Peer2Peer Finance News Magazine April 2020 by Alternative Credit Investor

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P2P TURNS 15

From niche sector to multi-billion-pound industry

WHEN INNOVATION MEETS UNCERTAINTY

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Property-backed P2P in the age of the coronavirus

Relendex co-founder Michael Lynn tells P2PFN why he's prepared for 2020

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ISSUE 43 | APRIL 2020

P2P fights back as coronavirus chaos threatens UK economy PEER-TO-PEER lending platforms have vowed to do all they can to support businesses and protect investors as the coronavirus pandemic threatens to cause a global recession. Since the Covid-19 virus was declared to be a pandemic by the World Health Organisation, P2P lenders have been quick to implement new measures to ensure that staff, borrowers and lenders are not left behind in the ongoing economic crisis. Zopa has offered a payment freeze to borrowers who are having trouble making repayments due to the impact of the coronavirus. RateSetter and Funding Circle have both urged borrowers to get in touch if they are concerned that they may not be able to make repayments – both platforms have offered to help borrowers where possible. Meanwhile, Crowd2Fund has said it is referring all distressed business loans to the

government-funded British Business Bank, while asset-backed lender Ablrate has also offered its borrowers assistance in accessing government support. In Ireland, Linked Finance has applied a twomonth payment break to all loans in the hospitality industry, as well as launching an instantaccess account to help small businesses access cash quickly. Other platforms, such as Simple Crowdfunding and Assetz Capital, have reported a spike in demand from worried borrowers and opportunistic investors who are keen to escape

the ongoing stock market volatility in favour of fixed-rate returns. More than a dozen platforms told Peer2Peer Finance News that they were taking a ‘business as usual’ approach, with staff working remotely and phone lines remaining open. These efforts have gone some way towards reassuring investors and positioning the P2P sector as a reactive and responsible investment option, against a backdrop of plummeting interest rates and tumbling stock market values. “We’re monitoring the situation closely and will continue to take

appropriate steps to ensure it is business as usual for our investors while ensuring the wellbeing of our employees is maintained,” said a spokesperson for propertybacked lender Kuflink. “We aim to thrive and truly demonstrate the strength and value of innovative P2P fintech, even with the recent uncertainty and economic turbulence which has caused concern amongst investors.” Similarly, Money&Co has implemented alternative working plans to ensure its services to lenders and borrowers remain unaffected. “Circumstances >> 4

EDITOR’S LETTER

Published by Royal Crescent Publishing

WeWork, 2 Eastbourne Terrace, Paddington, London, W2 6LG info@royalcrescentpublishing.co.uk EDITORIAL Suzie Neuwirth Editor-in-Chief suzie@p2pfinancenews.co.uk +44 (0) 7966 180299 Kathryn Gaw Contributing Editor kathryn@p2pfinancenews.co.uk Marc Shoffman Senior Reporter marc@p2pfinancenews.co.uk Michael Lloyd Senior Reporter michael@p2pfinancenews.co.uk Andrew Saunders Features Writer Emily Perryman Features Writer Hannah Smith Features Writer PRODUCTION Tim Parker Art Director COMMERCIAL Alamgir Ahmed Director of Sales and Marketing alamgir@p2pfinancenews.co.uk Tehmeena Khan Sales and Marketing Manager tehmeena@p2pfinancenews.co.uk SUBSCRIPTIONS AND DISTRIBUTION info@p2pfinancenews.co.uk Find our website at www.p2pfinancenews.co.uk

hat a month. There’s probably little I could write about coronavirus and its effect on the health of the UK population and economy that you haven’t already read elsewhere, so I’m going to focus my attentions on its impact on peer-to-peer lending. I was pleased to see how quickly P2P platforms have responded to the pandemic and are making every effort to support their customers – both investors and borrowers – at this troubling time. The government has quickly introduced a £350bn package of measures (at time of writing) to help small- and medium-sized enterprises (SMEs) survive the coronavirus crisis. These include a new coronavirus business interruption loan scheme, delivered by banks and other lenders through the British Business Bank, with the government covering up to 80 per cent of any losses with no fees. There has been talk of opening up the scheme to peer-to-peer lenders – this would a great way for the industry to do more of what it does best, providing much-needed finance to the lifeblood of the country’s economy, SMEs. The world is in crisis – but I feel confident that the P2P industry will do its bit to support investors and borrowers alike at this critical period in history. SUZIE NEUWIRTH EDITOR-IN-CHIEF

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.

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NEWS

cont. from page 1 have changed, and will change again, but please be assured we have already acted to ensure continuity of service, and will continue to move, plan and react in an agile fashion,” said a platform

spokesperson. “The gyrations of the stock market also caused alarm in some quarters. “As we've consistently pointed out, one of the great attractions of platform lending is its lack

of correlation with equity returns or interest rate fluctuations.” Meanwhile, rural lender Folk2Folk emphasised that its loans have fixed rates, so are not subject to

stock market volatility, and are secured against property. The platform also undertakes regular portfolio reviews to check the status of loans and identify any issues early on.

IFISA inflows on the rise after hitting £1bn milestone INNOVATIVE Finance ISA (IFISA) inflows have continued to rise since hitting the £1bn milestone last year, suggesting the industry has shaken off reputational issues following high-profile platform collapses. Fresh data compiled by The Investing and Saving Alliance shows the total amount invested in the IFISA tax wrapper reached £1.14bn by February 2020, with still a few months to go before the tax year ends. This is up from £711m in the 2018/2019 tax year. The figures show there are 78,714 IFISA accounts with an average of £14,503 invested in each one. These figures are based on around a quarter of ISA managers, and so could be much more. Funding Circle has said more than £400m has been invested through its IFISA, while RateSetter has reported inflows of £280m and Assetz Capital has £103m. Zopa has said it does not

disclose its IFISA inflows. Continued growth in IFISA inflows is good news for a sector that has been hit by the collapse of Lendy and FundingSecure over the past tax year, as well as tougher regulations. The City watchdog had also issued a warning about “high risk” IFISAs following the collapse of mini-bond provider London Capital & Finance last year. “The collapse of Lendy and London Capital & Finance shows the value of regulation in ensuring

companies have appropriate systems and controls to make sure the interests of their small investors are paramount,” Bruce Davis, co-founder of crowd bonds platform Abundance, one of the first IFISA providers, said. “We need to be clear that both companies set up their businesses outside of regulation and whether through intention or incompetence created structures which it transpires were financially unsustainable. “Their actions and approach do not reflect the

practices and standards of the regulated industry who work hard to make sure that investors are offered products that are appropriate for retail investors and that customers understand the risks of their choices.” The IFISA wrapper had a slow start in the 2016/2017 tax year, attracting just £36m of subscriptions across 5,000 accounts. This increased to £290m across 31,000 accounts in the 2017/2018 tax year. HMRC has not yet released figures for the 2018/2019 tax year, despite usually releasing figures for the previous period each August. An HMRC spokesperson said the next update – showing figures for 2018/2019 – would be made public in April 2020. Platforms may then have to wait for another year to see how the 2019/2020 tax year intake compares.

