulations looming, what should firms prepare for and should investors feel reassured that their money is in safe hands? Danielle Levy investigates

T IS CLOSE TO FIVE YEARS since the Financial Conduct Authority (FCA) took over regulation of the peer-to-peer lending sector – a move that has coincided with a period of exponential growth for the industry. This growth has presented the regulator with a number of challenges along the way: not least the task of regulating a sector that

is home to constant innovation, as well as a diverse range of business models and lending types. “There’s a myriad of business models and it took ages for the FCA to get their heads around this, so the authorisation process for many platforms was incredibly slow,” explains Michael Lynn, chief executive of P2P property platform Relendex.

Turnover at the FCA, a lack of resources and a lack of knowledge about the young sector are challenges that the regulator has grappled with over the past five years. Andrew Holgate, founder of fintech consultancy Equitivo, notes that the FCA’s post-implementation review consultation, published last summer, shows how far the P2P

COMPLIANCE

market has come since the FCA took over as regulator. “New models, innovation and a wider breadth of different loan types all pose problems for the FCA,” he says. He notes that when the financial watchdog became responsible for regulating the consumer loans market, many platforms operated under a reverse auction model, where no interest rate was specified and the lenders were free to bid for the borrower’s loan proposal. They quickly moved to a fixedprice model, where an interest rate is determined by the platform’s assessment of how risky the loan is, and then to quasi-discretionary management of investor funds. Dena Chadderton, senior adviser at regulatory consultancy BWB Compliance, was pleased that the FCA had considered the range of P2P platform models in its post-implementation review, grouping them into three

categories: ‘conduit’, ‘pricing’ and ‘discretionary’. “The FCA sees increased risk for the investor as the P2P platform’s role in the pricing and allocation of the loan increases,” she adds. The regulator’s number one priority is to protect the interests of private investors – and this is evident in the post-implementation

those who promise to invest no more than 10 per cent of their net portfolio in P2P. Finally, the FCA would like to see improved risk management at P2P platforms, including more formal wind-down plans. The financial watchdog is expected to publish its final thoughts during the second quarter of this year.

“ It is a burden in terms of time and cost for small organisations ”

review. For example, the paper included a proposal to improve transparency to allow investors to gain a better understanding of the historic performance of the platform and the loan they are investing in. The regulator also proposed restricting marketing to those who are certified as sophisticated or high-net-worth investors or

The proposals have so far received a mixed response from the industry. While many welcome greater transparency and the requirement to have more formal wind-down plans in place, the proposal to introduce marketing restrictions has attracted some criticism. At a Peer-to-Peer Finance Association event late last year,

COMPLIANCE

industry stakeholders argued that marketing restrictions could dissuade everyday retail investors from putting money into the sector and may create onerous costs for platforms. While those present at the event were broadly in support of appropriateness tests, they were concerned about how the tests would be implemented in practice. It was suggested that different types of marketing restrictions would be suitable for different types of platforms depending on the risk profile of the loans. “It seems like the FCA is focusing on this [higher risk loans] when the vast pot of investor money in the industry is with the lower risk options, where hardly any loans have lost them money overall and they have received plenty of interest for the risks,” says Neil Faulkner, founder of P2P analysis firm 4th Way. With this in mind, he hopes the FCA is simply touting the idea of marketing restrictions to see how the industry responds. However, Relendex’s Lynn suspects the regulator will put these proposals in place. If this is the case, his platform will need to respond to marketing restrictions by altering its technology, which will have operational repercussions. “I think the FCA is minded to put all of this in place,” he says. “It is good, but it is a burden in terms of time and cost for small organisations like us. “The big guys can absorb it as they have big departments dealing with this stuff but we haven’t – and we have got to comply with the same rules. This is quite tough but we will survive; our regulated status is very valuable to us.”

Lynn estimates that compliance costs equate to at least 10 per cent of Relendex’s revenues. Compliance also takes up a substantial amount of time internally: around 30 per cent of a senior director’s time, while two senior administrators spend 10 per cent of their time respectively on it, plus oversight from the management team. “In a small organisation that is quite a lot of management time,” he adds. We have external consultants and internally we have got a lot of compliance knowledge

“ A lot of regulation

is commercial common sense

”

going back 30 years.” He adds that the company is set to spend tens of thousands of pounds on in-house training on compliance-related matters. In Chadderton’s opinion, the biggest burden associated with compliance for all regulated P2P firms is time – particularly

COMPLIANCE

for senior staff, who may have multiple roles in a start-up. “The obvious money-spent costs of being FCA regulated are the annual fees and the cost of any compliance support, but the true cost runs deeper at the cost of management time,” she says. Once you factor in managing any complaints, client money oversight, reviewing and approving financial promotions, money laundering checks and the time spent staying up to date with FCA regulation, you can appreciate the effect this

might have on a busy senior executive, she adds. Stuart Law, chief executive of P2P platform Assetz Capital, estimates that between 15 per cent to 25 per cent of time spent by the company’s 100-strong team is on compliance-related matters. Assetz Capital has a compliance officer in-house, who also sits on the board, and the company does not use external compliance consultants. “A lot of regulation is commercial common sense,” Law asserts. “It is about doing the right thing regardless of whether you are regulated or not. We just made sure we had our ducks in a row from the beginning and evolved from there.” ‘Big three’ P2P lender RateSetter has a long-standing internal compliance team. “Our priorities include complying with relevant regulations; maintaining an open and positive relationship with the regulator; and helping to shape future regulation,” a spokesperson explains. Five years since taking responsibility for regulating the sector, how should the FCA’s approach evolve? While the approach so far has been relatively hands-off, Lynn would like to see greater dialogue between the FCA and the P2P sector in the future. “A closer dialogue and more face-to-face meetings would resolve quite a lot of problems,” he says. He adds that the FCA’s principles-based approach can also weigh heavily on platforms. “The responsibility is on us to do the right thing at all times – and it is not always clear what the right

