Peer2Peer Finance News Magazine April 2022

>> 7

NEW KID ON THE BLOCK

How the UKCFA's P2P body stacks up

MIGHTY OVERSIGHT

>> 10

Is the sector overregulated?

Innovate Finance chief Janine Hirt on the “huge opportunity” for UK fintechs >> 16

ISSUE 67 | APRIL 2022

P2P bosses optimistic after FCA roundtables THE CITY watchdog has stepped up its engagement with the peer-to-peer lending industry, raising hopes about the regulatory direction of travel.

Stakeholders present at roundtables hosted by the Financial Conduct Authority (FCA) heralded the “unprecedented access” to senior figures at the regulator, at a time when the P2P sector is grappling with contentious proposals for strengthening financial promotion rules.

The FCA met with P2P platform chief executives and industry trade bodies such as the 36H Group and the UK Crowdfunding Association (UKCFA), to gain feedback on its

proposals, which could result in tougher restrictions on the P2P sector.

“It’s a positive step they’re doing it,” said Bruce Davis, co-founder of crowd bonds platform Abundance and director of the UKCFA, who

was present at a roundtable event.

“We submitted quite a lengthy response to the FCA’s discussion paper, and they cited some of that in the consultation, but they also saw some value in having

conversations with the industry about the changes to understand what’s behind what we’re saying.

“I think the industry made its point. There were a lot of strong opinions being expressed by >> 4

Regulation played a part in Funding Circle’s P2P exit FUNDING Circle UK chief executive Lisa Jacobs has claimed regulation played a part in the decision to leave the peerto-peer lending sector.

Last month, Funding Circle permanently

closed down its retail P2P lending platform, two years since pausing retail activity while focusing on government lending schemes during the pandemic and almost 12 years since its launch.

Jacobs said it was “sad” the platform had moved away from its P2P roots but put the decision down to a combination of reasons including regulation and the evolution of the industry.

She said she couldn’t say “one way or the other” whether Funding Circle would have exited from retail P2P lending if the FCA were kinder to the sector and emphasised the platform >> 4

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EDITOR’S LETTER

03

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.

I

was excited to hear about the launch of the new peer-to-peer lending group last month.

The industry certainly needs to do more to propel itself into the mainstream and a cohesive voice would be helpful.

The new 36H Group is a sub-group of the UK Crowdfunding Association (UKCFA), which has already shown that it can lobby on behalf of the wider P2P and crowdfunding industry, so I’m optimistic that it can do the same in a dedicated P2P capacity.

Having said that, P2P organisations have had a rocky ride to date. The Peer-to-Peer Finance Association was extremely poorly managed after the departure of Christine Farnish and completely ineffective.

Innovate Finance’s 36H Group is promising but the majority of its members have now left the P2P space, raising questions about its future.

It would be great to see a P2P body that genuinely represents the whole industry, incorporating platforms of different sectors and sizes. Let’s see if the UKCFA’s group can manage it.

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.

04

NEWS

cont. from top of page 1 the industry about the changes.

“We’ve had unprecedented access to the people that are writing the policy. They have definitely been listening and have been willing to answer questions even when they are sometimes difficult.”

P2P business lender Folk2Folk was also present at a roundtable event and welcomed the “candid discussion” with the regulator.

“People were very open in the meeting and saying what they thought, that has to be positive thing,” a spokesperson said.

“I think it’s good to have candid discussion about what’s happening with the sector.

“It was a really informative meeting with some interesting discussions centred around the FCA’s definition of high-risk categories and finding out platforms’ feedback on changing risk warnings and appropriateness tests.

“What will be interesting is what they do with the feedback,” the spokesperson added. “Off the back of this there’s a paper the platforms fill in with their feedback on everything the FCA is talking about. There’s some things we agree with, some we don’t have a view on and some things we don’t agree on. It’ll be interesting to see what happens next.”

The City watchdog published its consultation on high-risk investments in January which proposed to ban the promotion of investor incentives, such as new joiner or refera-friend bonuses, to improve risk warnings on ads and to strengthen appropriateness tests, for example by removing the ease of retakes.

The consultation closed for feedback on 23 March and the FCA plans to confirm its final rules this summer.

The FCA has previously listened to industry feedback, citing UKCFA research in its consultation paper that

showed that investors have a good understanding of the sector, and shelving a proposed marketing ban on P2P development loans for now.

“As part of stakeholder engagement on our consultation to strengthen financial promotion rules for high-risk investments, we hosted roundtable discussions for relevant trade bodies, consumer groups and firms,” said an FCA spokesperson.

“We’re thankful to the attendees for their engagement on this important topic, and we hope to continue this constructive industry engagement as our work progresses.”

not been open to retail investment. Over that period about 80 per cent of the portfolio

have paid down, there’s been regular borrower repayments and it’s now just a small portion of our loans under management, less than five per cent.

“That combined with the fact the industry changed and the regulation has changed.

With all those things coming together, we thought it was a natural moment to retire the product, and we’ll continue to service the book for our investors.”

For more on regulation, read our feature on page 10.

cont. from bottom of page 1 has always supported regulation that protects customers.

“This is where we started as a business,” Jacobs (pictured) said.

“Over that period, we’ve had a great product that’s delivered a four per cent return to investors. It wasn’t one single reason.

“We paused retail two years ago when we started to lend through the government loan schemes because retail couldn’t participate, and we wanted to focus on the government schemes and those schemes ended up lasting

a lot longer than anyone expected at that stage.

“Now it’s been two years in which we’ve

NEWS

05

Innovate finance chief sees ‘data led’ future for P2P INNOVATE Finance chief Janine Hirt is predicting a more ‘data led’ future for peer-to-peer lenders.

