Peer2Peer Finance News April 2023

Exclusive: Largest IFISA providers revealed

THE THREE largest Innovative Finance ISA (IFISA) providers in the peer-to-peer lending space that are currently open to new investors are EasyMoney, Folk2Folk and Abundance, exclusive Peer2Peer Finance News research can reveal.

P2P property lender EasyMoney tops the list with more than £60m in IFISA capital. It is expecting “a huge amount” of IFISA money to be transferred from providers that wound down their offering such as Assetz Capital, a spokesperson said.

“We have continued to attract an impressive volume of IFISA transfers, new deposits and top

ups,” the spokesperson added. “Investor rates were increased at the start of the year and remain at those levels for now. We are always reviewing the industry and assessing where we are in relation to traditional accounts and competitors. We are making improvements to our website and hope to roll these out soon.”

Second of the ‘big three’ is the UK’s largest P2P lender in terms of cumulative lending volumes, Folk2Folk.

The business lender, which won Business Lender of the Year and P2P Lender of the Year at December’s Peer2Peer Finance Awards, has reported

cumulative lending of £650m, of which £53.5m has been invested via IFISA accounts.

The third largest IFISA portfolio belongs to Abundance, the green crowd bonds platform founded by Bruce Davis, who also helped launch Zopa and is a director of the UK Crowdfunding Association.

Abundance has around £50m in its IFISA, Davis said, who could not give a more specific figure as the platform had not done its year-end numbers yet.

“We have seen £500,000 of inflows this week alone [w/c 13 March] into our Green Municipal investment launch from Westminster council

that pays a low-risk return of 4.2 per cent per annum,” he said.

“There is still strong demand for the IFISA especially from those investors seeking diversification from the ups and downs of listed markets.”

However he added that the FCA’s prohibition of financial incentives, which was recently introduced as part of its stricter rules around promotions of highrisk investments, had an impact on IFISA inflows this year.

The next largest IFISA portfolios belong to property lenders CrowdProperty and Kuflink, at >>

MORE MONEY, MORE PROBLEMS Administration costs rack up

TAPE WOES P2P’s complex relationship with the FCA

HNW Lending’s Ben Shaw on investors, rules and risk

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Our exclusive research into the largest Innovative Finance ISA (IFISA) portfolios in the peer-to-peer lending space threw up some interesting revelations about data transparency.

Even the Peer2Peer Finance News team did not know who the ‘big three’ would be prior to collating the information, which illustrates the dearth of publicly available industry data.

While there are some P2P platforms that pride themselves on their data transparency, others flat-out declined to disclose numbers and there is little information on an industry-wide level.

When the Peer-to-Peer Finance Association was still in existence, we at least had quarterly data from its members on loan volumes and investor numbers. But its successors – the 36H Groups launched by Innovate Finance and the UK Crowdfunding Association – have not continued with this.

Whose responsibility is it to collate industry data, given that it is clearly essential in promoting the P2P sector and fostering trust among investors? Some may say that duty falls on the media. To some extent I agree, which is why you’ll have seen more data research in recent issues of the magazine.

But the responsibility cannot fall on us alone, and I think the onus should be on all platforms and trade bodies to work together to promote the industry.

As our regulation feature on page 8 shows, legal experts say the P2P sector is being too cautious in promoting itself in response to the new Financial Conduct Authority rules.

In a challenging economic climate, now is the time to educate the public about an asset class that provides regular, fixed income away from the volatility of the stock market. If the industry doesn’t sing the praises of P2P, who will?

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.

cont. from page 1

£38.82m and £38.027m respectively.

They are followed by fellow property lenders Loanpad and Proplend who have both reported IFISA volumes of around £30m.

“We currently have over £30m invested in our ISA products and are hoping to see this grow considerably over the next two years,” said Loanpad chief executive Louis Schwartz.

It should be noted that several active IFISA providers declined to disclose data. However, Peer2Peer Finance News’ statistics represent the majority of peer-to-peer lending platforms with IFISAs.

A number of P2P platforms have reported significant growth in their IFISAs over the past year, in an encouraging sign for the industry.

Shojin Property Partners reported a 187

per cent increase in IFISA inflows this tax year, although it declined to reveal exact numbers.

It also noticed a slight drop in the size of the average IFISA investment on its platform, which it attributed to its growing customer base.

“ISA eligibility remains a key benefit of the projects we approve for funding, shown by 83 per cent of our projects currently available for

investment being ISA eligible,” a spokesperson said. “With the UK remaining our core market for investors amid a high-inflation environment, the importance of tax efficient products will continue in the foreseeable future. We believe the option for investors to diversify beyond cash ISAs and stocks and shares ISAs with an IFISA is hugely valuable.”

Alternative credit fintech ramps up UK expansion

BRIDGING and development lenders are among those who have already signed up to Kennek, a software provider for the alternative credit space that is “doubling down” its expansion efforts in the UK this year.