NEWS

P2P industry celebrates 15th birthday THE WORLD’S oldest peer-to-peer lender Zopa marked 15 years of lending last month and its anniversary also represents a milestone for the wider sector. Zopa was the first P2P lender to launch, with a remit to link intereststarved savers with better rates by backing personal loans to borrowers who were struggling to get them from banks. One of its founders, Giles Andrews, said at the time of its launch in 2005 that Zopa wanted to create an eBay for money. Now in 2020, Zopa has been joined by several other platforms bidding for borrowers and investors offering personal, property, business and other assetbacked P2P loans. What started as a niche alternative investment has transformed into a multi-billion pound sector regulated by the Financial Conduct Authority with its own tax wrapper in the form of the Innovative Finance ISA. The sector has also evolved since 2005, with more institutional investment and expansions such as the launch of Zopa Bank. There have also been a few high-profile exits, with

Landbay and ThinCats shifting to focus on institutional investment. And, of course, there have been a clutch of failures such as the collapse of Collateral, Lendy and FundingSecure. “It’s hard to ignore the high-profile failures from last year, as a couple of platforms were found wanting in their underwriting and valuations processes,” said Jonathan Minter, an analyst at Intelligent Partnership. “The new regulatory regime should help weed out the worst cases of bad practice in the industry, and massively

improve disclosure, which should actually help reduce risk. “As the industry becomes more mature and the various players become more established, we would expect underwriting standards to improve.” Bruce Davis, co-founder of Abundance Investment and an early member of Zopa’s team, said P2P works best when it remembers its roots in “understanding the social life of money and connecting people rather than creating profits from abstract financial engineering.” This is a view echoed by Nic Conner, former

public relations manager at P2P business lender Growth Street, which restructured its business to a digital origination strategy last year. He is now a research consultant for analyst Rangewell and said the sector has undergone a big evolution. “I saw first-hand when I worked at Growth Street how the environment around P2P changed,” he said. “This has only spurred many platforms to look at funding lines away from the traditional P2P customers. “We are out of the gold rush of P2P. It served a purpose to help startup lenders scale and compete in the market. “In the next few years, we will see poorperforming lenders exit the market, whilst at the other end the successful propositions will move away from retail money to institutional. “We may see the volume of P2P lenders go down but there certainly will always be an offering to investors. “This unique funding model has its place and after a natural selection process in the market over the next year or two, I’m sure the proposition will still be attractive to investors."

NEWS

P2P hailed as potential ‘safe haven’ for IFAs LOW interest rates and stock market volatility should encourage more independent financial advisers (IFAs) to reconsider peer-to-peer portfolio investments, platforms have claimed. The adviser community has been slow to endorse P2P lending to clients, citing the need for a longer track record and the lack of a safety net such as the Financial Services Compensation Scheme. However, in the new economic climate, platforms have been renewing their efforts to attract IFAs, citing the benefits of fixed-return investments, diversity of options and underlying securities. “I would say that IFAs

should be recommending a diverse portfolio across multiple asset classes for their clients and P2P should be within that portfolio, because you get a fairer share of the return added to that capital,” said Mike Bristow, co-founder and chief executive of

CrowdProperty. “It’s time for IFAs to really understand the market and the best players in it.” Brian Bartaby, co-founder and chief executive of Proplend, said that P2P should be included within any IFA’s toolbox as part of their fixed income

strategy, adding that it is a fixed income investment and therefore a credit risk, while stocks and shares is an equity investment meaning it is a price risk. “Then within P2P you have secured and unsecured debt – you can decide which is safer,” he said. Meanwhile, Daniel Rajkumar, founder and managing director at Rebuildingsociety, said that P2P lending as an asset class can be lucrative in a downturn. “A lot of people have said they don’t know whether the P2P model will work and sustain itself because it hasn’t gone through a recession,” he argued. “Now’s our opportunity to prove that and get it to work.”

John Mould joins CrowdProperty FORMER ThinCats chief John Mould has joined CrowdProperty’s board as a non-executive director, Peer2Peer Finance News can exclusively reveal. Mould (pictured), who also held the chief executive role at ThinCats’ parent company ESF Capital, told P2PFN that he was delighted to join the peer-to-peer property lender as it helps fill a funding gap for small- and medium-sized enterprise housebuilders.

He added that he already knows CrowdProperty chief executive Mike Bristow as they have previously worked together and both sat on the board of the Peer-to-Peer Finance Association. “The CrowdProperty business model, funda mental expertise at the core of the business, quality first-charge positioning and technology

focus presents a huge opportu nity,” said Mould. Mould said that he will bring his years of financial expertise to CrowdProperty to act as a strategic adviser. “CrowdProperty has done so well in getting retail investors on board, but if it wants to grow it needs to appeal to some small institutions, and I know what they like,

don’t like and the controls and procedures in place,” he said. Bristow said that the firm is “extremely excited” to have Mould joining the CrowdProperty board. “John’s experience in asset management, risk management and alter native finance in highgrowth environments will enhance the strategic perspectives that are core to CrowdProperty and realising the potential of the business,” he said.