Speaking exclusively to Peer2Peer Finance News, Hirt (pictured) said the sector is entering into a new chapter.

Her comments came before Funding Circle announced its exit from retail P2P lending but acknowledged Zopa’s shift to banking and the acquisition of RateSetter

by Metro Bank.

“In many ways P2P lending was essentially one of the original fintech sectors and blazed the trail for others,” she said.

“The idea of matching lenders and borrowers was unique and reflected the ethos of putting the

consumer at the centre and to create a more attractive proposition.

We have seen some great successes.

“Right now, it feels like we are in an environment where it is a new chapter for P2P lending. There are areas where we are seeing a shift or pivot.

“Now we are seeing

a trend that it is about the data.

“The concept of matching borrowers and lenders maybe isn’t as fresh as when P2P first started out. What is fresh now is how we are utilising more personal data such as open banking and risk assessment.”

She highlighted P2P

property lending as a key growth area for the sector.

Hirt added that the fintech trade body and its P2P-focused 36H Group offshoot have been collating data on industry returns, which show strong performance over the past decade.

“Our research estimates that the loss rate from P2P lending over 10 years is about five per cent while the average platform returns as a whole have been very positive at roughly six to seven per cent,” she said.

“Some platforms have had zero losses.

“We are still considering whether to put out a full report detailing this.”

Read the full interview with Hirt on page 16.

JustUs boss says fintechs could have prevented huge amount of BBLS fraud JUSTUS chief executive Lee Birkett has said that the government could have prevented a substantial amount of bounce back loan fraud by using fintechs to deploy the scheme.

He said that fintechs, including peer-to-peer lending platforms, would have delivered the bounce back loan scheme (BBLS) better by conducting faster, more accurate checks.

“Fintechs were the perfect vehicle for fraud prevention,” he said. “Every

borrower, every director would have been checked.

“Tools were available, it’s just with archaic banks it didn’t happen.

A large percentage of the fraud would have been because of the decisions made by government on who should distribute the BBLS. “It was absolutely staggering. If they’d have done what we requested to get money from efficient platforms, fraud checks would have been

done automatically. We have the technology to do that, the banks didn’t.”

His comments come after Lord Agnew of Oulton, who stepped down as Treasury and Cabinet Office minister in January, told a Treasury select committee of MPs in March that quick checks could and should have been implemented at the time to reduce the possibility of Covid loan fraud.

The BBLS was

introduced in May 2020 to help microbusinesses impacted by the pandemic. The government underwrote the full value of the loans – which were up to £50,000 – in order to encourage lenders to deliver money to struggling firms as quickly as possible.

However, this meant the scheme was more susceptible to fraud than its larger counterparts, where lenders had to take on some of the risk.

06

NEWS

Who are the new big three?

THE PEER-TO-PEER lending sector has a new big three after Funding Circle exited the market last month.

The business lender was one of the three largest P2P platforms in the UK, alongside Zopa and RateSetter.

All three firms have now moved away P2P lending over the past two years for different strategies, leaving a vacancy for a new big three.

The largest UK P2P

platform is now Assetz Capital, which has lent £1.4bn to date.

Stuart Law, chief executive of Assetz Capital said that while it is sad to see other platforms leave the market, the lender is confident that it can grow and will fill the gaps left for investors and borrowers.

“We have continued to attract new investors and deliver strong returns throughout the pandemic, demonstrating the strength and reliability of our

approach and we believe will remain an important part of the retail investor toolkit,” he said.

Rural business lender Folk2Folk is now the second largest lender, with a loanbook worth £517.8m.

Roy Warren, managing director of Folk2Folk, said the market is consolidating so it is important for platforms to keep growing so they attract investors.

CrowdProperty also joins the new big three,

with a loanbook approaching £200m.

Mike Bristow, chief executive of the residential property development lender said building large loanbooks is fine as long as the platform can support the operational requirements and provide the necessary expertise.

Analysis of the sector by P2P trade body the 36H Group showed that the next largest lenders are Invest & Fund with £161m lent to date, ArchOver with £147m and Proplend with £145m.

P2P sector shows support for Ukraine PEER-TO-PEER lenders and fintech firms have stepped up to show their support for Ukraine amid the Russian invasion of the country and increasing humanitarian crisis.

European platforms such as Mintos and Twino are monitoring investor loan exposure to the region but many firms are also using their position to provide fundraising support and work visas for Ukrainians.

Here is how the industry is trying to do its bit to help those affected by the conflict.

Donations Assetz Capital and its institutional backer Aros Kapital have agreed to make donations to relief organisations out

of the profits from their continuing partnership.

UK fintech trade body Innovate Finance has also held sessions on how members can donate to humanitarian causes.

On the continent, Estonia-based P2P lender Bondora has donated to Mondo, a non-government organisation that is providing humanitarian

relief in Ukraine.

Similarly, Twino has teamed up with other fintech companies and Latvian businesses to raise at least €5m (£4.13m) for Ukrainian causes.

Visas Helping Ukrainians escape the Russian bombings and reach safety is one of the main priorities.

Zopa Bank announced at the end of February that it will support up to 50 work visas for eligible Ukrainian applicants already in the UK with backgrounds in engineering, technology, and data analytics or with experience in consumer financial services.

It will also fast track job applications from Ukrainians wanting to join their British national family members in the UK and will provide a relocation allowance of one month’s salary to support the moving costs.

Similarly, Funding Circle has teamed up with Job Aid to help fund fast-track UK visas for highly-skilled Ukrainian workers. It is also offering a relocation grant worth £4,000.