The London-based fintech, which launched last year, has developed a comprehensive solution that streamlines operations for the alternative credit industry. It can be used by existing lenders and banks, but also as a white label product for new lenders.

Chief executive and co-founder Xavier De Pauw (pictured right, with team), who previously worked in structured finance at Merrill Lynch, told Peer2Peer Finance

News that UK lenders from the bridging and development space, as well as those funding small- and medium-sized enterprises, have already signed up to use Kennek’s software as a service. He declined to name the lenders at this stage.

De Pauw said that he and his co-founders “saw a pain point” that Kennek aims to solve by providing

an end-to-end solution for smaller lenders.

“There was not much technology available for them,” he said. “They could pick certain elements like open banking but not one software as a service.”

Kennek raised $4.5m (£3.66m) in a pre-seed funding round in February and will be using the proceeds to build out

its 20-strong team and technology offering.

It is launching a new underwriting-as-aservice product, which will automate back and middle office processes such as risk management and payments.

While Kennek is more established in the UK market, it is also planning to expand into continental Europe.

“This year, we’re doubling down on the UK – it’s the biggest alternative credit market in Europe,” De Pauw said.

“But there’s definitely local demand in mainland Europe as well and we have some continental lenders ready to sign. We will be putting some revenues from the fundraise into a European expansion.”

Opportunities in mainland Europe for UK investors

INVESTORS who want to expand their peer-topeer lending portfolio overseas have seen their choices shrink since Brexit but there are still ways to earn returns of up to 12 per cent.

As with any investment, due diligence is needed so you understand what and who you are backing. You won’t be able to enjoy tax-free earnings from an Innovative Finance ISA wrapper, which is a UK product, but investors can still earn 12 per cent returns by looking to the continent.

For example, Croatiabased consumer lender

PeerBerry aims for returns of between nine and 12 per cent, while Latvia's Lande targets returns of nine per cent for backing its agricultural loans.

Investors on Estonian consumer and business lending platform Bondora can expect returns of between five and 10 per cent, while Dublin-based business lender Flender currently achieves an average return of 9.3 per cent.

These platforms are all open to UKbased investors.

One of the largest platforms in mainland Europe, Mintos, does not

allow UK investors to join, while Twino will only let UK residents invest if they open a company in Latvia to invest through.

There are two types of P2P lending platforms in Europe for investors to choose from. Firms like Bondora and Flender will source and arrange loans directly, while P2P lending marketplaces such as Mintos and PeerBerry connect investors with a variety of loan originators. They do not get involved in the underwriting process for each application beyond vetting the lenders accredited to their platform.

“I believe this model has mostly occurred because it makes it so easy for euroland countries to expand geographically across the continent,” said Neil Faulkner, founder of P2P research firm 4th Way.

“From there, they have sometimes taken it further by expanding into non-euro countries too. Another factor is that, on average, the founders of European platforms have less direct banking experience than in the UK, which means it makes sense to effectively outsource it.”

For more on Europe’s P2P market, go to page 14.

Construction tops debt collection activity

CONSTRUCTION is the sector currently facing the most debt collection actions, according to an industry expert.

Athena Collections managing director Andrew Athineos, who has been working in debt collection for 23 years, said the current economic climate has made construction the most prevalent industry for debt collection, followed by hospitality.

As well as seeing the highest volume of collections, construction is a slightly more complex industry for

debt recovery as it does not conform to the usual civil procedure rules.

Instead, depending on the type of debt and whether it is subject to a Joint Contracts Tribunal contract, there can be a separate pre-action protocol for construction.

“For instance, sometimes we get instructed on matters where our client has just provided materials to a project,” Athineos told Peer2Peer Finance News.

“That normally isn't subject to the construction protocol but if our client is, let's

say, a subcontractor to a main builder, then that’s where we come across the construction debts quite often.”

Athineos’ observations underline the risk profile of some developmentbacked peer-to-peer

lending portfolios, which can see borrowers at risk of default if projects run into these kinds of problems.

“What tends to happen is the main contractor sets up a special purpose vehicle, for a particular project,” Athineos said.

“If that project goes over budget, the main contractor hasn't got the funds to pay the subcontractors, and then the contractor will potentially shut down the company through voluntary liquidation and all the subcontractors are caught up in it.”

P2P administration costs rack up

ADMINISTRATORS are set to pocket more than £8m from defunct peerto-peer lending platforms, research has found.

Analysis by Peer2Peer Finance News has shown the cost of recouping funds and unpicking the tangled loan books of platforms including Lendy, FundingSecure, MoneyThing and The House Crowd, all of which have sought extensions of their administration periods due to the time and work involved.

Collateral

P2P pawnbroker and property lender Collateral collapsed into administration in February 2018 and entered liquidation in April 2019. Analysis by its administrator, BDO, found that Collateral operated two loan books, one worth around £14.8m containing loans secured by a first charge over property assets valued at £22m, and a second book containing £1.67m of loans secured over pawnbroking assets worth in excess of £2.4m.

