Peer2Peer Finance News April 2021 by Alternative Credit Investor

IFISA special report

>> 14

MITIGATING RISK

Supported by

How platforms are adapting to the Covid crisis

THE GROWTH OF GREEN FINANCE

>> 20

Abundance’s Bruce Davis talks to P2PFN

>> 8

ISSUE 55 | APRIL 2021

IFISAs maintain their value despite economic uncertainty

e Averag t e g r ta s as of return 021 2 h Marc

8.72 nt per ce s 32 (acros s) nt u o c c a

Average return

INNOVATIVE Finance ISAs (IFISAs) have maintained average returns above eight per cent per annum for the past four years, despite recent economic volatility, exclusive Peer2Peer Finance News research has found. For the 2020/21 tax year, the average target return being offered across 32 IFISA accounts was 8.72 per cent. Due to a lack of historical platform data, just 18 accounts were available for like-for-like analysis across the 12 months of 2020. With this in mind, the average actual return for IFISAs in 2020 was 9.4 per cent. In 2019, the average actual return across 17 IFISA accounts was 8.45

per cent. And in 2018, the average actual return across 16 IFISA accounts was 8.3 per cent. The IFISA was launched in 2016, but delays in regulatory approvals meant that most peer-to-peer lending platforms were unable to offer their own IFISA products until 2017 or 2018. These figures suggest that IFISA investments

have held their value across the past four years, even amid a period of extreme economic uncertainty. Peer2Peer Finance News has counted 38 IFISA accounts which are open to retail investors for the 2020/21 tax year. However, some of these IFISA providers only offer the tax wrapper on individual bond products, which

2020 9.4 per cent (across 18 accounts)

(calendar year)

2019 8.45 per cent (across 17 accounts)

(calendar year)

2018 8.3 per cent (across 16 accounts)

(calendar year)

Source: Peer2Peer Finance News

are subject to availability. This meant that target returns were not available for all IFISA accounts. Among the 32 IFISA accounts which shared target returns with their investors in 2020/21, eight were targeting double-digit returns, up to a maximum value of 16 per cent per year. The lowest target return recorded for the financial year was three per cent. Last month, Peer2Peer Finance News revealed that just 40 per cent of IFISA providers were open to retail investment for the 2020/21 tax year, with big-name providers such as Zopa, Funding Circle and RateSetter missing from the IFISA listings for the first time. Zopa paused new IFISA account openings due to lower demand for personal loans and Funding Circle temporarily paused retail lending while participating in statebacked loan schemes. Meanwhile, RateSetter was acquired by Metro Bank in September >> 4

It has never been more important to keep up to date with the latest peer-to-peer lending news. These are extraordinary times and our team is working hard to keep you informed about how the UK’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 £1.95 a week. Please go to www.p2pfinancenews.co.uk/subscribe to buy a subscription today, so that you can enjoy unlimited digital access to P2PFN, with the option of a monthly print magazine. For more information on subscriptions, including overseas queries, please email tehmeena@p2pfinancenews.co.uk.

EDITOR’S LETTER

Published by Royal Crescent Publishing

Green Park House, 15 Stratton St, Mayfair, London W1J 8LQ info@royalcrescentpublishing.co.uk EDITORIAL Suzie Neuwirth Editor-in-Chief suzie@p2pfinancenews.co.uk Kathryn Gaw Contributing Editor kathryn@p2pfinancenews.co.uk Marc Shoffman Senior Reporter marc@p2pfinancenews.co.uk Michael Lloyd Senior Reporter michael@p2pfinancenews.co.uk PRODUCTION Tim Parker Art Director COMMERCIAL Tehmeena Khan Sales and Marketing Manager tehmeena@p2pfinancenews.co.uk SUBSCRIPTIONS AND DISTRIBUTION tehmeena@p2pfinancenews.co.uk Find our website at www.p2pfinancenews.co.uk Printed by 4-Print Limited ©No part of this publication may be reproduced without written permission from the publishers. Peer2Peer Finance News has been prepared solely for informational purposes, and is not a solicitation of an offer to buy or sell any peer-to-peer finance product, or any other security, product, service or investment. This publication does not purport to contain all relevant information which you may need to take into account before making a decision on any finance or investment matter. The opinions expressed in this publication do not constitute investment advice and independent advice should be sought where appropriate. Neither the information in this publication, nor any opinion contained in this publication constitutes a solicitation or offer to provide any investment advice or service.

ne of the things I love about Peer2Peer Finance News is that it is read by a variety of industry stakeholders, but it can bring editorial challenges as well. Unlike most trade-specific publications, the magazine is read by the industry’s customers as well as the industry itself. While most of the feedback we receive is positive, P2PFN has been criticised by the industry on occasion for being too negative about the P2P sector, while being lambasted by P2P investors and borrowers for failing to hold the industry to account. This critique sometimes falls into what can be called constructive criticism, at other times unconstructive criticism, and sometimes, unfortunately, into trolling. We write many upbeat stories about the sector, but we are certainly more than a press release mill and we produce plenty of analytical features and exclusive news stories. Our aim is to be a credible, independent news outlet for the industry’s stakeholders and that means we must report fairly and accurately. P2PFN is not being unfairly negative or positive in its coverage of the sector, but simply holding up a mirror that wasn’t there before, which we think will help to support the sector as it continues to grow.