NEWS

07

New industry group aims to make P2P sector mainstream THE UK Crowdfunding Association’s (UKCFA’s) new peer-to-peer lending focused sub-group aims to work with industry policymakers and bring the sector into the mainstream.

The 36H Group, not to be confused with Innovate Finance’s 36H Group trade body, was launched last month to give the UKCFA’s P2P platform members a sub-group to discuss P2P specific issues.

Atuksha Poonwassie (pictured), managing director of Simple Crowdfunding and director of the UKCFA, said the new group has had a couple of meetings already focusing on responding to the

Treasury’s consultation on financial promotion exemptions.

She said it is now concentrating on the Financial Conduct Authority’s proposals on strengthening financial promotion rules for highrisk investments.

Poonwassie said the group aims to work with industry stakeholders and make the P2P sector more mainstream and wellknown for investing and raising funds.

“We were finding there was not enough time to talk about P2P lending and some specifics relating to that in the monthly UKCFA meetings,” she said.

“That’s why we decided

to have a sub-group of 36H specifically where we can talk about items relating to P2P lending and then the highlights would be shared as part of the wider UKCFA group.

“Platforms have the benefit of being part of the wider conversation with regards to the whole industry in the UKCFA group and being able to focus on P2P lending specifically in

the 36H Group.

“We’ve got a lot to cover, a lot has been happening in the marketplace in terms of consultations.

“The market is maturing, and our intention is to work with industry stakeholders to make P2P lending more mainstream so more people know about it and more people can participate, whether through raising funds or investing.”

The group’s founding members comprise Simple Crowdfunding, Abundance, Rebuildingsociety and Sourced Capital, as well as crypto platform Dacxi and fintech law firm Medici Legal.

New group ‘will complement not compete with’ trade body THE NEW peer-topeer lending group will complement rather than compete with the industry’s existing trade body, one of its founders has said.

Atuksha Poonwassie, a director of the UK Crowdfunding Association (UKCFA), last month helped launch the 36H Group offshoot for its P2P lending members.

It means P2P lending platforms now have a choice between Innovate Finance’s 36H Group launched in 2020 and the new body run by the UKCFA.

Poonwassie said the UKCFA group will give its members more time to discuss P2P lending issues, but said it is willing to, and already does, work alongside the 36H Group.

“Our experience of Innovate Finance’s 36H Group was that you had to be a larger platform to join when it was first set up,” Poonwassie, also a founder of the Simple Crowdfunding, told Peer2Peer Finance News.

“We would welcome Innovate Finance’s 36H Group members and ours are welcome to join both.

“We have wider conversations about crowdfunding and P2P lending in its entirety whereas the Innovate Finance group is more focused on 36H Group activities.

“I would encourage platforms to join both but it will boil down to the minimum requirements in terms of membership.”

The UKCFA requires firms to be authorised by the Financial Conduct Authority (FCA) and to be actively operating.

Firms must also follow its code of conduct.

Innovate Finance has

previously said all P2P lenders are welcome, but it has a small and diminishing membership.

Of its members, only CrowdProperty and Assetz Capital are still operating in the sector after Zopa, Funding Circle, RateSetter and Lending Works exited the P2P market.

Mike Carter head of platform lending at the 36H Group, has previously said the organisation has a future despite member platforms leaving the sector.

Carter has been asked for comment.

JOINT VENTURE

09

IFISA growth is due to word of mouth

T

HE RECENT INCREASE in Innovative Finance ISA (IFISA) inflows is down to the power of word of mouth recommendations among the peerto-peer investor community.

According to Narinder Khattoare, chief executive of Kuflink, the 2022/23 tax year is set to be a banner year for the IFISA tax wrapper and it’s all thanks to existing investors spreading the word.

“I think it's happened because a few people have tested the waters, put money in for a year, and got the rewards at the end of it,” says Khattoare.

“And they've gone on to refer friends and family over to us. I know one individual who has referred 18 of his family members into us and they’ve all opened an IFISA account.”

This is a trend that Khattoare has noticed across the entire P2P industry. Recent research has found that IFISA returns have remained relatively stable over the past four years, meaning that experienced IFISA investors now have a track record that they can point towards when speaking to would-be investors.

“I think this will be a big year for the IFISA,” says Khattoare. “I mean, inflation is where it is at the moment, and people need to get a higher return on their money.

People need to start actively looking to see where they can get a better return on their money, and the IFISA tax wrapper works!”

Kuflink’s IFISA is backed by properties where the platform has a charge registered on the freehold or long leasehold title. This means that

if a loan goes into default, Kuflink will be able to realise the value of the underlying property to repay investors.

There are two IFISA options for Kuflink investors: an autoinvest IFISA which automatically diversifies investor funds across the number of loans in the pool; and the select invest wrapper, which allows investors to take a more hands on approach by choosing individual loans.

Returns range from five per cent

to 7.44 per cent, depending on the type of investment chosen.

“I believe this year will be more attractive for IFISA investors,” says Khattoare. “The stock market has been very volatile and inflation is very high, and more people need to have their money working for them than ever before.

“It is a challenging time for investors, I myself have seen friends dabble in the crypto space where some have made some serious gains and others losses. I think people are happy to earn slightly less but would like some stability.

“Our product offering has seen great traction and think that will only grow due to the solid track record of our business.”

Kuflink has seen many transfers from Zopa’s now-defunct IFISA, and Khattoare expects to see some Funding Circle IFISA money start to trickle into the platform in the near future.

“We are very much open to transfers into our platform where investors can see good returns from a business that has traded through the pandemic without the need for outside investment,” he says.