BDO has previously highlighted issues with valuations and matching investor funds to loans. Customers should have been emailed last year about what they can get back based on what has

been realised so far. Costs for the administration and liquidation have surpassed £470,000 but this money has not been drawn yet.

Lendy Property lending platform Lendy entered administration in 2019. It had more than £160m outstanding in its development finance and bridging loan book and at least £90m of those funds were in default at the time of its collapse. The latest update from its administrator RSM showed there were 12 live development finance loans with an outstanding value of £49.6m. There was £117m owed to investors when Lendy first entered administration and £34m has been recouped, with £16m repaid to investors. RSM already had a 36-month extension on the administration period to take it to the end of May 2023, but the company has said it will seek another extension. It has amassed £5.2m of

costs so far, according to the January update.

FundingSecure

P2P pawnbroking platform FundingSecure collapsed in October 2019, following concerns about mounting loan defaults. Administrator CG&Co has recovered almost £43.8m from the platform’s £80m loan book, according to the latest update, with 51 loans still in default, worth £25m. However, only £24m has been withdrawn by investors since access was stopped in May 2021 due to an ongoing claim from a creditor. The administration was extended in 2020 for three years and is currently due to end in October 2023. Administrator fees have totalled £808,353.30 so far.

MoneyThing

P2P business lender

MoneyThing went into administration in December 2020 as it could not afford to defend itself against future litigation from a borrower. At the time, it

had 50 loans outstanding to 18 borrowers, with around £19m owed plus interest and costs. The administration period had been extended by a year in 2021 so was due to end in December 2022 but has since been prolonged by another two years. The total administration fees so far amount to £1,219,108.50.

The House Crowd

P2P property lender

The House Crowd entered administration in February 2021, due to “ongoing financial issues.” Its administrator Quantuma said at the end of last year that realisations from the bridging and development loan book will take at least another six to 12 months due to the “incredibly complex” administration process, so no repayments are expected yet. It had previously extended the administration deadline to February 2023 but this has now been extended to 24 August 2023. Last summer, a court ruled that Quantuma’s fees would be fixed at a set rate of 11 per cent of realised funds from the platform’s loan book. Quantuma has previously estimated that its fees will top £800,000.

Folk2Folk: Investors need to “get switched on” to the IFISA

INVESTORS NEED TO “get switched on” to the benefits of the Innovative Finance ISA (IFISA) as we enter a higher-rate environment, Folk2Folk’s managing director Roy Warren has said.

Following several years of low interest rates, a recent series of base rate rises has had a knockon effect on the wider financial services market, and several peer-to-peer lending platforms – including Folk2Folk – have raised their investors’ returns.

Warren (pictured) predicts that this higher-rate environment will continue for several years, and has urged investors to make good choices with their money during the current ISA season.

“With increased interest rates it's time to get switched on,” says Warren.

“A lot of people have been switched off because of the low rates historically – we knew that the low interest environment wouldn’t last forever. Now is the time to start making the most of your allowance again as we expect interest rates will probably stay high for the next couple of years.”

Folk2Folk has maintained an average annual return of 6.5 per cent on its IFISA since inception. However, recently the platform increased its target rates to between 7.5 per cent and 9.5 per cent. In fact, depending on the loan investment chosen, returns could reach as high as 10 per cent.

Warren believes that the income-generating aspect of the

Folk2Folk IFISA is what makes the product most attractive to investors. However, he adds that investors are just as interested in doing social good.

“What’s interesting in our investor base is there’s a complete split among those who care what their money is being used for and those who are just looking for the return,” says Warren.

“It’s a fairly equal split – lots of people want to put their money into something that makes a difference.”

Folk2Folk’s IFISA investments are used to fund small- and mediumsized businesses and property developments in regional parts of the UK, helping to enable the flow of capital and level the playing field between the urban and rural parts of the country. Its cumulative lending volume now stands at £650m, £53.5m of that having been invested via IFISA accounts.

Folk2Folk has the highest IFISA minimum on the market, at £20,000. Warren says that “there is always a temptation to reduce that level” but adds that

it also works as a filter to ensure that only sophisticated investors and high-net-worth individuals are investing via its platform.

“Because we have a minimum investment of £20,000, we are going for the more sophisticated investor,” he says. “That’s key for us because we want people to understand the risks that are involved in their investments.

“Our investors have confidence in our approach to risk and how secured their money actually is.”

To date, the platform states there have been no capital losses for its customers in the 10 years it’s been trading.

The platform has seen transfersin from other platforms this year, including Assetz Capital. In general, the majority of ISAs transferred into the platform have come from cash ISAs.

“Savvy investors will always be looking around to see what’s out there, so it’s heartening to see that we’re still being chosen for transfers,” Warren said. “In fact, investors who transfer their ISAs to us usually go on to open a new ISA account with us as well, and from there continue their annual ISA investing via Folk2Folk.”

As well as increasing returns, the platform’s default rate remains low, which Warren credits to a strict due diligence process. What’s more, the platform continues to be profitable. This makes it a great option for suitable investors seeking a new home for their ISA money this financial year.