NEWS

IFISA inflows unaffected by FCA marketing restrictions INNOVATIVE Finance ISA (IFISA) inflows have been unaffected by the City regulator’s marketing restrictions, peer-to-peer platforms have claimed. Under the new rules, which came into force in December 2019, platforms can only communicate ‘direct-offer financial promotions’ to certain investors. These comprise highnet-worth or sophisticated investors, those receiving

regulated financial advice or restricted investors – meaning everyday investors that pledge to put no more than 10 per cent of their portfolio in P2P. However, despite fears that the new restrictions might discourage new IFISA investments, several P2P platforms told Peer2Peer Finance News that their IFISA inflows have actually increased in the run-up to this ISA season.

Stuart Law, chief executive of Assetz Capital, said there has been an uptick in deposits into the platform’s IFISA, adding, “we are expecting another strong ISA season overall.” A RateSetter spokesperson also confirmed that its ISA deposits were growing, despite the new marketing restrictions. Meanwhile, Mike

Bristow, co-founder and chief executive of CrowdProperty, said the rule change has not affected his platform because it has been focusing on marketing to existing customers. He added that P2P marketing is changing because “people are finding out about P2P through news items” as well as by word of mouth, rather than via traditional marketing channels.

P2P ‘could play a bigger role’ in helping environment MORE can be done by peer-to-peer platforms to help address the climate change crisis, former Zopa executive Bruce Davis has said. In a call to action for the industry, Davis – founder and managing director of crowd bonds platform Abundance Investment – highlighted the growing appetite among investors for green energy loans, noting that Abundance has funded more than £100m of these projects over the past eight years. “The general public is more supportive of putting their money into green projects and taking action on the environment and now the UK government has much clearer policies supporting green infrastructure,”

Davis told Peer2Peer Finance News. “We think it’s important that it’s not just down to big institutions or big capital and people can help with a minimum of £5. “There’s been lots of talk and now people want to take action. P2P offers that direct action with your money, you’re backing that actual project, a windfarm or a green start-up, for example.” Davis’ comments came after the government signed an agreement

promising to bring greenhouse gas emissions to net zero by 2050. “That requires billions of pounds of investment to achieve and I believe the P2P and crowdfunding sector could play a bigger role in raising this money,” Davis said. “We haven’t really seen much movement from the P2P industry but I wouldn’t blame others for not doing stuff, it’s challenging to grow a business in a changing regulatory environment and harder to become greener as well. “We’ve always crafted our own path, but there’s an opportunity for P2P lenders to get behind this. However, it would be a new line of business for most of them and would require investment and effort.”

In recent months, property-backed P2P platforms such as CrowdProperty, The House Crowd and Blend Network have taken a more active role in encouraging developers to build more environmentally friendly and sustainable developments in response to investor demand. “Today's investors are not just looking for return,” said Yann Murciano, chief executive of Blend Network. “Their investment decisions reflect their desire for sustainability and responsible investing. “Therefore, investment platforms need to be part of the solution by providing multi-stakeholder engagement. We have a social responsibility we need to uphold.”

EVENT

Propping up pension investing On a chilly February evening in Manchester, investors, financial advisers and property developers met to discuss a new type of property investing. Kathryn Gaw reports from The House Crowd’s latest event…

AN PEER-TO-PEER property lending fund your retirement? This was the question at the heart of The House Crowd’s ‘Tax-free Property Investing’ event in partnership with Peer2Peer Finance News and Equitivo Advisory, which was held at the Barclays Eagle Lab in Manchester. Addressing a room filled with sophisticated and high-net-worth investors, executives and advisers, Frazer Fearnhead, founder and chief executive of The House Crowd, explained the shocking truth about the UK’s private pension provisions, and how P2P property lending can help. Fearnhead noted that the average Briton will need to save at least £600,000 towards their pension fund in order to live comfortably in their 70s and 80s. However, he pointed out that the average 55-year-old has just £42,621 saved for their retirement. After fees and inflation, this pot would be worth just £50,000 by the time they are 80. This concern over the future of the UK’s future pensioners was echoed by the event’s four panellists: Andrew Holgate, co-founder of Assetz Capital and head of Equitivo Advisory; Elizabeth Bird, a partner at Chronos Wealth Management; John McGuire, a former RBS executive and non-executive director at Cambridge & Counties Bank and Goldcrest Finance; and Justin Molloy, director at House Crowd Developments.

The panellists brought a range of different perspectives to the room, but one thing they could all agree on was that property investing is a viable way to save for retirement – as long as it is done properly. Fearnhead began investing in property in 1994, but the market has changed a lot since then. In order to be a successful property investor in 2020, he said, you need to think outside the box. “Why would you want to own something?” asked Fearnhead. “You have the hassle of owning a property when you could be earning better returns from a debtbased investment instead.” And unlike direct property investing, property loans offer a certain amount of liquidity as well as the flexibility to move into different loans – or indeed, different platforms – if your

portfolio is underperforming. But despite these clear benefits, it is essential that P2P property investors understand the risks that they are taking on. Elizabeth Bird, a financial adviser at Chronos Wealth Management, said that she is aware of P2P property investment but wouldn’t recommend it until it is backed by the Financial Services Compensation Scheme (FSCS) or a similar compensation scheme. Her advice for budding property investors was to “trust the experts”. For pension savers, she advised people to invest as early as they can so that they have time to recover if things go wrong, and to benefit from compound interest. “Create a diverse portfolio that is encased in a tax-free wrapper," she added. And try not to lose any of your capital.” Former bank manager John McGuire was careful to point out the