SUZIE NEUWIRTH EDITOR-IN-CHIEF

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

NEWS

cont. from page 1 2020 and will no longer accept retail investment. The IFISA market has also been reduced over the past 12 months due to the closure of several platforms. Octopus Choice, Fitzrovia Finance and The House Crowd are just a few of the former IFISA providers which no

longer have a presence in the market, and have therefore not been included in the Peer2Peer Finance News research. However, despite these platform closures, the absence of the former Big Three and ongoing economic uncertainty, dozens of P2P lenders have continued to offer

competitive IFISA products with riskadjusted returns which dwarf the average savings rate and stock market returns. For example, across the whole of 2020, the FTSE All-Share Index lost 12.46 per cent. According to analysis by Moneyfacts, the average cash ISA returns for 2020

were between 0.19 per cent and 1.37 per cent. According to a recent study by P2P analyst 4th Way, a balanced portfolio of all P2P accounts would have returned at least 4.5 per cent to investors in 2020, with most investors earning between five and eight per cent.

New BBB boss was warned about “glass cliff” CATHERINE Lewis La Torre has revealed her friends warned about the risks of women being “set up to fail” in high-profile roles when she took over as interim chief executive at the British Business Bank (BBB). Lewis La Torre (pictured) was named interim head of the state development lender in September 2020, replacing Keith Morgan, and has subsequently been appointed permanent chief executive. She was previously chief executive of British Patient Capital and the BBB’s commercial arm, British Business Investments, having built a career in venture capital and private equity fund management before joining the BBB in 2016. Her friends warned her about the “glass cliff ” analogy, where a woman

is given the impossible job that men do not want to do and is set up to fail. But she does not believe this happened to her. Speaking at a virtual event held by fintech trade body Innovate Finance last month, she revealed that she was called into a meeting with thenbusiness secretary Alok Sharma last year who said it was not the right time to find an external chief executive to replace

Morgan and she was asked to fill the role. This coincided with the BBB rolling out the government’s emergency lending schemes such as coronavirus business interruption loans. “I think he felt I had the right qualities,” she said. “We have continued to grow and introduce new things to the market. “I have managed to keep the ship on an even keel and am still standing.

“I am very happy, it’s been the opportunity of my career to be at the centre of this whirlwind and things that needed to happen. “Long may it continue.” The glass cliff concept, coined by British professors Michelle Ryan and Alexander Haslam from the University of Exeter, argues that women are more likely to achieve leadership roles in periods of crisis when the chance of failure is highest. They suggest that women are better suited to leading stressed or unhappy companies because they are believed to be more nurturing and creative than men. Women will not necessarily improve the situation but they are seen as good people managers who can take the blame for organisational failure, according to research.

NEWS

Collaboration between platforms forecast this year PEER-TO-PEER lending platforms will collaborate more to bring down their costs over the next 12 months, an industry chief executive has predicted. Jatin Ondhia, of property investment platform Shojin Property Partners, said that he expects platforms to work together in areas such as the integration of investors and technology. He used the analogy of a shopping mall, where customers are more likely to visit as they

can access a variety of products, to describe a scenario where P2P platforms would become more integrated and collectively accessible to investors. Rather than “fullblown mergers,” Ondhia feted a number of ways in which platforms could collaborate, including “cross-pollenation of investors” with single sign-on functionalities for multiple websites. He also suggested that platforms could bring together their technology

as it was not as valuable to develop proprietary offerings these days. Secondary trading was another area where Ondhia saw the potential for co-operation, as there is “more liquidity if you

bring it together”. Ondhia also sees the potential for platforms to collaborate on the underlying information given to investors, so that it is possible to compare the risk of projects on different platforms. “Firms need to agree on a standardised definition and risk metrics,” he said. “We’ve started doing this with our European counterparts. We have agreed 25 to 30 factors so that we can measure risk.”

Estonia-based P2P platform mulls UK launch EUROPEAN peer-topeer lending platform Income has attracted nearly €500,000 (£429,171) in investments since launching in January, as it eyes a UK expansion. Estonia-based Income was founded in response to the coronavirus crisis, with a view to creating a transparent and lowerrisk platform that would provide a better experience for investors. Chief executive and cofounder Kimmo Rytkönen is a P2P investor himself, with what he calls a “significant” portfolio. Rytkönen, whose background is in consumer finance, feared he would lose a lot of money during the crisis

and saw an opportunity to launch a P2P platform with an “institutional type of security” to mitigate risk. “Speaking broadly, we noticed the protections in P2P were quite weak and you would think investor interest would be aligned with the marketplace but that seemed not to be the case with the platforms I was operating in,” said Rytkönen. “So then came the idea of, how do we build something in the P2P space where investors can be more secure, to make a better investment experience and to bring a sort of institutional type of security? There’s a certain way that institutions

secure the debt and analyse it.” Income connects both retail and institutional investors with unsecured consumer and business loans from third-party loan originators. The platform has a buyback guarantee to mitigate against late payments with borrowers, as well as skin in the game and a cashflow buffer. If a loan originator cannot meet its payments, Income seizes the loanbook if the default is not fixed and creates a waterfall structure whereby borrower payments go to the platform through special purpose vehicles or a collection company.

It distributes payments to investors first. After investors’ payments are satisfied, the loan originator receives its money. Income also aims to be transparent by fully disclosing how the security and legal structure of the investments work. The platform is currently only open to investors in the European Economic Area (EEA) but it is considering expanding. “We aren’t open to UK investors at the moment, but the UK market is huge for P2P and it’s very interesting,” Rytkönen said. “We will take a look later this year and have plans on opening for global investors.”