Status: It’s complicated

Knowledge gaps, lack of engagement, and lack of clarity around new rules – the relationship between the Financial Conduct Authority and the peer-topeer lending industry is fraught and complex. Kathryn Gaw investigates

REGULATION IS A touchy subject in the world of P2P. Since the earliest days of Financial Conduct Authority (FCA) compliance, there has been a sense in the industry that the regulator has been an agent of chaos, making sweeping – and often inappropriate – decisions on behalf of an industry that it did not fully understand.

This has culminated in a series of regulations which have convinced

many platforms that they cannot, or should not, advertise their products to retail investors. This is not true, but this disconnect speaks to a wider issue between the regulator and its charges.

P2P platforms have long been sceptical about the FCA’s ability to effectively regulate the space, and they have a point. Last year, an employment tribunal led to the release of a number of emails which showed that the City regulator was

“confused” about how to regulate P2P lending in 2016, and missed key opportunities to take actions which would have protected Lendy investors from losses.

In 2020, the Gloster Report excoriated the regulator for an apparent “disconnect” between the FCA and the financial services sector, which contributed to the collapse of the mini-bond firm London Capital & Finance (LCF)

The FCA’s failure to protect

Lendy and LCF investors from capital losses has led to calamitous headlines about the dangers of P2P and mini-bond investments, when many would argue that the blame should have been laid at the feet of the regulator.

Last year, the FCA announced a new framework to “strengthen our financial promotion rules for high-risk investments and firms approving financial promotions.” The City watchdog listed P2P lending among the "high-risk investments", lumping it in with unregulated asset classes such as cryptocurrencies. Unsurprisingly, this categorisation led to an outcry among platforms, and warnings that regulatory over-

reach could kill the retail P2P sector.

All P2P lenders must now feature a prominent risk warning on their websites and in all marketing materials, and all new investors are required to complete an appropriateness test before being allowed to invest. In anticipation of further FCA crackdowns, some platforms have gone even further and have stopped advertising their products, or have shifted away from their retail investor base by increasing their investment minimums.

were plastered on the side of football pitches, appearing in TV ads, and taking up prime real estate on the sides of buses and the platforms of the London Underground. But in light of the latest regulations, awareness has dropped off.

Thomas Donegan, a partner at the law firm Shearman and Sterling, believes that platforms are being overly cautious in the way that they present themselves to the public, wary of attracting the scrutiny of the regulator.

"When onerous or difficult new compliance requirements are introduced, we often find that firms prefer to cease a particular service or activity, rather than incurring the compliance risk of getting it wrong or being second guessed by their regulators,” explains Donegan.

JustUs has recently increased its minimum Innovative Finance ISA (IFISA) investment to £10,000 as part of its new strategy to focus on high-net-worth individuals and family offices rather than retail investors. Chief executive Lee Birkett says that it has simply become too costly to advertise effectively to individual lenders.

“The costs involved with onboarding retail P2P clients just isn’t worth the regulatory hassle,” he says. “We’d rather focus on one £500,000 investment which would be more profitable than a hundred £5,000 investments, which would be massively loss making.”

More recently, property platform Brickowner increased its minimum investment from £500 to £1,000 due to “changes to the regulatory environment”.

These changes have had a knockon effect on the visibility of P2P in the financial services market. Just a few years ago, P2P brand names

“We have also seen this sort of phenomenon in the decline of corporate hospitality and in some firms' reluctance to allow postBrexit EU customer access from the UK, for example."

But it could be argued that a lack of visible P2P options is actively harming retail investors, who could benefit from the inflation-beating, tax-free returns that P2P can offer – if only they knew where to look. Contrary to popular belief, platforms can still advertise their products and services while being compliant with regulations, and some industry leaders have even praised the regulator for its efforts to protect retail consumers.

“P2P platforms are not prohibited from advertising,” says Veryan Skinner, head of brand and communication at Folk2Folk. “We have a set of rules and guidelines from the FCA which are there to protect consumers and ensure we deliver positive outcomes.

“We promote the credentials of

“ P2P platforms are not prohibited from advertising”

our company and our advertising aims to raise awareness of our loan investment product and our IFISA. Our adverts invite potential investors to find out more, they are not direct financial promotions.”

Jason Ferrando, chief executive of EasyMoney, has also spoken out in support of the FCA’s mission to reduce investor risk. However, he believes that the FCA’s risk warnings have gone too far, particularly when applied to asset-backed lending.

“It seems somewhat unjust to corral diverse and risky investment businesses into one ‘pot’ regardless of the fact that some of us have, in effect, low risk to our investors and others have significant risk," says Ferrando.

Ferrando explained that while he supports transparency around investor risk, he felt it was unfair to bundle payday lenders and unsecured loan providers in with property-backed lenders such as EasyMoney.

“It just doesn’t seem equitable,” he added.