EVENT

specific risks of development finance. “Secured property lending is viewed as a panacea because people think there are no losses, but they’re wrong,” he said. “The asset class is sound on day one, and sound on the day that the property has been built, but in the middle, it is a liability.” He told a story about a development where construction was stopped for over a year due to health and safety concerns. A forklift driver was carrying a palate of bricks from one part of the site to another. He decided to drive a slightly quicker route that took him near a bridge which

crossed a nearby railway line. A train happened to be passing at the time, and the train driver reported him for a potential safety breach. National Rail got involved and the whole case took a year to solve. These sorts of unpredictable risks are the reason why most banks won’t take on property development loans anymore, McGuire said – but this has presented an opportunity for P2P. The average investor can now access the types of opportunities that banks used to snap up. Holgate – another former banker – pointed out that there

is nothing new about P2P, and as long as investors are educated on the risks involved, and take the necessary precautions, they can target higher returns within a tax-free investment wrapper and build up a substantial pension pot over time. The entire panel agreed that the North West of England was primed for steady property growth over the next few years. Molloy – a House Crowd borrower and director of The House Crowd’s subsidiary House Crowd Developments – reminded the audience that there is still an overall housing shortage, while office rentals indicate a growing working population in the North West. This suggests that the residential property market should remain buoyant in 2020 and over the longer term. However, he warned the investors present that they have to understand their investment and their market – property development risks can be difficult to spot, and it is essential to rely on the expertise of professionals. Judging by the response from the investors present, The House Crowd’s panel embodied this expertise. As the evening drew to a close, investors were spotted making a beeline for Fearnhead, armed with questions about The House Crowd’s business model, auto-invest products and future plans. In a call with Peer2Peer Finance News the following day, Fearnhead confirmed that more than £200,000 had been invested in the platform’s IFISA and SIPP products since the event – further proof that P2P property investing is an attractive option for pension investors, just as long as they have access to the right information.

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JOINT VENTURE

Contractor due diligence Simon Betty, head of credit at Wellesley Finance, explains the importance of appointing the right contractor

HOOSING THE RIGHT contractor is vital to the success of a property development project. The last thing any property lender wants to hear is that a project is taking much longer than expected, or that work on site has ceased because the contractor has financial issues or even worse, has gone into administration. This is why Wellesley has made it a priority in their assessment of potential development loans, that an appropriate contractor will always be appointed. Wellesley’s head of credit Simon Betty ensures a comprehensive approach is taken to the assessment of contractors. Importantly, he is adamant that contractor selection should never be driven purely by cost, adding that “the cheapest is frequently not the best.” In Betty’s experience, at the point a proposal is put to Wellesley, developers will usually have a shortlist of potential contractors, if they have not appointed one already. These may be contractors that they have worked with in the past, or recommendations from a third party. “The first thing that we look for is whether or not the contractor has appropriate experience of the size and nature of a particular project,” says Betty. “For example, if it is a highrise development in Manchester providing 100+ apartments – has the contractor satisfactorily completed a scheme of this nature before? If they

haven’t, that is a warning sign.” It’s also important to look at the type of construction, Betty adds. For instance, if it is modular, does the contractor have experience of this type of construction? Then Betty goes even further, looking into the contractor’s past performance and set-up, including the reliability of their supply chain, the procurement method, and their

health and safety record. “I was recently looking at an application that was submitted by a lender – I Googled the contractor and found that they had a recent conviction for a significant health and safety oversight,” he explains. “That’s the sort of thing that should cause some concern and should be investigated further.” Concentration risk is also a big issue for the lender. “If a contractor has a number of projects on the go at one time, we have to determine if they can actually cope with the new contract, both in terms of manpower and in terms of cashflow,” Betty says. “I had one situation recently where the contractor had taken on too many contracts and was not able to cope with them all. And then you find that you can potentially be releasing money to the contractor but it's not all perhaps going where it should go, and people on site are not being paid.” Next, Betty does some due diligence into the contractor themselves – what their balance sheet looks like, and whether they have sufficient cash reserves. Undertaking such due diligence can be time consuming but the results speak for themselves. Over the past four years, Wellesley has reported zero losses and zero non-performing loans – a testament to the value of taking the time to conduct thorough due diligence before any investor money changes hands.

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JOINT VENTURE

Tackling the coronavirus challenge

Mark Turner, managing director, regulatory consulting, and Geoff Bouchier, managing director, restructuring advisory, at Duff & Phelps, explain how Covid-19 could upend the peer-to-peer industry

AST DECEMBER, THE Financial Conduct Authority (FCA) formally introduced a raft of new regulations for the peer-to-peer sector, alongside the Senior Managers and Certification Regime (SMCR) which makes executives more accountable for platform failures. Many platforms spent months working closely with professional advisers like Duff & Phelps to come up with appropriate plans, in the unlikely event that their business follows some of the recent highprofile platform collapses. Yet just a few months later, a new challenge has emerged in the form of Covid-19. Suddenly the entire economy is at risk, and platforms are being forced to reckon with the very real possibility that they may need to visit their wind-down plans sooner than expected. “Coronavirus is causing significant and increasing disruption across all business sectors, including P2P platforms,” says Geoff Bouchier, managing director, restructuring advisory at Duff & Phelps. “Success for many platforms is dependent upon the attraction of retail investors to fund loans, principally to small- and mediumsized enterprises (SMEs). The question then becomes whether investors still have confidence in lending to SMEs in the present uncertain economic environment. “If the investors retreat, then

the platforms will lose revenue whilst still being faced with fixed overheads, eroding their capital reserves.” In this scenario, and in accordance with the new rules, it will be essential that platforms hold sufficient ‘ring-fenced’ collateral to manage a possible wind-down. However, uncertainty remains as to how this collateral is to be held in practice. But collateral is not enough. “Ideally, platforms should be periodically reviewing and reassessing the appropriateness of their wind-down plans in light of present trading conditions,” says Bouchier. “Prolonged adverse market conditions could see numerous platforms needing to assess their ongoing viability.” This is particularly important for senior managers. Under SMCR regulations, senior managers

are ultimately accountable for their decisions and may be asked questions by the FCA as to why certain decisions were made. “In the current climate, where decisions might be far reaching and need to be made quickly, senior managers need to ensure that they capture their rationale,” says Mark Turner, managing director, regulatory consulting at Duff & Phelps. “It is possible, particularly where customer detriment occurs, which is more likely under current market conditions, that the FCA may ask questions of senior managers even after they are no longer in that role—for instance, where the platform goes into administration or where the senior manager resigns. “FCA action can ultimately include fines and restrictions on future roles that can be held by individuals within the financial services industry.” “What we are seeing here is a market shock,” Turner explains. “The market itself is being disrupted through unexpected loan defaults and in many instances failure of borrowers, whilst at the same time investors are seeking the return of their investment, so this is not a straightforward scenario.” The P2P sector is not going to be immune to the effects of Covid-19, but it can prepare for the worst. And the first step for any concerned manager is to seek expert advice.