JOINT VENTURE

Invest & Fund IFISA set for best ever quarter David Turner, co-founder and head of lender relationships at Invest & Fund, reveals how a deep credit understanding and strong track record has allowed it to grow its IFISA subscriptions

NVEST & FUND EXPECTS the first quarter of 2021 to be its best quarter yet, thanks to strong demand for its Innovative Finance ISA (IFISA). David Turner, co-founder and head of lender relationships at Invest & Fund, says that the firm “had a good, strong month in December” despite minimal marketing of its IFISA products. “We remained very passive with no active promotion over the last year,” says Turner. “So what we've seen over the last year was a steady, positive inflow of IFISA cash. And now we're looking to ramp our activity up.” The success of Invest & Fund’s IFISA owes a lot to the platform’s track record. The lender has never lost any investor capital or interest, and its resale market has remained open throughout the Covid-19 pandemic. The resale market continued to see good demand for its loans which meant that all loans posted went quickly, and that remains the case today. “We've never had anybody not get their cash back within hours,” says Turner. “It might take up to 72 hours. But when any loan inventory went up onto the resale market, it sold. It's an active market.” Turner believes that the popularity of Invest & Fund’s products is down to the platform’s deep fundamental credit approach and robust risk parameters. “Because of our history, a lot of

people will sign up to what we term a mandate,” explains Turner. “And assuming it meets their criteria, then when the loan becomes available, people will get allocated a loan part depending on the amount of money in their account and obviously the oversubscription of that loan at that particular time.” All of Invest & Fund’s IFISAeligible loans have been taken up by lenders and are generally oversubscribed. Turner believes that the platform has benefitted from the consolidation of the IFISA market over the past year, as well as the trust that it has earned from its existing investors. “Credit is very much front and centre of what we do,” says Turner. “It really is part of our DNA and our lenders' money is of the utmost importance to us.” Invest & Fund’s deep creditassessment process is central to its success. As Turner says, it is the reason why the platform’s investors are comfortable with the risk involved and understand the type of

lending on offer. “Our business development managers are our front line, they are highly experienced and intimately understand the needs and demands on developers,” he explains. “Invest & Fund’s speed and responsiveness are a clear differentiator, and they go out and meet every potential borrower face to face. “All applications go through multiple levels of assessment and deep due diligence, the rigour on credit assessment is at the core of our model. “Once that's achieved, we will put it on the platform for lenders to bid on,” he adds. “But because of our track record and history, a lot of lenders are very comfortable that if it's passed through our credit process they will allow us to lend via their mandate.” This process has allowed Invest & Fund’s IFISA investors to earn a minimum gross return of 6.5 per cent, with no losses recorded to date, so it’s no surprise to learn that there has been an increasing number of IFISA enquiries at the platform. “There really has been a positive and steady increase in demand for the IFISA and as other platforms change their models we have been the beneficiary of that, without a doubt,” adds Turner. “If you're a lender looking for good, risk-adjusted returns, low volatility and with a strong asset behind it, we are the ideal place to come to.”

NEWS

Assetz Capital mulls future fund successor scheme ASSETZ Capital will look at taking advantage of the new future fund, which was unveiled in last month’s Budget to replace the original initiative. In his financial statement, Chancellor Rishi Sunak revealed ‘future fund: breakthrough’, a new £375m scheme which will encourage private investors to co-invest with government in high-growth, innovative firms. The initiative will target research and development (R&D) intensive companies seeking a minimum of £20m to support their growth. The scheme is separate to the government’s future

fund, which launched last May but has now closed to applications. Assetz Capital raised £1.5m under the first future fund and chief executive Stuart Law said he will “certainly look” at the future fund: breakthrough. “We're certainly an intense R&D company,” he told Peer2Peer Finance News. “I can see why that is a requirement. So, we have very substantial R&D claims because we have immense R&D, and it is only going to increase this year and next. “And the technology that we're building and planning to build, particularly over the next

couple of years, will finally cement us as a competitor.” The future fund offered convertible loans ranging from £125,000 to £5m from the government, subject to at least equal match funding from private investors, to address the immediate funding challenges that innovative companies faced due to the pandemic. In contrast, future fund: breakthrough has a minimum investment round size of £20m, which is likely to impact which companies utilise the scheme. Lee Birkett, founder of JustUs, which raised £1.2m using the future

fund, suggested that the new scheme might be less applicable for P2P platforms due to the higher minimum investment requirement. “The future fund has worked well for us,” Birkett said. “I thought the new scheme looked good when I thought it was continuing the same terms, but I saw it had a minimum of £20m which is crackers. “Unlike the recovery loan scheme and the coronavirus business interruption loan scheme where it looks to be a continuation, the new future fund looks to be very restrictive and less applicable for P2P platforms.”

Moneybrain prepares for US launch MONEYBRAIN is working on partnering with a regulated entity in the US to help it launch there and in Canada later this year. eMoneyHub is the parent company of peer-to-peer lending platform JustUs and Moneybrain, an app that enables investors to deposit money in different currencies. Moneybrain also allows investors to exchange their funds into its BiPs cryptocurrency, which can be invested in JustUs loans.