It appears that the regulator is listening to industry feedback, but engagement still leaves a

lot to be desired. According to compliance specialists, there is still a significant knowledge gap between what the regulator is aiming to do, and what P2P platforms believe is required of them.

It is impossible to know what the FCA thinks of the criticism of its approach towards P2P regulation. Multiple requests for comment by Peer2Peer Finance News have gone unanswered. However, the FCA’s choices could have a widerranging impact that stretches far beyond its jurisdiction.

The UK has become a sandbox for P2P regulation, just as it was a sandbox for P2P activities in general. P2P was founded in the UK by Zopa in 2005, but it was another 10 years before the first P2P regulations were put in place. During that unregulated decade, new products were tested, new technologies were tried out and a

blueprint for modern-day P2P was established.

Today, the major trends in P2P lending are coming from the regulator, not from the platforms themselves. Perhaps earlier regulation could have made space for more responsible innovation during the early years of P2P, or at least helped to forge a better relationship between the regulator and its charges.

In Europe, the regulatory journey for P2P lenders is just beginning, and it is clear that the European Commission (EC) is learning from its UK counterparts.

While some individual countries passed laws to regulate crowdfunding as early as 2012, the launch of the European Crowdfunding Service Provider Regulation (ECSPR) represented the first time that a single law would be applicable to all P2P lenders across

“ The costs involved with onboarding retail P2P clients just isn’t worth the regulatory hassle”

Europe. The EC has worked closely with crowdfunding platforms, P2P lenders and trade bodies such as EuroCrowd during the draft phase of the ECSPR, to ensure that retail investors have been the focus of these new rules.

“Regulation is there to enable capital movement and protect investors, while keeping enough breathing space for brokers to work in the space,” says Oliver Gajda, founder and executive director of EuroCrowd. “It is hard to get this right and it is a process.”

The regulations were finally signed off in late 2020, before becoming law in late 2021. A two-year transition period will end on 10 November 2023. So far, the regulations have been welcomed by European platforms, who see the benefit of being able to operate across multiple European countries without having to change their business models. There are currently no restrictions on P2P advertising in the EU.

Meanwhile, in the UK, P2P regulation is still a work in progress. The new consumer duty will come into effect in July, and requires all regulated firms to place consumer interests at the heart of everything that they do. Some P2P platforms argue that they have been doing this for years, despite stifling regulations which have made it harder for them to reach their target investor base.

“The FCA is hot on reviewing direct offer financial promotions and the cooling off period means that many customers are walking away,” says Daniel Rajkumar, chief executive of Rebuildingsociety.

“The current cooling-off rules were intended to mitigate the

FOMO effect of instigating lenders to register and invest on impulse. However, the drop-off has been dramatic with many suitable lenders abandoning the process for the inconvenience.

“It has been said that some FCA supervisors have confused generic financial promotions (which do not require cooling off) for direct offer financial promotions which do. So, for a platform it’s just not worth advertising any more.”

The UK Crowdfunding Association (UKCFA) pushed back on this point in the consultation paper, but Rajkumar says that the trade body’s feedback was ignored. He believes that some platforms could now consider leaving the UK and moving into foreign markets where “the regulator is more conducive to fair competition.”

“The FCA has basically killed the retail investor,” adds Birkett. “The FCA didn’t listen to the industry, and it has missed its opportunity to regulate P2P effectively.”

While this last point is up for debate, it appears that the regulator does have good intentions when it comes to P2P. Its stated aim is simply to protect investors from losses – platform complaints and a lack of P2P visibility are just the unfortunate side effects. But there is still time to get it right. Better engagement from the FCA could help platforms to navigate the new rules while still highlighting the substantial investor benefits.

The FCA did not respond to requests for comment.

“ The FCA didn’t listen to the industry, and it has missed its opportunity to regulate P2P effectively”

Kuflink reveals its secret to development loans

KUFLINK HAS BEEN sourcing, funding and supporting property development loans for more than seven years without losing any investor money. This phenomenal track record is down to the expertise and due diligence of the team.

Property development lending can be a high reward business but can come with certain risks associated to it. If the development is a success, it can offer very competitive investor returns. But if the development runs into difficulties, it can cause costly delays in the construction, leading to a higher possibility of borrower default.

Pete Wilkins (pictured), asset manager at Kuflink, has plenty of experience in the property development sector. Prior to joining the peer-to-peer lending platform, he worked full time on construction sites. Now, his job is to protect investor money, while monitoring the progress of Kuflink’s ongoing development projects.

“My history is actually in onsite construction,” explains Wilkins. “I have done everything from refurbishments to new builds, barn conversions, graded listed buildings, and industrial units. I’ve covered a wide range of builds myself.

“There is so much more to a construction project than just the building. There is so much more work underground than people realise.

“With the knowledge that I have, I am able to read build schedules and know whether a project is feasible to a certain extent. I can liaise with the underwriters on loans that come in and work closely with our clients and contractors.”

Wilkins’ experience means that he can work alongside the construction team to ensure that key milestones are being met. For instance, are key materials arriving onsite in good time; does the site need to be protected from inclement weather; and is the work

being done in line with the latest regulations?