PROPERTY

When innovation meets uncertainty Michael Lloyd explores the latest emerging trends in the peer-to-peer property

sector, how regulation continues to affect platforms, and what the future holds in these uncertain times

ROPERTY-BACKED peer-to-peer platforms may have only been around for a less than a decade, but loans secured against property have existed for hundreds of years. For many, this makes property P2P the perfect combination of the old and the new – offering a traditional financial service with a modern spin. However, times are changing – and fast. A rapidly-changing regulatory environment and global economic uncertainty threatens the growth of the UK’s property market. And, in the middle of this, the sector is expected to

evolve faster than ever before. Towards the end of last year, the Financial Conduct Authority (FCA) announced that everyday investors could not put more than 10 per cent of their portfolio into P2P, as part of a range of new marketing restrictions. The regulator also strengthened rules relating to transparency and wind-down plans. “It’s had a huge impact, but for the better,” says Andrew Holgate, chief executive of Equitivo. “The changes are primarily to protect investors, but it has forced platforms to become more professional and more conservative.”

All P2P platforms now have to be fully transparent about their loan book and historic performance, as well as putting in place controls around risk management and valuations. “The new rules are a big step in the right direction and should help to build a more mature industry,” says Charlie Taylor, head of Octopus Choice. Other platform leaders seem to agree. Yann Murciano, chief executive of Blend Network, believes the regulations have brought a lot more confidence and trust into the sector. He says that despite the new stricter

PROPERTY

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Within a volatile, late-cycle market environment, investors are looking for yield and they see P2P as offering a decent yield secured against physical property rules, the market has a real appetite for P2P lending, particularly property-backed P2P lending. “Within a volatile, late-cycle market environment, investors are looking for yield and they see P2P as offering a decent yield secured against physical property,” Murciano says. Similarly, Filip Karadaghi, cofounder and chief executive of LandlordInvest, explains that regulation has not caused much meaningful change. In his view, the worst offenders had already collapsed and the remaining professional platforms already had a range of protections in place. “I’m sure on a general level it will change as fewer retail investors will be likely to use the product,” he says. Across the board, propertybacked P2P lenders seem to be mulling the possibility that their investor base is likely to skew away from retail money in the future. Taylor argues a much greater proportion of P2P investment will go through financial advisers. Meanwhile, Carl Davies, chief operating officer of The House Crowd, says that – although the regulation is overall positive – it has dulled the entrepreneur’s enthusiasm for this market. “These are not things which typically excite an entrepreneur,” he says. “However, it has meant that everyone has to raise their game.” And doing so is apparently no bad thing. Last year saw the devastating

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collapse of property-backed lender Lendy, leaving dozens of investors out of pocket. Unsurprisingly, Lendy’s failure dominated the headlines, and almost certainly damaged the reputation of the property-backed P2P sector as a whole – at least among risk-shy retail investors. Davies points out that without certainty of retail funds, institutional lines will be needed to give borrowers confidence that platforms can deliver. “These funds will be hard to find until the platform is wellproven,” he says. “Thus, a catch-22 situation exists. “Apart from those platforms that have folded, many players are shying

away from retail investors because of the additional regulations and/ or the hassle that inevitably arises from inexperienced investors experiencing delays on property related loans; especially higher risk loans such as property development rather than bridging loans. “Smaller, less profitable platforms will need to be very well capitalised to survive.” This means that, in order to survive, platforms must be prepared to innovate. For example, some P2P property platforms are focusing more on auto-invest products. “The big advantage of auto invest is it gives diversification,” says David Genn, chief executive of Goji, the investment platform technology provider. Meanwhile, The House Crowd's Davies explains that investors will always want the ability to self-select, which is not a problem for sophisticated and high-net-worth investors. However, he adds that vulnerable

PROPERTY

and inexperienced investors need to be protected from themselves whilst still being given the opportunity to make the attractive returns that property investment can offer. “Diversification is the key to this and auto-invest is the mechanism that delivers it,” Davies adds. “In my opinion it is the best way forward for investors.” Holgate also believes there will be a general trend towards auto-invest. “It seems the FCA would prefer this model,” he notes. “They want to protect investors by encouraging diversity across risk levels.” Other types of innovation might come in the form of enhanced tech capabilities, or a pivot towards another type of business model altogether. “Innovations are hard to come across,” says Holgate. “Perhaps there is better use of technology for data gathering to support due diligence and monitoring, but otherwise lending operations are pretty consistent.” Over the past year, several platforms have opted to exit the retail investor market altogether. Landbay and ThinCats have already pivoted towards an institutional investment model, and there has been speculation that some smaller platforms may be open to mergers or acquisitions. “Other platforms have exited the market as well so I wouldn’t be surprised to see a few more do the same,” says Goji's Genn. “New regulation has raised the operating bar for these platforms which may well drive consolidation.” Neal Moy, head of property finance at RateSetter, agrees that consolidation is inevitable, but he predicts that it may be a case of

“ Everyone has to raise their game” unsustainable platforms failing, rather than being taken over. But despite the current uncertain economic climate, property-backed P2P platforms are forecasting a bright future.

Industry stakeholders such as Genn believe that P2P property platforms have made it easier for a new generation of investors to access a wide variety of property development loans and investment opportunities and this looks set to continue. “There’s a strong future for P2P property as it’s an asset class people want in their portfolio,” he says. “As long as platforms continue to

PROPERTY

“ Smaller, less

profitable platforms will need to be very well capitalised to survive

”

deliver strong customer service and strong underwriting, it’s a sector that will still stick around.” Meanwhile, Murciano believes that P2P lenders are feeling a lot more secure and protected in the wake of the latest FCA rules, which hold platforms to a higher standard of compliance. “Hopefully in the future we will see platforms being a lot more responsible in the way they

assess risk and carry out their due diligence process, all for the benefit of lenders,” he says. One thing that all platforms can agree on is that despite the many changes and challenges that the sector has lived through, there is more to come. The coronavirus has introduced a wild card element to the sector – just weeks after the much lauded ‘Boris Bounce’ in the

post-election property markets, leading to fears that property prices could drop again. While the majority of propertybacked platforms cap their loan-to-value (LTV) at 75 per cent or less, these are unusual times and the threat of a new recession could result in a squeeze on the UK’s property market. Any significant fall in valuation can put investor capital at risk, and platforms will no doubt be focused on protecting their investors, even while offering much-needed support to the property development industry. But this is a challenge which property lending platforms are likely to embrace. After all, this is a sector which prides itself on seeking innovative solutions to complex financing problems, and prioritising risk management every step of the way. “There are exciting times ahead,” says Davies. “We want to help solve the UK’s housing crisis, democratise property investment and offer the younger generations the chance to save for their future in products such as the Innovative Finance ISA.” It remains to be seen how the P2P property sector will weather the challenge of the months ahead. But these platforms’ commitment to the future puts them in a great place to use their innovation, technology, and expertise to bring an ancient investment class into the 21st century and beyond.