Lee Birkett, founder of the group, said that Moneybrain will be the first to launch there initially and is working on partnering with a regulated entity there, after receiving hundreds of downloads of the Moneybrain app. He said he was pleased the Securities and Exchange Commission has proposed to raise the crowdfunding limit in the US from $1m to as much as $5m. “There’s a limit on

how much firms can crowdraise,” Birkett said. “In the UK the maximum is £5m, while the US has a very small crowdfunding market, but

this is set to be opened up from $1m to $5m. “We’ve had hundreds of people download the Moneybrain app but we can’t deal with them, we need to set up in the US first. “We’re working on partnering with a regulated entity. It’s subject to local regulations. Initially it’ll be for BiPs, the cryptocurrency and then the sale of that gets lent on the JustUs platform. It’s a massive market.”

IFISA

Innovation in the IFISA transfer window Platforms are deploying a range of tactics to attract IFISA transfers during the Euros-esque ISA season. Michael Lloyd reports…

E'RE HEADING towards the end of the tax year, which means one thing – it's ISA season. For peer-to-peer lending platforms, this is the time to promote and receive transfer-ins for their Innovative Finance ISAs (IFISAs) and find out who will be crowned the year’s IFISA champion. In many ways, ISA season is the P2P version of the European

Championships. After a long year featuring transfers of players among football clubs and IFISA money among platforms, now is the time for the short and sweet, terrific tournament. Platforms are deploying tactical innovations in the IFISA market, as exciting and varied as the skills of football players representing their countries. And similar to the Euros this summer, platforms are competing

against each other – only for IFISA money rather than a trophy. Like the heavyweights of the Euros – France, Belgium, and (dare I say it) England – the IFISA market has its own established leaders. For years, RateSetter was at the top of the table, but following its acquisition by Metro Bank last year, it has lost its spot. Instead, Assetz Capital is the favourite to win the most IFISA funds this

IFISA

year, boosted by the significant transfer-ins that it has received from RateSetter. For investors, the focus this ISA season will be on the most attractive

opportunities available in the P2P market, as the Covid-19 crisis looks to be nearing an end thanks to the vaccination roll-out. Some platforms are looking to make changes to attract more IFISA money, deploying tactics such as extending their tax wrapper to cover more products, offering cashback incentives or embarking on affiliate marketing. Kuflink has been digitalising its IFISA transfer-in sign-up process and segregating the IFISA and selfinvested personal pension wallets. In March, Narinder Khattoare, chief executive of Kuflink, told Peer2Peer Finance News that the platform was looking at implementing the tax wrapper on some of its manual, select invest deals in a few weeks’ time. “It’s something we’ll be offering shortly after some lenders asked for it,” he says. “The key thing for us is to have that wrapper around individual deals on the select invest side after investors have been asking for it and having more deals available for people in the IFISA. “We average about 18 to 20 deals monthly and we’re very active on what we want to offer.” Similarly, Simple Crowdfunding is conducting an internal review

in which it is looking at extending its IFISA product range and is also “currently exploring new IFISA opportunities”. “We’re working on things, but we can’t talk about them yet,” says Atuksha Poonwassie, managing director of Simple Crowdfunding. “Ultimately the priority is the

“ We’re certainly seeing substantial influxes of ISA money

”

business operating and doing what it needs to do. There are still plans, things are taking a bit longer because the market is still a little weird.” Elsewhere, Rebuildingsociety is undergoing an affiliate marketing programme with other websites to generate referrals to the platform’s IFISA, and Unbolted is offering a £50 cashback incentive on £1,000 invested through the ISA account with its sister company OnStep Homes. JustUs is planning on launching P2P residential owner-occupied mortgages called the People’s Mortgage, which will be IFISA

Earn up to 4.1% p.a. target interest tax-free with our peer-to-peer lending IFISA.

Capital at Risk. No FSCS. 0800 470 0430 assetzcapital.co.uk/invest

IFISA

eligible, once it has secured the relevant permissions. Meanwhile, sister company Moneybrain is soon launching an auto-invest simplified IFISA. Lee Birkett, founder of eMoneyHub – the parent firm of both JustUs and Moneybrain – says that he hoped to have launched this simplified IFISA in February but was busy with the group’s future fund and Crowdcube fundraising campaigns, but plans to launch it soon. However, other P2P platforms have indicated that they will not be changing their approach to promoting their IFISAs this year. This is for a range of reasons, such as being busy elsewhere or preferring not to make major changes amid economic uncertainty. And some platforms are simply satisfied with their current offering. New research from Peer2Peer Finance News found that the average target return for IFISAs in

“ We saw a large transfer-out of cash ISAs previously but now we’re seeing a trend of IFISA transfers in

March 2021 was a healthy 8.72 per cent. According to our research, the average IFISA return for 2020 was 9.04 per cent, while 2019 saw average returns of 8.45 per cent and 8.3 per cent in 2018. This proves that IFISA investments have been able to hold their value, despite unprecedented economic volatility. No wonder some platforms are in no rush to make changes. LandlordInvest is one of these platforms that is happy with its current offering, with chief executive Filip Karadaghi highlighting that transformation does not take centre stage during uncertain periods. “We did not prioritise the

”

innovation in the ISA product and as such we are happy with our current offering,” he says. “It’s an uncertain environment and although innovation is not at the forefront, it’s marinating the core functions.” It should be noted that a handful of the biggest IFISA providers are out of action this year. These include: Zopa, which has closed to new IFISA sign-ups and has fewer loans currently, Octopus Choice, which has permanently closed, The House Crowd, which entered into administration and Funding Circle and LendingCrowd, which have both temporarily paused retail lending while lending under the