“But as with any investments people should always seek some sort of advice either from a professional for a sophisticated investor.

“The risk is the key. From an investor’s point of view, they need to be aware of where their money is going, how secure it is and whether they can exit if needed.

“No investment is guaranteed but doing a little bit of research without being interest rate led will go a long way.”

10

REGULATION

Too much is never enough

Overregulation has been blamed for a number of high-profile exits from the peer-to-peer lending space. Michael Lloyd asks if regulation is having an undue influence on the future of P2P…

W

HEN FUNDING Circle announced last month that it was closing its peer-to-peer lending business, it offered a number of reasons. But the one that really resonated with the wider P2P lending community was regulation.

Lisa Jacobs, chief executive of Funding Circle UK, told Peer2Peer Finance News that while regulation was “not the leading factor” behind the platform’s P2P exit, “it was one of the many things that went into our decision making”.

This will be a familiar refrain to

regular readers of this magazine.

Over the past few years, P2P lenders have been hit with a raft of different regulatory proposals which have changed the face of the sector forever. Several platforms have already left the space due to the cost and limitations of ongoing regulation, while others have spoken out about the sheer volume of compliance work that is now required of all platforms, regardless of their size.

There are the Financial Conduct Authority’s (FCA) proposals for a new consumer duty, tougher rules

for appointed representatives (ARs), strengthening financial promotion rules for high-risk investments and the Treasury’s consultation on the financial promotion exemptions for certified high-net-worth individuals, sophisticated investors and selfcertified sophisticated investors.

Last summer, P2P property lending platform FutureBricks left the retail P2P space in favour of unregulated corporate lending because of the regulatory burden impacting the “potential commercial viability of P2P”.

And earlier this year, P2P

REGULATION

pawnbroking platform Connective Lending wound down stating that compliance with regulation had made the business “uneconomical in the P2P sphere”.

Even more regulation is on the

funding over the last few years and the pace in 2022 hasn't shown much sign of slowing,” says Bruce Davis, co-founder of crowd bonds platform Abundance and director of the UK Crowdfunding Association.

“ Such a pace of change is unsettling

for businesses and introduces the risk of unintended consequences horizon for P2P platforms and other industry stakeholders.

The City regulator has set out its proposals on strengthening financial promotion rules for high-risk investments, including P2P lending.

It is planning to ban the promotion of investor incentives, such as new joiner or refer-a-friend bonuses, improve risk warnings on ads and strengthen appropriateness tests.

The FCA has also proposed changes that would improve principals’ oversight of appointed representatives (ARs) and plans to introduce a new consumer duty for all regulated firms, including P2P lending platforms, which will force firms to test and show that consumers are receiving good outcomes.

The Treasury has also suggested amending the criteria for selfcertification, with alternative tests placing a greater degree of responsibility on firms to ensure that individuals meet the criteria to be deemed either high-net-worth or sophisticated.

For some, the content is not necessarily the problem, but the pace of change.

“There have been an unprecedented number of changes and consultations to the regulations governing both P2P and crowd-

”

“Such a pace of change is unsettling for businesses and introduces the risk of unintended consequences as rules are being brought in simultaneously from both government and regulators.”

Out of all these changes, the regulator has been paying particular attention to the issue of ARs. Principals have historically been able to offer an easier route to market

11

for smaller P2P platforms which are unable or unwilling to become directly authorised. In March 2022, the regulator revealed it stopped one in four firms from entering the consumer finance market between April and September last year, up from one in five the year before, demonstrating how difficult it can be to become directly authorised.

But now the regulator is making it more difficult for principals to operate.

In December, the FCA proposed tougher rules for the oversight of ARs after finding that there are “real risks of consumers being misled and mis-sold”.

The regulator said that its proposed changes would improve principals’ oversight of ARs and require principals to provide it with more information on their ARs, allowing the watchdog to spot risks quicker.

Daniel Rajkumar, managing

REGULATION IN 2022 2022 is set to be a year of sweeping regulatory change for the alternative finance sector. Here’s a brief timeline of some of the changes that are already underway…

January 2022 On 19 January, the FCA set out its proposals on strengthening financial promotion rules for high-risk investments, including P2P lending.

The watchdog is planning to ban the promotion of investor incentives, such as new joiner or refer-a-friend bonuses, improve risk warnings on ads and strengthen appropriateness tests.

February 2022 The FCA’s consultation on the consumer duty proposals closed on 15 February.

March 2022 23 March was the deadline to submit feedback on the FCA’s proposals for strengthening financial promotion rules for highrisk investment. The regulator intends to confirm its final rules this summer.

July 2022 The City regulator expects to publish a policy statement on its consumer duty, summarising responses and making any new rules by 31 July 2022.

12

REGULATION

director of P2P platform and principal Rebuildingsociety, which since 26 February 2021 has been subject to an FCA lending restriction on its ARs, says he has replied to the FCA’s consultation and hopes to have the ban removed once the watchdog has seen evidence that the company has the appropriate resources.

“It’s a bit of a shame the regulator was uncomfortable with principal firms and P2P lending firms acting as principals,” he says.

“Hopefully this policy statement that comes from the policy paper will pave the way for better collaboration between industry and the regulator.”

Rajkumar says that he agrees with most of the points from the consultation.

However, he believes that regulatory hosting, in which the principal oversees the AR but does not necessarily use the permissions themselves, is harder to operate successfully within innovative financial services such as P2P lending, as the principal should have a good understanding of how the AR operates.

He also criticises the FCA for proposing more data gathering without knowing what it wants it for, as this would create further costs and more work for the AR and principal.

“I can understand how the regulator in the past has had some concerns about where the risks lie,” Rajkumar says.