“Regulations change all the time,” Wilkins says. “While the construction team can rely on their architects, they also need to rely on local building controls.”

There is also an added value for the borrowers as they can access Kuflink’s expertise and flexibility as well as securing financing. Kuflink’s borrowers know the team will always work with them to find a solution to any issues that crop up on site. This symbiotic relationship is what keeps good quality developers coming back to Kuflink again and again.

“An original schedule can change and does change, and you need to be able to run with that,” says Wilkins, but he adds that in his time at Kuflink, he has never seen anything on site that has given him cause for concern.

“I’ve been invited to a lot of sites to inspect the work – to go out on site is the highlight of the job for me,” he adds.

“I have never been declined a site visit, I am always welcomed with open arms. And I have never seen anything that shouldn’t be there. The sites are run how they should be and that’s a great comfort to myself and the company.”

For Kuflink, the secret to its zero loss record is simple – when you only choose the highest quality loans, and only work with experienced developers and construction experts, you naturally reduce the risk of something going wrong.

This quality-led approach, along with a commitment to protecting investor money, has helped to make Kuflink one of the largest P2P property development lenders in the market today.

A new era

With more than 400 peer-to-peer lending platforms currently active in mainland Europe, the market looks set for consolidation as regulation and investors in the region become more sophisticated. Hannah Gannage-Stewart reports

THE MAINLAND

European peer-to-peer lending market has grown substantially in recent years. Unlike the UK, where many platforms launched in response to the 2008 financial crisis, many of the continent’s biggest platforms have launched in the last five to 10 years. This is likely due to growing tech literacy among investors and a desire to find high-yielding alternative investment opportunities in an increasingly constrained socio-economic market.

Moreover, the introduction of pan-EU regulation has enabled platforms to expand more easily across borders to other EU states,

providing the company was established in the EU to begin with.

The European Crowdfunding Service Provider Regulation (ECSPR), which includes P2P lenders, has applied across the EU since November 2021, however firms that offer services only on a national basis are still permitted to operate under their national laws until November 2023.

Crowdfunding projects worth more than €5m (£4.4m) in a 12-month period aren’t caught by the regulation, but those might fall within the scope of other EU regulations instead, such as the markets in financial instruments directive (MiFID) regime, which

can impose a lengthy admin process for platforms to offer their products in other European markets.

Ultimately, ECSPR should increase the scope of the P2P market in Europe. Recently, European crowdfunding trade bodies, including the UK Crowdfunding Association, met in Paris and discussed plans to form a consortium that would enable them to speak with one voice to the European regulator, the European Markets and Securities Authority.

This move towards a more united European market, including input from the UK despite it being outside the EU regulatory regime, hints towards an evolving sector where

continuing growth may soon give way to greater sophistication and consolidation.

The European P2P market is extremely diverse and made up of several different models, some of which are less likely to be seen in markets such as the UK or the US, where greater regulatory scrutiny has limited the models available.

P2PMarketData.com lists 495 P2P platforms in Europe, 94 of which are in the UK and fall outside the scope of this article. The remaining 401 are concentrated mainly in Italy, France and Germany, where there is a total of 175.

German P2P blogger Lars Wrobbel, who covers the European market at Passives Einkommen Mit P2P, cites the Baltic states as the most active, with the largest platform, Mintos, headquartered in Latvia. Croatia is home to other

Aggregators vs the rest

Some of Europe’s most successful platforms are loan originator aggregators, such as Mintos and PeerBerry.

Mintos is Europe’s biggest P2P platform, with more than 60 lending companies on its marketplace and more than 500,000 registered investors from all over the world. It is not possible to borrow money on Mintos, it is designed purely for investors. In order for investors to assess the risk attached to the various loans featured on Mintos’ platform, the firm provides a risk score for each lending company and offers a buyback guarantee in the case that a loan goes 14 days without being paid.

PeerBerry is a similar, albeit smaller, platform. It was founded by loan servicing company Aventus Group, which had been an originator on Mintos until it saw the opportunity to set up a rival platform. PeerBerry also offers a buyback guarantee. The benefit of using an aggregator is that investors can diversify their lending from one platform, rather than having to monitor the performance of loans across numerous sites. Both Mintos and PeerBerry offer an auto-invest feature too, making diversification that bit easier.

major players, such as Robo.cash and PeerBerry.

Elsewhere, Estonia claims 30 of Europe’s P2P platforms, Spain and Switzerland have 26 each and there are 19 in the Netherlands. Latvia is home to 10 platforms.

Mintos, which launched in 2015, is one of several platforms known as aggregators, or loan marketplaces, where the loans are provided by originators partnered with the platform, enabling investors to easily manage and diversify their loan portfolios, usually via an autoinvest function.

However, as aggregators draw loans from across several countries and different industries, arguably there is a greater risk of some volatility affecting one or some of a portfolio of loans managed by them. However, in a diversified lending portfolio, as these platforms offer, chances are losses will be offset by stronger performance elsewhere.