IFISA

coronavirus business interruption loan scheme. Furthermore, one of the largest IFISA providers – RateSetter – closed to retail investment following its Metro Bank acquisition and the sale of its P2P portfolio to the bank. This has left hundreds of millions of pounds of IFISA money up for grabs, with Assetz Capital and Folk2Folk just two of the beneficiaries of RateSetter transfers. Folk2Folk has seen 65 per cent of its existing ISA customers coming from transfers-in, including investors from RateSetter, while Assetz Capital has reported that almost 60 per cent of its March transfers came from RateSetter. “We’re certainly seeing substantial influxes of ISA money from RateSetter and the other two of the big players, Funding Circle and Zopa,” says Stuart Law, chief executive of Assetz Capital. But he added that the platform may have to “put the gates up at some point and limit investment coming in” if demand outstrips supply. Meanwhile, Karadaghi says that LandlordInvest has seen an increase in IFISA inflows recently from other P2P platforms and a few building societies, which shows increased risk willingness. “The growth is still there,” he says.

“ The growth is still there”

“We saw a large transfer-out of cash ISAs previously but now we’re seeing a small trend of IFISA transfers in, showing that lenders are potentially prepared to take more risk.” In the 2021/22 financial year, several more IFISA launches are expected, demonstrating that there is room for growth in the IFISA market. Peer2Peer Finance News understands that FutureBricks will

launch its IFISA later this year, while Plend has also indicated that it will launch an IFISA before the end of 2021. In the meantime, platforms are focused on boosting their transfers, retaining their investors and innovating where possible to ensure that their IFISA offerings remain attractive to retail investors. Platforms are hoping that – like the Euro 2020 tournament – the 2021 ISA season will make up for lost time and spark interest from investors after a challenging year.

Earn up to 4.1% p.a. target interest tax-free with our peer-to-peer lending IFISA.

Capital at Risk. No FSCS. 0800 470 0430 assetzcapital.co.uk/invest

The home of peer-to-peer lending. Earn up to 4.1% p.a. target interest tax-free with our IFISA. Capital at Risk This tax year (2020/21) you can invest up to £20,000 into an ISA, protecting your income from tax, both now and in the future. Our Innovative Finance ISA (IFISA) is an investment that gives you the opportunity to lend to UK businesses, whilst earning fairer rates of interest tax-free.

Fairer growth for all. 0800 470 0430 assetzcapital.co.uk/invest As with most forms of investment, peer-to-peer lending carries a degree of risk to your capital; in this case, if the borrower is unable to repay their loan. At Assetz Capital, we seek to reduce this risk to our investors by taking asset security on every loan. Investment Account target interest rates should be considered along with the relevant Investment Account expected defaults & losses information. Past performance does not guarantee future performance. Investment in peer-to-peer loans is not protected by the Financial Services Compensation Scheme. We recommend that prospective lenders read the Key Investor Information pages before investing. Assetz SME Capital Limited is a company registered in England and Wales with company number 08007287. Assetz SME Capital Ltd is authorised and regulated by the Financial Conduct Authority (Reg No: 724996). ’Assetz Capital’ is a trading name of Assetz SME Capital Ltd. Assetz SME Capital is registered with the Office of the Information Commissioner (Reg No: Z3338899) for data protection purposes.

JOINT VENTURE

Assetz claims IFISA crown after challenging year Assetz Capital’s chief executive Stuart Law and director of investor relationships Martin Heelam, explain how Assetz became the biggest IFISA provider in the UK open to new investment during a particularly turbulent year

SSETZ CAPITAL IS the largest peer-to-peer lending Innovative Finance ISA (IFISA) provider open to new investment in the UK for the tax year 2020/21, despite the many challenges of Covid-19. Just over a year ago, the platform was grappling with a global economic shutdown, a spike in withdrawal requests, and a community of concerned borrowers. It implemented a host of new measures designed to protect investors and help borrowers, and 12 months later chief executive Stuart Law (pictured) believes that the company is in prime position to be a “future winner”. “We weren't without challenges,” says Law. “There weren't many businesses that sailed through the pandemic without any turmoil. We had turmoil in adapting to the new environment, but we have adapted to it well, and quickly. I think people can see that we're clearly one of the future winners.” Although withdrawals slowed and stopped very abruptly in March 2020, Law had anticipated this type of scenario, although nobody could have predicted the precise timing. As a result, the accounts “did exactly what our disclosures said they would do if normal market conditions ceased, which they did for a year,” he says. “They became illiquid for a period, but continued to pay healthy returns to investors,” Law adds. In fact, Assetz has continued to

pay an average of approximately four per cent in interest (net of fees) to its investors over the course of the year. “Whilst past performance does not guarantee future performance, we are pleased with the returns paid to investors during this difficult period and the overall management of the loanbook,” says Law. In response to the pandemic and the first national lockdown, Assetz paused new lending through its manual lending accounts and access accounts, added a temporary lender fee, and introduced a queue for investors seeking to withdraw their cash. This meant that lenders saw a slight reduction in their returns. “Our target interest rates have come down, but that's the right thing to do to then help bolster the provision fund,” he says. “Rates are still healthy in a lowinterest environment and that's attracting people.” The current lender fee is to be

lifted by June, and Law says that the withdrawal queue should also disappear within the coming months, with well over £100m of cash now delivered on withdrawals in the last year. “We expect investors will see liquidity return, hopefully very soon into the new tax year,” Law says. “We've been through what has been a very testing time in a number of different ways. “But what we have seen during the 12 months of Covid is that our IFISA and its returns have remained robust.” Assetz has certainly benefitted from a surge of transfers from other IFISA providers this year, as many of the big lenders have paused their retail offerings indefinitely. “We’ve seen a dramatic increase in transfers and new openings versus what we've seen over the previous year,” says Martin Heelam, director of investor relationships at Assetz Capital. “The bulk of those transfers seem to be from other IFISA providers.” With £100m of IFISA investments, Law is confident that Assetz can build on this success as it continues to scale its business. Within the next few years, Assetz plans to initiate a public listing, and position itself as a real competitor to challenger banks, without actually becoming a bank itself. Funding around one in 12 of all small housebuilder new homes in the UK in 2018 and 2019 is “just the beginning”, says Law.