“I hope they give us another chance at operating a P2P network.

I hope this consultation paper is the beginning of this opportunity to

enable us to do that.”

Neil Faulkner, managing director of P2P ratings and research firm 4th Way, believes that new rules for ARs and principals would make it more difficult for new platforms to launch in this space. Instead, he hopes for a tiered strengthening of the rules for each asset class, based on historical risk levels.

“The FCA is estimating very high costs of its interventions, but has been unable to estimate the benefits, which can potentially lead to dubious results, so I hope it treads very carefully,” Faulkner says.

“I think possibly the biggest cost

“ The FCA is estimating very high costs

of its interventions, but has been unable to estimate the benefits

”

will be a hidden one in that it will make it harder for new P2P lending platforms to start up. I hope that the FCA cares about that cost to the overall P2P lending ecosystem.”

Long-time principal ShareIn stopped offering AR services to new clients in 2020 due to regulatory expectations.

ShareIn’s chief executive Jude Cook told Peer2Peer Finance News that “the FCA’s expectations on a principal are so onerous it doesn’t stack up for us financially anymore”.

Instead it will retain just five of its existing clients as ARs. Regulation doesn’t just stop with principals and ARs. Going forward all platforms will have plenty to deal with.

Some industry stakeholders are worried that the FCA’s proposals for strengthening financial promotion rules for high-risk investments will

REGULATION

13

“ I hope they give

us another chance at operating a P2P network

”

lead to more retail investors being blocked out of the sector.

And others are worried that the Treasury’s proposals for financial promotion exemptions will harm platforms when they look to crowdfund.

“Some of the proposals may potentially reduce the availability of the exemptions for early financing rounds and impact the ability for early-stage companies to grow,” says Sam Robinson, a financial services partner with law firm CMS. However, it’s not all doom and gloom. The sector has welcomed the FCA’s apparent willingness to take on feedback in its high-risk investments consultation. For example, P2P property lending platforms have praised the regulator for shelving a proposed ban on the marketing of P2P property development loans for the time being.

The FCA has also been engaging with the sector on its high-risk investments consultation through a series of roundtables, which P2P industry stakeholders have seen as a positive exercise.

“The rules we introduced in 2019 were necessary to enhance protection for investors while allowing them to take up innovative investment opportunities and supporting the P2P market,” said an FCA spokesperson. “It was, and remains, vital that investors receive the right level of protection.

“Our more recent work on strengthening the financial promotion rules for high-risk investments aims to see a market in which consumers can invest with confidence, understanding the risks they are taking and the regulatory protections provided. We do not want to restrict consumers

if they want to invest, but we do want them to be able to access and identify investments that suit their circumstances and attitude to risk.”

As well as absorbing industry feedback, Peer2Peer Finance News understands that the P2P sector may have a secret ally in the Treasury.

Although unconfirmed by the Treasury, two P2P platforms have revealed that industry leaders have been in talks with Treasury officials about the direction of travel for regulation in the sector.

“I think we are seeing a more balanced and evidence led approach now compared to a couple of years ago at the height of the London Capital & Finance scandal,” one industry stakeholder says.

Mark Turner, managing director in Kroll’s financial services compliance and regulation practice, says although new proposals will mean the cost of compliance will rise, most will be able to adapt and comply.

“I don’t think there’s anything in there to threaten the sector as a whole,” he says.

P2P platforms and industry stakeholders have their concerns over new regulation for the sector, but there is some evidence that the FCA is listening.

By entering into discussions with the regulator, responding to public consultations, and showing a willingness to invest in best practice, P2P platforms are proving their ability to adapt and thrive –whatever is thrown their way.

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JOINT VENTURE

15

How Lendwise is putting the S in ESG

E

nvironmental, social, and governance – or ESG – has become a huge investment trend in recent years. More and more companies are now committing to net zero, reduced carbon emissions and renewable energy, in an effort to address the E in ESG. But what about the S? Peer-to-peer lender Lendwise has been focused on the S in ESG since the earliest days of the platform, and the ability to do some social good is still a key pillar of the business.

“Myself and my two cofounders, Yiannis Georgiou and Kypros Mouzouros, wanted to do something not only entrepreneurial, but something that had this aspect of making a difference really to wider society,” says Rishi Zaveri, chief executive of Lendwise. “And enabling access to education is very much something that ticks that box for us.”

Zaveri says that the platform’s commitment to doing social good is already paying dividends.

Investors have historically received average returns of up to nine per cent per annum. But more importantly, in the four years since the platform has been originating loans, Zaveri has received scores of emails and messages from former borrowers thanking the company for the opportunities that their Lendwise loan has afforded them.

“We've had some lovely emails and feedback from so many of our customers who are very magnanimous when they say that were it not for the loan from Lendwise they wouldn't have been able to achieve the outcomes that they have been able to achieve,” says Zaveri.

“It's not the loan in terms of just the money, but the loan in terms of the way that the product works, in terms of the fact that there's no repayments while you study, the flexibility of being able to repay your loan early or make overpayments without having any penalties or charges, but at the same time having an interest rate fixed.

“And that's the social impact right there.”

Lendwise offers education loans to graduates who are keen to improve their earning potential and make a difference in the wider world.

Former borrowers have gone on to become doctors, nurses, academics, teachers, engineers and even financing specialists themselves. By making fairly-priced loans available to graduates, Lendwise is creating social opportunities for its borrowers.

“Your investment is going towards someone who is in a way investing in themselves,” says Zaveri, “They are pursuing postgraduate education, which is either augmenting their skills or they’re reskilling. But either way, they are

doing something that will have a positive outcome in the sense of a better salary and better career progression.