“ Being FCA

approved is not a guarantee

”

thing is,” Lynn says. This means that platforms can incur extra costs employing professionals, like lawyers and compliance consultants, in the quest to find the right answer. Faulkner would like the regulator to set higher transparency standards in the future. He hopes this would allow consumers to spot the loans that are too risky and points out that collapsed platform Collateral did not offer enough transparency to investors. With the regulator poised to take a tougher approach to regulating the sector, one important question remains: can P2P investors feel reassured that their interests are protected? FCA regulations should help protect investors’ money from scams, frauds and back office incompetence, but there is always scope for things to go wrong. “Being FCA approved is not a guarantee,” says Holgate. “Things can and will go wrong, but regulations should significantly reduce the risk of malpractice.” Chadderton says that the FCA’s latest proposals seek to improve investor protections by ensuring they have all the information they need to make an investment decision that is right for them. “But as always, it is worth noting that P2P loans are investments and the regulations are not able or designed to protect an investor from capital loss due to the performance of the investment itself,” she adds.

Make your money work harder. Boost your investment returns by lending to established British businesses. Up to 16% pa* Receive up to 5% cashback!** Investment Amount

Cashback

£1,000 - £4,999 £5,000 - £9,999 £10,000+

3% 4% 5%

Register today to view our latest loans huddlecapital.com * Gross returns. Your capital is at risk. ** Enter code ‘P2PHUDD2019’ when registering. Terms apply – see huddlecapital.com/terms-conditions. Huddle Capital Limited is an Appointed Representative of rebuildingsociety.com, a firm authorised and regulated by the Financial Conduct Authority under firm registration number 656344. Huddle Capital is not covered by the Financial Services Compensation Scheme. Registered in England (Company Registration No. 10238385) with registered address at 4 Brewery Place, Leeds, LS10 1NE

JOINT VENTURE

Credit where credit’s due Emily Rackham, head of credit at Huddle Capital, unpacks the platform’s unique approach to the credit checking process

REDIT LOGIC IS increasingly becoming a sticking point for peer-to-peer lenders. While the UK’s P2P sector is undoubtedly committed to risk awareness, a recent series of highprofile defaults have led to new calls for heightened transparency among P2P investors. Huddle Capital’s credit process is a little more thorough than most. Like most platforms, Huddle Capital mainly lends on assets that have been secured with a legal charge, but unlike its competitors, it also requires a personal guarantee from a director or shareholder of every borrower, as an extra line of protection. What’s more, the firm invests alongside its lenders on every single loan on a pari passu basis. “In doing this, what we are effectively saying is that we have 100 per cent faith in our credit policy,” says Emily Rackham, head of credit and director at Huddle Capital. “In the early days of us starting out, we were putting around 90 per cent of our money into those loans, and even now we will put 50 per cent of our money into most loans. “We put our money where our mouth is.” Huddle Capital’s loans are broken up into two different categories: pure property loans including development or refurbishment loans; and small- and mediumsized enterprise business loans. But regardless of the loan category, Huddle Capital takes the same

can help shield investors from a potential lack of liquidity in the property market, and the risk of delayed or missed loan repayments. “We look at the property purely as secondary security,” she says. “This means that we want to see that the business has got profit, has got cashflow, has got serviceability. Most of these loans amortize from day one on a monthly repayment profile.” This approach has allowed Huddle Capital to offer high yields of

“ We put our money where our mouth is ”

holistic view on credit logic. “It’s not purely down to the value of the property,” says Rackham. “It’s also about the business and the guarantors. “When we underwrite the loan, we analyse the business-owners, the accounts, the bank statements, VAT returns – everything we can look at to satisfy ourselves that there is serviceability and security within this loan. “And most of that information is presented to the lenders along with the lending report.” By looking at the creditworthiness of the borrower as well as the asset, Rackham believes that the platform

12-16 per cent to investors, while effectively decreasing their risk on a month by month basis. “Since we've started these specific loans, there has been no bad debt,” says Rackham. “It's our job as a platform not only to originate loans and underwrite them but to manage that collection process. “And that's something we're very good at doing because we've done it for years on our own balance sheet. “Ultimately, if a borrower has got a late payment it’s not just affecting us as a platform from a reputational perfective, it's affecting us as a business because we've got our own cash in there so you know our lenders can rest assured that we will manage the collection process as aggressively, humanly and legally as possible.”

www.facebook.com/p2pfinancenews @p2pfinancenews

@p2pfinancenews

www.linkedin.com/company/peer2peerfinancenews/