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JOINT VENTURE

Investing for your retirement Frazer Fearnhead, chief executive of The House Crowd, explains how property-backed peer-to-peer investing can help you save for your retirement

you are a higher rate taxpayer that’s probably the equivalent of earning 11 per cent and being taxed on it, so it’s a very attractive rate.” Furthermore, The House Crowd pays interest out twice a year – in The Crucial Importance of Compounding £1,000,000 £800,000

Investment valuation

ENSION INVESTING IS probably the most important financial commitment you will ever make. But with savings rates cut to an all-time low, and pandemic panic causing chaos on the stock markets, there are not many options left which combine prudent risk management with long-term returns. “Some people think pension investing just involves an institutional pension fund, but it doesn’t have to be like that,” says Frazer Fearnhead, chief executive of property-backed peer-to-peer lender The House Crowd. “There are better ways to save for your retirement.” One of these ‘better ways’ involves using The House Crowd’s Innovative Finance ISA (IFISA) as a personal pension pot. According to Fearnhead, IFISAs offer greater flexibility and better liquidity than most pension funds, which means that money can be withdrawn in a timely fashion if required. IFISAs also offer higher target interest rates than cash ISAs, with less volatility than a stocks and shares ISA. The House Crowd’s IFISA product targets seven per cent per annum, but the average actual interest rate it has paid out is 8.71 per cent across all loans. “If you put your money into an IFISA at seven per cent, you get diversification across our autoinvest products, which lessens your risk,” explains Fearnhead. “And if

£600,000

Compound interest

£400,000

Without interest

£200,000 £0

10 15 Years of investment

April and October. This allows investors to reinvest their interest and compound it year after year to maximise their earnings. In fact, Fearnhead has calculated that if an investor put £20,000 per year into an IFISA paying seven per cent per annum, withdrawing the interest payments twice a year, at the end of 20 years they would have amassed £400,000. However, if the same investor reinvested that interest and made no withdrawals, after 20 years their IFISA would be worth almost £1m. “Compound interest is an absolutely critical factor in reaching your long-term investment goals,” says Fearnhead. “I often use the example that if you had a piece of paper and you folded it just 42 times, it would reach all the way to the moon. And that’s the value of compounding. You just have to keep doing the same thing again and again.” However, Fearnhead is adamant that each potential IFISA investor has a good understanding of the risks that come with P2P investing – and more importantly – how to mitigate those risks. “You have to take sensible risk if you want to make returns,” he says. “And there is a risk there, but you can diversify. Lend your money out over a number of different loans – make sure that proper due diligence has been done and I think it’s a very effective way of reaching your pension fund goal.”

IFISA

The ISA transfer window ISA season is upon us and investors have more options than ever before. Emily Perryman investigates the ISA transfer market and the role of the Innovative Finance ISA…

ITH INTEREST rates on cash ISAs persistently low and pronounced volatility in stocks and shares, transferring to an Innovative Finance ISA (IFISA) can be an attractive option for many investors. Although there aren’t official figures on the total number of ISA transfers, data from the Financial Conduct Authority (FCA) shows IFISA subscriptions grew from 5,000 in 2016/17 to 31,000 in 2017/18, with

the amount subscribed increasing from £36m to £290m. Individual peer-to-peer lending platforms say transfers make up a sizeable chunk of the money placed into their IFISAs each year. At Ablrate, around 70 per cent of subscriptions come from ISA transfers with new money making up the remaining 30 per cent. At RateSetter, LendingCrowd and Relendex, transfers make

up between one quarter and one third of subscription value. The types of ISA being transferred into P2P lending platforms vary from one provider to another and are largely driven by investment risk. Ablrate, which sits towards the riskier end of the spectrum, only gets a few transfers from cash ISAs whereas the majority, around 60 per cent, are from stocks and shares ISAs and the remainder from other IFISAs.

IFISA

“I suspect those with cash ISAs are a little more cautious than most,” says Ablrate’s chief executive David Bradley-Ward. RateSetter, on the other hand, says around three quarters of its transfers come from cash ISAs. At LendingCrowd, cash ISAs account for approximately half of the volume

will generally be fairly stable, or fixed, which makes it easier to predict returns. For some investors, this stability is worth the price of potentially higher gains,” he explains. “Of course, for equity, P2P and debt-based securities investments, there is always the risk that investors

“ I suspect many investors will be using an

IFISA as a way of diversifying their portfolio with something truly different from the more traditional ISA options and value of ISA transfers, while stocks and shares ISAs make up around 20 per cent of volume and 40 per cent of value. Best of both worlds The main driver for switching from a cash ISA to an IFISA is the higher interest rates on offer. No cash ISA on the market currently pays more than the rate of inflation, so money held in these accounts is actually falling in value in real terms. Even if a saver locked away their cash for five years, the best available rate of 1.6 per cent lags behind the Consumer Prices Index, which measured 1.8 per cent in January, according to data compiled by LendingCrowd. Stocks and shares ISAs offer the potential for high returns but investors have to be comfortable with the stock market’s volatility, which can sometimes be extreme. Jonathan Minter, senior editor – financial services at Intelligent Partnership, says IFISAs can act as a middle ground between cash ISAs and stocks and shares ISAs. “An IFISA investment’s return