“We're all about outcomes,” he adds. “It's not for us to say who should study what and where.

We're inclusive as a platform.

What we want to see is that by undertaking a form of education, there's an outcome that's being attained which is enabling someone to go on and do better.”

Lendwise’s credit committee is where loan applications are analysed, assessed and discussed.

Once a credit decision is made, the platform generally only communicates with a borrower if there is an issue with any repayments. However, Zaveri notes that the platform has a 96 per cent on-time collection rate, which means that borrower interventions are minimal.

In the future, Zaveri is keen to change this and follow up with more former borrowers to learn more about the various ways these funds have benefitted individuals and the wider community.

“It's really heart-warming to hear from our former borrowers,” he says. “And actually, it serves as very nice reminder that there is a wonderful impact that we're having on our customers.

“But let's not forget our lenders, who are the ones truly making all of this possible. They are delivering that impact by investing in these loans whilst earning a commercial return.

“They should be very proud of the social impact that they have had and are continuing to have by investing with Lendwise.”

16

PROFILE

Maintaining momentum

Innovate Finance chief Janine Hirt talks to Marc Shoffman about the “huge opportunity” for UK fintechs in a post-Covid world

J

ANINE HIRT IS approaching almost a year in the hot seat as chief executive of Innovate Finance.

It has been anything but a quiet year though, with the economy and society attempting to move on from the pandemic and the prospect of tougher regulation coming to the fore.

She has brought plenty of experience to the role, having already been chief operating officer, ecosystems director and head of community at the fintech trade body since 2015.

Hirt reveals her 2022 highlights, the work that still needs to be done and the role that fintech and peer-to-peer lending can play in supporting consumers and demonstrating the UK’s strengths at home and abroad.

Marc Shoffman (MS): How did it feel to step into the chief executive role?

Janine Hirt (JH): The previous chief executives Charlotte Crosswell and Lawrence Wintermeyer were great leaders to learn from.

I have been with Innovate Finance since its initial days of launch. It has been incredible to see how the organisation has matured and the entire ecosystem. I love the people we work with.

MS: What are your highlights of the past year?

JH: Definitely the people. We had a

really great session where we went to Number 10 Downing Street with our founders to look at how to implement changes around the listings regime.

It was also great to work on our recent open letter to mark the anniversary of the Kalifa Review with more than 75 signatures calling for the positive momentum to be maintained.

MS: What further action needs to

be taken on the Kalifa review?

JH: We shouldn’t rest on our laurels and must build on the positive momentum. It is critical that we as an industry continue to work with government and regulators to have an environment that is conducive to innovation and protects consumers at the same time.

With the future regulatory framework, the Financial Conduct Authority has a new secondary objective around international

PROFILE

competitiveness so it would be good to see more focus on that.

It is also important to have a strategy around new and emerging technologies such as cryptoassets.

MS: Is fintech being taken seriously by government now?

JH: The feeling towards fintech feels very positive. The Kalifa review was commissioned by the chancellor and reflects interest in supporting the sector and we see progress has been made. But we are fintechs so there is always more that we could do.

Wider adoption of fintech has also helped the mood towards the sector. We have one of the world’s highest levels of adoption, it was 71 per cent before Covid and is now 76 per cent. People are using these new technologies and that has shifted the mindset.

There has also been a move away from fintechs eating the banks’ lunch to fintechs transforming financial services more broadly with partnerships and collaborations. That can be startups partnering with each other or teaming up with institutions.

MS: Has the pandemic been good for fintech?

JH: The pandemic was a horrible experience for society. In terms of sectors, we probably were luckier than many others as it shone a light on how important technology is to every aspect of our lives but particularly when it comes to financial services.

A lot of the incumbents maybe struggled to get services online, so fintechs stepped into the gaps by either providing services directly or supported established players.

There are tangible examples such as Funding Circle funding more

than 12 per cent of coronavirus business interruption loans.

MS: What role can peer-to-peer lending play in the fintech space?

JH: In many ways P2P lending was essentially one of the original fintech sectors and blazed the trail for others. The idea of matching lenders and borrowers was unique and reflected the ethos of putting the consumer at the centre and to create a more attractive proposition. We have seen some great successes.

Right now, it feels like we are in an environment where it is a new chapter for P2P lending. There are areas where we are seeing a shift or pivot. Now we are seeing a trend that it is about the data.

The concept of matching borrowers and lenders maybe isn’t as fresh as when P2P first started out. What is fresh now is how we are utilising more personal data such as open banking and risk assessment.

I think we have seen a change in regulatory landscape. We want to make sure we have a framework where P2P lending can continue to do business in terms of benefiting the end consumer.

The cost of regulation has become somewhat more burdensome over the years as well.

For some platforms it has reached a tipping point. Zopa is very open about that.

It is interesting that we are seeing success for example in the property space, it’s an evolution and a bit of a shift.

MS: Is further P2P lending regulation needed?

JH: We need to find the balance between protecting the consumer and enabling innovation to thrive

17

in the market while also benefiting the consumer.

It’s important to emphasise that these new innovations are about benefiting the end person on the street.

MS: Are Innovate Finance and the 36H Group still planning to collate and publish P2P industry data?

JH: We as an industry have a responsibility to talk about the impact of the sector.

Our research estimates that the loss rate from P2P lending over 10 years is about five per cent while the average platform returns as a whole have been very positive at roughly six to seven per cent. Some platforms have had zero losses. We are still considering whether to put out a full report detailing this.

MS: What are Innovate Finance’s priorities for 2022?