RISK MITIGATION

Managing risk during the Covid storm Platforms are innovating and adapting in order to survive the current crisis. Michael Lloyd asks how risk mitigation has evolved during the pandemic

HE PEER-TO-PEER lending sector is facing choppy waters after a year of the ongoing storm that is the Covid-19 crisis. Platforms’ risk mitigation has been put to the test like never before, as the sector has weathered its first downturn. And while there have been some failures, there have also been many examples of P2P lenders adapting successfully to current conditions. Now, as we enter what is hopefully the last phase of the coronavirus pandemic, innovation is returning. Luckily, this is one of the things that the sector is best known for. Many platforms have been lending more cautiously during the crisis, but now they are developing new

tools and processes to improve their risk mitigation. P2P property lending platform FutureBricks has placed its focus on the accuracy of the information used to assess risk. With this in mind, the platform introduced a loan risk categorisation scoring system in February this year. “FutureBricks’ processes now validate the quality of data used at input and risk assessment output to ensure risk is fully understood and handled appropriately,” says Arya Taware, managing director of FutureBricks. “FutureBricks is currently using a number of new and innovative software models throughout our underwriting and loan management functions which considerably help

the speed and accuracy of the assessment process.” Similarly, asset-backed P2P lending platform Ablrate is developing a risk score for its investors. David Bradley-Ward, chief executive of the platform, says the system will look at an investor’s portfolio of loans and give them a score out of 100 as well as tips on how to improve their score in the future. “If you have £100,000 on the platform and one loan paying 15 per cent, that’s not diversified and is risky, so you’d get a low score,” he says. “If the score’s below 30, it’d say ‘you’re in the risky band and might want to diversify and this is how you do it, go onto the secondary market

RISK MITIGATION

and buy other loans’. The more diversification, the higher the score. “And if a business you have a loan for is asset-backed it may have a high score.” Atuksha Poonwassie, managing director of property investment platform Simple Crowdfunding, views this as an interesting concept but suggests that it could be challenging to implement because investor profiles are so different. She says her platform is currently conducting an internal review into risk mitigation to see if there are any improvements it can make. “It’s good practice to do a review every so often anyway so it makes sense to do that for our business to help further mitigate risk if there are viable points to consider,” Poonwassie says. “We do an internal review every so often to look at policies and procedures and at the moment part

of that is looking at risk mitigation and credit list segments.” Some platforms are using technology to streamline their processes, which can benefit their risk mitigation.

says Stuart Law, chief executive of Assetz Capital. “You want it faster and slicker and driving risk out of the system by improving your processes.” As well as developing new

“ We are always vigilant to changes in borrower circumstance and the external environment, but even more so now

Peer2Peer Finance News knows of one platform working on implementing a new technology system to improve efficiency. Meanwhile, Assetz Capital is currently undergoing major improvements to its processes, by implementing system enhancements to streamline its bridging loans. “Streamlining can help with risk mitigation or make it worse,”

”

technology, P2P platforms are well known for using software and APIs which have risk mitigation systems already in place, some of which are powered by open banking. The data-sharing initiative is hugely beneficial for risk mitigation. Using open banking to view transactions in real-time, rather than uploading pdf documents of bank statements, reduces the risk

RISK MITIGATION

of fraud and gives lenders a more accurate picture of the affordability of borrowers. But despite these benefits, only a handful of P2P platforms are currently using open banking. These include, but are not limited to, ArchOver, Lending Works, Leap Lending – which launched at the start of last year with the requirement of only lending to borrowers that use open banking – and Rebuildingsociety, which implemented the data sharing initiative for itself and its appointed representatives during 2020. “TrueLayer’s open banking is working well for us, people can deposit money onto the platform using open banking,” says Daniel Rajkumar, managing director of Rebuildingsociety. “It gives confirmation of the payee and we get direct access to bank statements when we used to rely on people uploading pdfs. Now it’s bank-to-bank which is more reliable and the confirmation of payees works well to mitigate fraud.” It’s worth noting that technology can aid risk mitigation, but this needs to be underpinned by manual work and processes, such as quality underwriting. These have certainly been tested during the tempest of Covid-19. Rising default rates and increased investor redemption requests have served as thunder and lightning to the sector, forcing platforms to adapt and get their houses in order. As a result, the majority of platforms have become more cautious and risk adverse, tightening their lending. Although it differs from platform to platform, by and large they have been reviewing their processes and keeping in regular contact with

“ It’s good practice to do a review every so often

”

borrowers to ask how Covid has affected them and whether they have taken government support, while steering clear of riskier sectors such as the hospitality and leisure industries. On the investor front, platforms are regularly updating lenders on projects and what they are doing. As a result of the pandemic, Folk2Folk has made some adjustments to its sector appetite, application forms and portfolio review.