”

could end up with less capital than they put in. I suspect many investors will be using an IFISA as a way of diversifying their portfolio with something truly different from the more traditional ISA options.” Over the last 12 months, investors with portfolio/bond style IFISAs have earned around 5.75 per cent on their money, according to data from Relendex. “In contrast, although not

directly comparable, stocks and shares ISAs experienced a significant period of volatility as world markets fell and those with cash ISAs earned an average of just 0.7 per cent from high street banks,” says Max Lehrain, managing director of Relendex. Transfer considerations IFISAs can represent an attractive way of obtaining an above-inflation yield and smoother returns, but a transfer isn’t something to be taken lightly. First off, investors need to be aware that they can only open one of each type of ISA each tax year. This means they need to be certain the IFISA meets their financial needs and goals and offers enough diversification. If an investor is transferring from a cash ISA, they also need to consider the additional risks involved. “The single biggest consideration for cash ISA investors is risk,” says Justin Modray, co-owner of Candid Financial Advice, an independent financial adviser. “Whilst bank deposits may pay low rates of interest, they are safe, especially when within Financial

IFISA

Services Compensation Scheme (FSCS) limits. However, P2P lending losses are not covered by the FSCS, so if debts turn bad investors could lose money. “Investors also need to take a view on the extent to which P2P lending returns would be hit by an economic downturn and the potential size of losses that could result in a bad case scenario. It’s important to weigh up potential returns with the risks involved.” Once an investor is sure a transfer is right for them, the process itself is fairly straightforward. Investors complete a transfer form provided by the IFISA provider they want to move to, and the transfer should be carried out within 30 days. Neil Faulkner, chief executive and head of research at P2P comparison site 4thWay, says P2P lending platforms are typically doing better than their counterparts in banking and equities when it comes to making transfers easier. “This is probably because most platforms count technology expertise and speed among their selling points,” he says. “Hold-ups typically comes from the other side.” RateSetter and Relendex are both in the process of trying to make transfers more efficient. Relendex claims it is significantly investing in new platform technology with the aim of providing investors with an improved experience. RateSetter says it is going to speed up the process of transferring in a cash ISA and will announce more information in due course. Meanwhile, Bradley-Ward says Ablrate’s transfer-in process is becoming more efficient, however many legacy providers still send cheques rather than carrying out a bank transfer, and this requires

“ There is reason for optimism that the number of transfers into IFISAs will continue to grow”

hard copy paperwork. “The process could be more digital on the whole and we are working towards encouraging this,” he says. One thing investors need to be aware of is that transfers into an IFISA have to be done in cash, which means investments in a stocks and shares ISA must be sold before they can be transferred to the P2P platform. Existing P2P investors can also

transfer their funds into an IFISA, but again this must be done in cash. This means investors have to sell their loan holdings, add the funds to the IFISA and then purchase loan parts within the wrapper. “There is an ‘open market’ requirement which can get frustrating for lenders, many of whom expect the platform to just convert their holdings from their standard account to their IFISA

IFISA

“ After what is likely to be a brief slow down, transfers will pick up and exceed previous years

”

account,” says Bradley-Ward. “Fortunately, we have a very efficient secondary market which makes the process easy – i.e. you can offer your loans from your standard account and buy them with your IFISA account.” Appropriateness tests New regulations implemented by the FCA at the end of 2019 mean most P2P investors can only invest 10 per cent of their overall portfolio into P2P and they must pass an “appropriateness test” set by the platform. Faulkner says appropriateness

tests make it harder for new investors to tap into the IFISA market, but only if they are unwilling to take the time to learn what they are doing. Overall, most industry experts predict a temporary lull in transfers to IFISAs before a significant pick up in the future. “I think that after what is likely to be a brief slow down, transfers will pick up and exceed previous years,” says Faulkner. “As more investors and financial advisers see the stable, solid returns available in P2P lending when investing in a sensibly diversified

portfolio, P2P lending is going to be seen as a sensible place for substantial investment. It will help to better adjust the risk-reward balance of investors’ overall portfolios between safe but dreadfully poorperforming savings versus the more volatile stock market.” Roger Blears, founder and senior partner of law firm RW Blears, believes there will be a lot more transfers into IFISAs in the future because of the fragile nature of banks, which borrow short and lend long. “If, as seems likely, banks reign in their corporate lending for fear that productivity and profits fall because of the coronavirus, then the next financial crisis will not be pinned on sub-prime mortgages but on sub-prime companies which are having their bank facilities withdrawn,” he explains. “This being the case, the opportunity to fund corporate credits with secured IFISA bonds will be attractive to investors.” Others reckon the new regulations have brought increased maturity to the P2P market, which will serve to increase consumer confidence. As Minter says: “In this case, there is reason for optimism that the number of transfers into IFISAs will continue to grow, even if there is a stutter while the impact of recent changes takes effect.”

PROFILE

Always be prepared

Relendex co-founder and chief executive Michael Lynn tells Andrew Saunders why his platform is ready for anything in 2020 and beyond…

HE PEER-TO-PEER lending sector was born out of the aftermath of one crisis – the financial crash of 2008 and the subsequent collapse of traditional bank lending – and now it faces another, in the form of the coronavirus pandemic and the ongoing global economic fallout that is accompanying it. How the industry – often criticised for never having faced the downward part of a full business cycle – will cope with this new challenge is a question that will only be fully answered once the dust has settled on the outbreak. But Michael Lynn (pictured), co-founder and chief executive of housing development loan platform Relendex, says that platforms like his which provide secured loans against tangible assets are best placed to weather trouble. In fact, the fundamental security of the housing sector was what prompted him (along with his partner Max Lehrain) to quit a successful career in traditional financial services to set up Relendex in the first place. “My previous experience told me that as a sector and an asset class, this was the most secure. We consider ourselves to be much better protected than [unsecured] small- and mediumsized enterprise (SME) lending or personal loans,” Lynn says. As a chartered accountant

who spent a chunk of his early career in audit before moving into commercial property, the carefully-spoken Lynn may not fit the stereotypical profile of the iconoclastic fintech entrepreneur.