JH: Regulation is key. We have some of the most proactive regulators in the world and tools such as the regulatory sandbox. That mindset needs to continue. Regulators need to have the culture and capability that protects consumers and doesn’t stifle innovation.

We are very focused on ensuring the wider UK government recognises the fact that fintech is a key pillar for the UK’s soft and hard power globally.

Post Brexit and Covid, the UK is a global leader in fintech.

There is a huge opportunity to support the sector. Fintech can be a force for good and promote financial inclusion and wellness, while it also has a role to play in creating a sustainable future.

We are moving in a positive direction and just need to keep that momentum going.

18

EXPANDING OVERSEAS

UK P2P versus the world UK peer-to-peer lending platforms have faced challenges when expanding abroad, but the tide may be turning thanks to their innovative approaches.

Michael Lloyd reports

P

EER-TO-PEER LENDING was born in the UK in 2005, but since then it has spread into almost every country in the world.

Despite pioneering the global P2P industry, few UK P2P brands have ventured overseas, with industry experts citing a variety of challenges including different regulatory and lending environments.

But that may now be changing, as savvy P2P firms adapt and innovate with their expansion plans.

Before entering new markets, there are a number of things for

P2P firms to consider, including the different levels of risk and pricing of loans in that country, its financial infrastructure and how it will attract investors and borrowers.

All of this requires thorough market research, consulting with lawyers and working with local experts by partnering with local lending companies or acquiring lenders – extremely costly ventures with no guarantee of success.

Simon Deane-Johns, a consultant solicitor for Keystone Law who has advised P2P platforms and was general counsel at Zopa, says that

platforms need to be prepared to do their homework before entering a new market.

He describes marketing to overseas investors and borrowers as a huge challenge and says that there is a significant amount of market research required before platforms consider launching overseas.

“There are loads of things that a firm has to consider when expanding to another country or market, like a marketing strategy, obviously another language potentially and the preference of customers for not only national

EXPANDING OVERSEAS

brands but also brands they are familiar with,” he says.

“P2P firms also need to consider consumer preferences for the products on both sides of the market, what the borrowers’ attitudes are to credit in the relevant market, how easy it is for them to get credit, whether there is a gap P2P lending can help fill and if credit information on borrowers is readily available.

“And on the lender side, P2P platforms need to ask what type of product they would be competing with in the relevant market and what customers’ attitudes are like for those products and new ones offered.

“We’ve seen some examples of P2P expansion but it’s quite difficult for a UK business to address all of those challenges in another market which might already be served by existing P2P lending platforms.”

Assetz Capital, which is now the UK’s biggest P2P lender, has notably been reticent to expand internationally.

“We considered it in the past, but the market is so big with Assetz Capital we could comfortably build a £5bn to £10bn loanbook here in the UK and it takes a lot of focus to achieve that, and I think given the property laws and rules are different it would take a lot of risk to understand while the market here is already big,” says chief executive Stuart law.

Law goes on to say that his firm owns the Assetz trademark across Europe and some parts of Asia, to be prepared in case it wants to launch abroad in future.

“We are ready for it but it’s not the right time, there is plenty to do in the UK,” he adds.

Former ‘big three’ P2P platform Funding Circle makes an interesting case study. The business lender,

which recently exited the retail P2P space, was at one point a success story for UK P2P growth overseas.

While other players focused on the domestic market, Funding Circle launched in Germany, the Netherlands and the US, with Canada on the horizon.

But in 2019, it shelved its Canada plans, and in 2020, the lender withdrew from Germany and the Netherlands because of slower-

“ It makes sense

to launch to access international capital

”

than-expected growth.

Conversely, it has thrived in the US, where it was given a boost from its participation in the country’s Covid loan scheme. In an interview with Peer2Peer Finance News last year, then-chief executive Samir Desai would not disclose the split of government-backed loans and non-government-backed loans on the platform, but it is clear that its delivery of Paycheck Protection Program loans has played a key part in its US success.

19

Funding Circle’s history of expanding overseas may serve to highlight the specific challenges of entering continental Europe in the past. The market was fragmented with an array of regulatory frameworks and languages to navigate.

However, that may all be about to change thanks to new EU crowdfunding rules that aim to create a harmonised regulatory framework across the bloc, meaning that authorised crowdfunding platforms can easily passport into other EU member states.

This passporting means that UK platforms can in theory launch in one member state to operate across all 27. The rules also benefit investors, as all platforms must be transparent about returns and interested parties.

Oliver Gajda, executive director of the European Crowdfunding Network – or ‘EuroCrowd’ - says the harmonised rules present an opportunity for UK platforms to enter the EU market more easily.

“There is a relevant market opportunity,” he says.

“Expansion into Europe has been made as easy as it can be expected under any professional financial services regulation. It does not come

20

EXPANDING OVERSEAS

cheap, but we need to understand what the intention and impact on the existing market will be.

“The benefit of, say a UK entry to the market, is that they have no legacy with a specific legislation and can choose freely the most appropriate member state to apply for their licence.”

UK P2P property platform LandlordInvest is one player considering taking advantage of a harmonised European market.

Co-founder Filip Karadaghi said he is considering expanding his platform into Europe “one day, hopefully”, as the specialist property finance market in the UK is very saturated.

“Europe is an attractive, huge market with space for expanding in,” he says.

“There are very few established property platforms in Europe which are active across the whole continent.”

Looking away from Europe, the US and Australia are obvious expansion targets for UK P2P firms due to the language and cultural similarities. However, platforms should not be fooled that this means they are easy markets to crack.

Law says Assetz Capital previously conducted extensive market research about the possibility of a US launch.