“Changes include having a new stage in our application review where we include information about how Covid has impacted any potential borrower,” says Roy Warren, managing director of Folk2Folk. “If necessary, this may lead us to limit the loan-to-value on any borrowing we agree to proceed with. We are always vigilant to changes in borrower circumstance and the external environment, but even more so now.” However, there is some disparity between platforms’ approaches to changing risks, with some undergoing lots of changes and others making no changes at all. Money&Co was already ensuring it had proper security on its loans

RISK MITIGATION

“ Platforms need to take a quite serious

concerted effort to understand and mitigate risks for customers and give information to them to make informed decisions on it

during 2019 and its approach has remained the same since, as chief executive Nicola Horlick was already concerned about the UK economy due to Brexit. Furthermore, while Simple Crowdfunding has been asking investors and borrowers if their circumstances have changed, its core risk mitigation has remained the same due to downvaluations. “We do first charge lending on P2P loans based on current values and the valuation reports are already cautious,” says Poonwassie. “The valuations themselves have come down during Covid so that work has already been done. Downvaluations are not generally a good thing for us but take into consideration market conditions.”

Rajkumar says that as a principal platform, Rebuildingsociety has made significant efforts to improve the framework it operates within, in light of onboarding appointed representatives. He adds that P2P lending is a sector that aligns risk and reward for investors, so the platform provides information to lenders to make educated judgements on investing. “Platforms need to make a serious, concerted effort to understand and mitigate risks for customers and give information to them to make informed decisions,” he says. “Rebuildingsociety has always been a conduit platform airing on the side of providing more information and this has worked well for those that understand the risks and for those that don’t, the appropriateness test is there. “During Covid there’s significantly more risk and appropriate investors take the time and care to understand the macroeconomic climate.” As Rajkumar says, during Covid there are more factors that platforms have to consider, which in turn introduces further risk. Platforms and industry stakeholders clash on the topic of whether the sector’s risk management is currently fit for purpose. Some point to the obvious recent examples of The House Crowd entering into administration and the permanent closure

”

of Octopus Choice, and say improvement is needed. One thing is for certain, platforms are improving and at the end of the pandemic, the survivors will have demonstrated their successful risk mitigation during the sector’s first economic downturn. “We’re in a scenario we did not directly envisage,” says Mark Turner, managing director, regulatory consulting at business advisory firm Duff & Phelps. “There are a number of risks platforms are having to deal with at the moment. Financial risk to their businesses may have been impacted by the sudden change of environment. Firms have had to take action in terms of risk oversight and mitigation. “Lots of the firms I talk to in the sector are keeping on top of things, a number I talk to have been able to demonstrate their business model has been resilient and fit for purpose. “For those firms coming out of the other side of this crisis in a good state, it definitely is a demonstration that their business is strong.” P2P platforms have faced their biggest-ever challenge over the past 12 months and have had to innovate and adapt to address unprecedented risks. It is vital that these platforms stay ahead of the curve and continue to prioritise their risk mitigation processes as the storm starts to show signs of abating.

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.

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PROMOTED CONTENT

Why IFISAs should contribute to your personal investment strategy The peer-to-peer lending tax wrapper is one of the best opportunities for investors seeking capital growth in the current market, as Kuflink chief executive Narinder Khattoare explains

WOULD START BY saying that if any readers are completely risk averse, I would recommend that they skip to other reading material, as I don’t want to waste their time. Hopefully, the majority will stay with me as they recognise that in this low interest deposit environment, the twin goals of investing in any meaningful way, as far as decent returns are concerned, while having an absolute guarantee of capital safety, are incompatible. So, let’s look at one of the alternatives available which offers investors a real opportunity for capital growth. An Innovative Finance ISA (IFISA), invested in the peer-to-peer lending sector, benefits not only from an opportunity to generate real growth but also taxfree earnings on interest that do not count towards your Personal Savings Allowance. But let us be clear, investors must understand that the capital placed in an IFISA is not covered by the Financial Services Compensation Scheme (FSCS) so there is an element of risk. Depending on the underlying security, IFISA investments can be said to sit somewhere between cash and stocks and shares in terms of the risk involved. However, the IFISA can be a worthwhile addition to your

portfolio for several reasons. Although there is some risk of capital loss if the borrower fails to pay or there are lower-than-forecast returns, the Kuflink IFISA invests in property, a sector in which Kuflink has a stellar track record. Since we launched our P2P offering, no investor has lost a penny of capital. Furthermore, unlike stocks and shares, IFISAs tend not to suffer daily fluctuations in value. In our case, we spread your investment, and your risk, across a portfolio of property-backed loans and provide you with a rate of interest in relation to the term that you choose. Our IFISA offers the ability to diversify your funds across multiple,

property-secured loans. In general, IFISAs can offer a dependable, decent return over a fixed period. In this continuing low interest rate environment, IFISAs generally offer benefits such as interest payments, but at a rate that unlike cash, typically beats inflation. In our case, we are currently offering deals returning up to seven per cent per annum depending on the term chosen to invest. In the interests of balance, I will point out that P2P is still a relative newcomer as an investment medium and there have been failures. However, investing with us where the due diligence we do on applicants for loans and the property being used as security means that they are thoroughly checked, has led to the ‘no loss’ success record we have achieved since we launched. The simple fact is that if you are looking for a return better than cash deposits, you are going to have to look further afield. There is an old saying that applies to investing and that is not to put all your eggs in one basket. Spread your money around and take advice, but also study the investment options for yourself so that you can decide on the best plan for you. IFISAs can play an important role as part of a balanced portfolio.