Nevertheless, niche lenders have their benefits too. Investors can become very familiar with a smaller niche lender, really understanding its management and lending strategy to make lending decisions that realise high returns.

The recommendation from analysts such as Neil Faulkner at 4th Way is to ensure your own lending is adequately diversified, via an aggregator, several niche lenders or a mix of both. The scale of the aggregators versus smaller players does not indicate either greater or lesser risk. “Size isn't a massive factor for investors,” Faulkner explains. “They need to see that there's enough history, they need to go and analyse the people behind the platform and their competence and have great confidence in them. But the size isn't a massive indicator of that.”

“ I foresee a lot of smaller mergers and acquisitions starting this year”

The aggregator model is popular across Europe. It will take loans from across Europe and generally accept lenders from across the region too, although US and UK investors are not permitted on Mintos’ or many other aggregator’s platforms.

One of the smaller aggregators is Swedish SaveLend, which does not market to the UK but will accept organic traffic from there. The platform is longstanding by European terms having been founded in 2014 by chief executive Ludwig Pettersson.

SaveLend is targeting 40 per cent revenue growth and a move into profitability this year, as it expands across Europe. The platform received its EU crowdfunding licence at the end of last month.

Pettersson says when he entered the European P2P space almost a decade ago the average retail investors were akin to today’s crypto enthusiasts. Showing little risk aversion, they were tech savvy and seeking high returns.

Now the platform has around

Top 10 mainland European platforms by cumulative lending

SEK1.2bn (£93.8m) invested and more than 19,000 investors targeting returns of around 8.04 per cent. While those early adopters are inevitably still among today’s investors, the demographic has broadened. He says the average investor has around £5,000 invested in around 300 loans spread across different originators.

Pettersson says the market has evolved, with more high-networth (HNW) investors coming to the platform (those with more than £1m invested). Where he saw early investors attracted to the aggregator model because the autoinvest product meant they needn’t scrutinise every separate loan, he

Five to watch

Source: P2PMarketData

PeerBerry is a Croatian debt investment marketplace which was launched by parent company Aventus Group in 2017. It is an aggregator platform with an auto-invest feature, but no secondary market making early exits difficult. The platform accepts minimum investments of €10 and has an average annual return of 11.09 per cent. Lande is a P2P platform specialising in investments for agriculture and farming. It launched in 2009 and is headquartered in Riga, Latvia. P2P blogger Wrobbel touts Lande as one of the more interesting European offerings, due to its agricultural niche. The platform accepts minimum investments of €50 and delivers an average return of 11.4 per cent.

Income Marketplace is a relatively new Estonian platform founded in 2020. It offers refinancing of consumer loans from originators in Northern Europe, as well as from Asia and Latin America. It has funded around €37.5m worth of loans to date, according to P2PMarketData. It accepts minimum deposits of €10 and offers an average return of 11.8 per cent.

InRento, which launched in 2020 in Lithuania, recently merged with Europe’s largest real estate aggregator EvoEstate. It enables investment in Europe’s buy-to-let sector, with interest generated from and capital gains. It accepts a minimum investment of €500 and P2PMarketData projects return of between four and nine per cent.

Lendermarket is another relative newcomer. It is registered in Ireland and was founded in 2019, but runs from Creditstar's offices in Tallinn, Estonia. Loans are issued by Creditstar subsidiaries, and the platform has funded around €307.3m to date. It accepts minimum investments of €10 and targets average returns of 13.8 per cent.

says now HNWs are attracted to it because they don’t have the time to manage large portfolios with individual platforms.

“They don't have the exact knowledge to do the same analytics as we do,” he explains. “I mean, we have the whole credit and legal department to do this for them. So, once they trust us, they put in the money and forget about it. We take care of it. So, it's almost a wealth management product.”

Looking ahead, Pettersson says consolidation seems inevitable very soon.

“I foresee a lot of smaller mergers

and acquisitions starting this year, most likely,” he predicts. “Because if you want to borrow money, you also want to go to the platform where you know you will get the money, so I don't think there will be enough space with 100 players.

“There will be a few for each market, maybe two to three. And from there I think there will be, as we're seeing in the UK and US, a lot of platforms shifting towards institutional money.” Despite this, SaveLend is committed to retail lenders. Pettersson believes that those who switch to institutional funding will ultimately regret it.

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Lendermarket investors earn €10m in interest

LENDERMARKET’S

investors have earned more than €10m (£8.83m) to date, the company has revealed.

By March 2023, the Dublinbased peer-to-peer lending marketplace had facilitated €310m in loans, with no defaults to date. It is now eyeing an expansion of its business model as it actively seeks to onboard new loan originators, including UK-based P2P lenders.

“We are working on a number of opportunities to list the loans of new loan originators on our platform to give our investors further diversification and choice as to the products on our platform,” said Lendermarket’s head of finance Conor Gibney (pictured).

“We would like to grow the number of different loan originators on the platform significantly.