But his measured approach to business runs right through Relendex’s model. The firm provides development finance typically of between £500,000 and £3m to established regional housebuilders

PROFILE

with a track record of success, largely at fairly modest loan-tovalue (LTV) ratios and with very carefully chosen criteria in mind. “Liquidity is a big thing for us,” he explains. “So we’re always looking at the statistics: how many days does it take to sell a house or flat in a particular area? What’s the year-on-year growth? And what’s the average price there? Because we don’t want to be too far away from the market norms, we don’t want to be judging an area on average prices of £300,000 if we are lending against a £1m house – that wouldn’t be representative.” Although Relendex is a national lender, it is most active in fastgrowing cities such as Liverpool and Manchester and in the outer London commuter belt – Bedford,

“ My previous experience told me that as a sector and an asset class, this was the most secure” Luton, Berkhamsted, parts of Essex and Kent. “We’ve never been London-centric because we’ve always thought the market was frothy and too high,” Lynn says. “There’s quite a lot of foreign capital coming in and inflating the market, and the first capital to take flight when things go wrong is that international money.” Liquidity is also important to Relendex’s retail investors, typically 50-somethings with accrued capital looking for decent risk-adjusted returns. Because although they are prepared to invest for the term of a

loan, circumstances can change and they like to know they can exit a loan early if they need to. “Unforeseen expenditure can come up for all kinds of reasons,” he says, citing the example of one investor who needed to pay for his daughter’s wedding. “If you haven’t got the cash in your bank account, you can’t pay for whatever it is.” The firm has an active secondary market where loan parts can be traded between existing investors. But it also helps the platform to provide diversity to new customers. As Lynn says: “If you are given a

PROFILE

mandate to invest £1m, but you’ve only got two or three loans live on the platform, but you don’t want to be in only two or three loans, you want to be in 20 – that’s where the secondary market comes in.” Relendex’s investors are split fairly evenly between retail, aggregators like fund and wealth managers and pure institutions. Lynn admits that raising retail money is expensive, especially for a platform like Relendex whose coffers are not filled with venture capital or IPO-derived riches to spend on marketing. “It’s a real challenge,” Lynn says. “You can burn money on Google AdWords at an alarming rate, and your conversion will still be poor.” He believes that this is a big part of the reason why platforms like ThinCats have recently decided to go down the institutional only route, but says that while Relendex may seek to increase the proportion of institutional investment over time, it will not be giving up on retail entirely. “I have been involved in investment banking and stock broking, and what they discovered is that you get market feel from your private clients – a sense of where the market is, what the supply and demand is and what rate will fly,” Lynn says. “We get great feedback from our [retail investors] and that’s really important. It helps us improve our proposition all the time.” Since it first opened its doors in 2015, Relendex has lent more than £44m at an average LTV of 60.5 per cent with no crystallised losses and a blended return of 8.37 per cent. Not bad in an era of historically low interest rates, Lynn points out. But to satisfy the varied risk appetites of its investors – and better meet the needs of borrowers – over the past

“ Responsible platforms are doing a good

job and delivering good risk-adjusted returns net of defaults

”

18 months or so it has started to offer both senior and junior debt tranches, a technique borrowed from Lynn’s corporate finance background. “Certain kinds of investors really

want to lend against a property secured at 50 per cent LTV for a coupon of say six per cent to 6.5 per cent,” Lynn explains. “But borrowers might want to borrow at 65 per cent

PROFILE

“ We are still not

fully accepted into the fold of the investment community

”

or even 70 per cent LTV. So we will provide that as a junior piece – it’s still part of the first charge but it ranks behind the senior piece at up to 50 per cent LTV. The coupon on the junior piece is between 8.5 per cent and 10 per cent – it reflects a different risk and that attracts a different type of investor.” When it comes to the impact of the recently-introduced restrictions limiting new investors to a

maximum P2P stake of 10 per cent of their investable wealth, he is not too concerned that this will lead to lower investment coming into the platform. “Rather the reverse in fact,” he says. “If people have been set some parameters they will probably lend up to that, whereas previously they perhaps didn’t know how much of their investable wealth they ought to be putting in.” He also believes that, with the

exception of some obvious bad apples such as collapsed mini-bond provider London Capital & Finance, regulated and responsible alternative lending is increasingly proving its worth. “The responsible platforms are doing a good job and delivering good risk-adjusted returns, net of defaults,” adds Lynn. “There’s enough data now to show that to be the case.” Thanks to this growing track record – and the introduction of the Innovative Finance ISA (IFISA) – Lynn reckons that mainstream acceptance is coming, but it’s not quite there yet. “We are still not fully accepted into the fold of the investment community,” he muses. “One the one hand, the government has allowed P2P IFISAs, but on the other they are still not fully acceptable in the pension space.” This is unfair on the platforms and also denies pension investors access to a valuable asset class, he adds. “With good security and portfolio diversity we should be on a par with stocks and shares,” says Lynn. “Let’s not forget that a stocks and shares ISA can plummet in value, as we have seen in the first months of this year. Whereas we believe that your IFISA, if you have some reasonable spread, will actually protect your capital. That’s the difference.” It’s time to recognise that all P2P products are not the same, he says. His proposed solution is that P2P loan fractions should be recognised as standard tradable assets – at least when those loans are secured and

PROFILE

result in the creation of a new asset that can be independently valued, such as a house. So unsecured personal loans to consumers or small businesses wouldn’t count, but Relendex’s loans to housebuilders would. “We already satisfy the liquidity requirement, because we have a very active secondary market,” Lynn explains. “But a piece of paper is not a recognised security. We don’t enjoy that accreditation, and yet an institution that invests in commercial mortgages can securitise those loans. Where’s the difference between what they are doing and what we are doing?” It’s a battle that is not going to be won overnight, but it is

“ It’s an ideal time for our sector and its ability to grow”

close to Lynn’s heart – don’t be surprised to hear more from him on the subject in future. His other plans for the business? Chasing big lending targets is off the menu, perhaps unsurprisingly after Relendex’s failure last year to hit its £50m goal due to “Brexit uncertainty”. Rather, the secret to success whatever the economic weather in 2020 is to focus on really getting the basics right, he says. “The underlying business is an old fashioned one that is all about hard

underwriting,” says Lynn. “I think it’s an ideal time for our sector and its ability to grow, providing that we stick to our knitting, do the hard work and don’t go out on a limb to chase growth for growth’s sake.” And the P2P model is an intrinsic part of that ethos. “You’ve got to keep it simple and you must never lose the direct link between an investor and a loan,” he says. It’s an approach that should stand Lynn, Relendex – and its investors – in good stead over the uncertain months to come.

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