But after looking at the landscape of regulation, different property lending rules and the distinct national lending culture with higher interest rates, he decided against it.

Deane-Johns says that Zopa

looked at launching in Australia but concluded that the challenges a UK team would face trying to launch a business there would be “very costly” compared to the benefits they would receive. They ultimately nixed the plans.

He adds that the platform also tried entering the US but also chose not to pursue this because it would mean spending a lot of money to comply with a “very challenging regulatory environment”.

“I’m not saying people wouldn’t attempt it but from Zopa’s standpoint we looked at Australia

“ Expansion into Europe has been made as

easy as it can be expected under any professional financial services regulation

”

early on and discounted it and tried in the US for a long time and that wouldn’t work in a truly P2P way and would be very expensive as a securitisations model that wasn’t going to be truly P2P,” he says.

Industry stakeholders have mixed views about the feasibility of the US and Australia markets for UK players, indicating that success may come down to the suitability of an individual business model or the sector it operates in, rather than a broad-brush approach. While Funding Circle has had success in the US, for example, that does not mean that every UK P2P firm can expect to make it on the other side of the pond.

Some platforms are opting to expand Down Under.

CrowdProperty launched in Australia last May, with UK chief

EXPANDING OVERSEAS

“ P2P firms need to consider consumer

preferences for the products on both sides of the market

”

executive Mike Bristow saying at the time that the residential development lender “is a perfect fit for the Australian market”.

Since then, it has raised AUS$1.5m (£842m) in an oversubscribed seed funding round backed by tech entrepreneurs and property professionals. It has fully funded two phases of a development project in Australia raising AUS$952,500, with more projects currently live on its platform.

Crowd2Fund is also eyeing Australia, as well as the EU market.

The business lender is seeking

authorisation from the Australian Securities and Investments Commission to open in Australia as a test market and is also in talks with Malta’s financial regulator to launch in the EU. “There is an opportunity to broaden our proposition and provide not just private capital for investment but banking services via smartphones within developing markets,” says Chris Hancock, chief executive of Crowd2Fund.

Meanwhile, JustUs is working on launching in both the US and the EU. It has opted to establish its

21

European base in Estonia, while its sister company Moneybrain has confirmed its initial registration as a money service business in the US and partnered with Visa to roll out its P2P lending on a state-by-state basis this year.

“It makes sense to launch to access international capital and for an international business like ours with our cryptocurrency BiPS,” says Lee Birkett, chief executive of JustUs. And some platforms are looking to make their mark in other parts of the world.

Earlier this year, Shojin Property Partners raised over £850,000 for its first international project outside of the UK, in Malaysia, while also working on expanding into India and the UAE by finalising deals to distribute its products through local partnerships in both countries.

“Through expansion we can cover more markets, providing developers with access to much needed capital to build homes and create jobs, while providing investors with more options to make their savings work harder,” says chief executive Jatin Ondhia.

Platforms have historically struggled or decided against launching overseas due to an array of challenges such as facing different lending and regulatory environments. This has left UK platforms to build innovative and expansive businesses at home, leading to the diverse P2P environment that we know today.

However, the ability to scale is vital for the future success of these platforms and overseas expansion must seem like an obvious next step for ambitious platforms.

Once they crack the formula for global domination, there will be no stopping UK P2P from truly taking over the world.

Our magazine is read by peer-to-peer lending professionals, investors and more. If you'd like to be included in our directory, please email Tehmeena Khan on tehmeena@p2pfinancenews.co.uk for details and pricing.

DIRECTORY

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INVESTMENT PLATFORMS

Assetz Exchange is a property investment platform delivering long term stable income for investors, primarily through the purchase and leasing of housing for social good. Regulated by the FCA, it provides the opportunity for investors to create a diversified property portfolio and alternative funding options for the housing sector. www.assetzexchange.co.uk T: 03330 119830 E: info@assetzexchange.co.uk Invest & Fund is an established alternative finance platform, that has deployed over £107m on behalf of clients with zero per cent bad debts written off.

Lenders can achieve a diversified, asset-backed portfolio with gross yields starting from 6.5 per cent per annum with an option to lend through an ISA or SIPP for tax-free returns. www.investandfund.com T: 01424 717564 E: lending@investandfund.com JustUs is an innovative peer-to-peer lender that provides a range of consumer and property-backed loans. It has lent out almost £15m and paid more than £1.1m in interest to lenders to date. Investors can enjoy returns of up to 9.61 per cent, with all products eligible to be held in an Innovative Finance ISA for tax-free earnings. www.justus.co T: 01625 750034 E: support@justus.co Kuflink is an award-winning lender and online investment platform. With over £156m invested through the platform, investors can customise their own portfolio investing in specific loans or in a pool of loans diversified across a number of opportunities. Earn up to 7.49 per cent (compounded) per annum, with an IFISA available. www.kuflink.com T: 01474 33 44 88 E: hello@kuflink.com Lendwise is the UK’s only peer-to-peer lender that is dedicated to impact investing in education finance. Investors finance education for borrowers at universities and business schools across the UK and globally. Investors define their own risk appetite and use Lendwise’s AutoLend feature to diversify their strategy across a pool of loans, which can be invested in an IFISA wrapper. www.lendwise.com T: 0203 890 7270 E: lenders@lendwise.com SERVICE PROVIDERS

Q2 creates simple, smart, end-to-end lending experiences that make you an indispensable partner on your customers' financial journeys. Its modular platform gives you the ability to manage lending simply throughout the entire loan lifecycle, from application, onboarding, servicing to collections. The result is a better experience for both borrowers and lenders. https://eu.q2.com T: 020 3823 2300 E: info@Q2.com

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