PROFILE

The future is green

Abundance Investment’s Bruce Davis tells Marc Shoffman how a shift in government thinking will support the growth of green finance this year

ROWD BONDS platform Abundance Investment has been among the loudest voices in green finance in recent years. Its platform has let investors fund a range of renewable energy projects and it has helped to pioneer community municipal investments, which enable councils to fund local renewable projects. Now its managing director Bruce Davis says the government and financial services are finally understanding its importance. The government already has a target of net zero carbon emissions by 2050 but the Budget last month outlined how financial services can get involved. The Budget document, which outlines how the government will balance the nation’s finances, may be known as the red book but the document was rather green this year. It outlined plans for a new green savings bond and also altered the remit of the Bank of England’s monetary policy committee “to reflect the importance of environmental sustainability and the transition to net zero.” Davis explains why this shift, as well as the government’s green bonds plan, will help the Abundance platform and the economy hit net zero. Marc Shoffman: What difference will the extra Bank of England responsibilities make?

Bruce Davis: It’s a big deal from a monetary perspective. It is a structural change to the financial system. Until now, the position of the Bank was that it was neutral on environmental issues and considered them a political issue. They previously saw climate change as a material financial risk but not actively in terms of an alignment with the government’s net zero target. MS: How will the new Bank of England powers help green finance? BD: Now it will be proactive in shifting the financial system. Which means everything from banks and pension funds to crowd bonds will have a responsibility to make sure the financial system is contributing to net zero. Money is no longer neutral on

the climate and green finance is just finance. The Bank can have a bias towards green bonds and away from brown. For example, it could be harder for fossil fuel companies to raise funds. The Bank of England is the prudential regulator of big purchasers of corporate bonds and could require banks to report on their environmental exposure. It can tell pension funds and banks that they should invest in green opportunities and regulated firms will have to report on how they are meeting net zero targets. This will affect the risk weighting of certain assets. I wouldn’t be surprised if other banks follow suit. MS: Why have attitudes to the climate shifted? BD: It has been a slow process. The green finance strategy was presented

PROFILE

by the Treasury in 2018 and we made similar recommendations to this. It has taken a process of two years to get the Treasury machine to look carefully and consider it as a policy. It’s a lot of hard work from pretty committed civil servants behind the scenes who were driving the green finance strategy. The shift has also been helped to some extent by lobbying from groups such as a ourselves and well-argued economic papers. MS: What has been holding green finance back? BD: Finance does not do new things very willingly, there are always risks of unintended consequences. The balance has shifted when there was a clear economic argument and opportunity with the pandemic to hit the reset button. The economy has to be built back. It is an unusual recession in that it is deliberate. That offers opportunities as you build back up to do things you haven’t previously considered. From a political perspective, polling shows 80 to 90 per cent want action taken on the climate. We are not dealing with 52 per cents.

MS: What difference will government-backed green bonds make? BD: The green sovereign bonds are great news. There are two elements to it. There is a green gilt which is £15bn of issuance and there will also be a National Savings and Investments product as a savings version. From a green bond market point of view, a sovereign bond is an important marker that green investment is now mainstream. It gives out a strong signal for other structures such as Abundance’s community municipal investments (CMIs). We will do more CMIs off the back of this. We are talking to five or six local authorities at the moment about launching CMIs. I don’t know how many will come out this year. Covid is their priority right now and that is the only reason we haven’t had more. MS: What involvement has Abundance had with the government’s green strategy? BD: We have had meetings with the

Treasury and put forward the case that green gilts should be accessible to retail investors. There was a lot of interest in how that may work and what it will mean. We will see if it has any benefits to crowdfunding structures. MS: How realistic is the government’s net zero target? BD: It is realistic in the sense that it is necessary. It is really about whether we can do it earlier. The sooner the better with carbon budgets. The big challenges we have are the heating of people’s homes, supply and transport. We have to continue the trends on energy generation. We don’t have the same momentum when it comes to transport and heat. We are waiting for the government to publish its strategy to give an indication of what it prefers as heat sources. There is a really polarised debate going on around how we heat our homes. We look at all projects based on their merit but it affects what we look at in the pipeline.

HOW THE BUDGET IS MAKING FINANCE GREEN The 2021 Budget had two main green recommendations. The Bank of England’s monetary policy committee (MPC) was given a new remit to consider climate change in its decision making. “The chancellor is responsible for setting the MPC’s remit in the Budget,” the document said. “The chancellor reaffirms the symmetric inflation target of two per cent for the 12-month increase in the consumer price index measure of inflation.

“This target applies at all times. Within the remit, the description of the government’s economic policy has been updated to reflect the importance of environmental sustainability and the transition to net zero.” The Treasury also said it would issue its first sovereign green bond – or green gilt – this summer, with a further issuance to follow later in 2021 as the UK looks to build out a ‘green curve’. It will help fund state-backed green projects.

A green gilt framework will be published in June and the government will look to raise a minimum of £15bn. The government said it would report the contributions of green gilt spending towards social benefits such as job creation and levelling up. Savers will be able to access a green retail National Savings and Investment (NS&I) product this summer. It will give all UK savers the opportunity to earn interest while supporting projects that tackle climate change.

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