“This will allow us to offer a wider range of options for our investors to assess and hopefully benefit from.”

The platform is open to investors from across Europe and the UK, and its largest investor markets are Germany, Spain and Bulgaria.

The P2P lending platform was founded in 2019 and aims to provide a unique investment opportunity to investors whilst solving lending companies' funding issues.

“Typically, the ability of global lending companies to raise capital to fund their operations has been challenging,” said Gibney.

“Similarly, retail investors have not had the opportunity to invest in higher interest-rate debt products such as bonds to lending companies.

“Lendermarket connects these lenders with investors providing a solution that meets the demand at both the investment and the funding end of the spectrum.”

Gibney added that the company’s priority is to maintain its track record of zero defaults, while ensuring that only the highest quality loans are listed on the platform. He said that they would also like to “grow the volume of investments on our platform and

become one of the largest and best P2P lending platforms in Europe and also globally.”

Lendermarket currently works with four loan originators –Peru’s CrediFace and Nigeria’s QuickCheck, as well as Estonia’s Credory and CreditStar Group. These four originators specialise in consumer and business loans, with target interest rates for investors ranging from eight per cent to 16 per cent, depending on the loan.

Gibney has predicted that there will be “significant growth” in the European P2P lending market in the coming years, despite ongoing economic turmoil.

“The European P2P lending market is a huge opportunity and we forecast significant growth in the area due to the unique solution that P2P lending provides for lending companies and investors alike,” Gibney said.

“However, there are macroeconomic headwinds that are certainly impacting the market in general. Increasing interest rates is challenging as they are putting pressure on lending companies and they will likely result in competition for P2P lending investment products rising.”

Recently, a number of European P2P lending platforms have lowered their target investor rates due to stricter regulation. Last year, Lendermarket’s investors earned an average annual return of 14.4 per cent, and the platform is currently targeting average investor returns of 15 per cent.

Know your assets

HNW Lending’s Ben Shaw talks to Marc Shoffman about the evolution of his asset-backed lending platform

FORMER ACCOUNTANT and portfolio manager Ben Shaw founded peer-to-peer lender HNW Lending almost 10 years ago with the aim of helping the well-off access money quickly.

He initially aimed to focus on lending against assets such as classic cars and fine wine but due to his career experience has found the majority of the P2P lending platform’s business is bridging and property finance.

Shaw explains what the future holds for HNW Lending.

Marc Shoffman (MS): How did you get into P2P lending?

Ben Shaw (BS): I trained as a chartered accountant with one of the big five firms. I then went into banking for a short while before becoming an investment adviser for property firm Telereal Trillium.

I was helping with portfolio management, contract management, assessing new portfolios or property to buy and financing.

One of my jobs was helping run a £100m pension scheme and investing its money. Whilst I was doing that, I came across P2P lending and thought it was an interesting business.

MS: How has it evolved?

BS: I thought my niche would be the more exotic stuff – cars, planes and boats – but as I knew lots of people in property financing and

bridging from my previous roles, the platform has actually mainly focused on that. When I sent out an email saying I was leaving my old role, people approached me with property loans and now 95 per cent of what we have done is property and only five per cent is the more unusual stuff.

HNW Lending has been running for about nine years. We have done something close to 500 loans, we have almost always earned interest and are rated highly by P2P research and ratings firm 4th Way.

I now put my money in as a first loss tranche on pretty much every loan, usually worth 10 per cent.

What that means is if you have someone borrowing £100,000 and they only pay back £90,000, I lose £10,000 and lenders get capital back in full.

Because we have grown, we are able to do larger loans, our average loan size is now four times what it was and is around the £400,000 level. We are also quicker at doing stuff, so we can take a view on things where we weren’t able to in the beginning.

MS: Who are your typical borrowers?

BS: Our typical borrowers tend to be individuals who are moderately wealthy but not super wealthy, who need money quickly and are prepared to pay a bit over the odds.

It could be someone who needs to do a buy-to-let deal quickly, for example at auction, whereas it may take six months to get a mortgage.

I am often the one who completes the loan if we haven’t had enough signs ups, knowing full well that chances are high that in week or two there will be lenders who buy the remaining portions. If I am doing a loan, it is because I am comfortable the person will repay, I do the loan and hope lenders will come. They usually do.

MS: How do you check and choose your loans?

BS: We look at the asset, valuation and the borrower’s ability to repay. Also, we look at the exit strategy

and do a background check on the borrower and any guarantors.

I have a guy who specialises in trawling the internet and other data sources to look for potential issues. There are also a bunch of checks the solicitor does.

MS: Has the pandemic and costof-living crisis changed the way you operate?

BS: Our attitude changed as a result of Financial Conduct Authority (FCA) rules in December 2019 and the Covid-19 pandemic. The two things kind of fell on top of each other.

The new FCA rules made us look at creditworthiness assessments of borrowers, while the impact of the pandemic on the courts has influenced what we can enforce. That means we are now trying to choose loans we don’t think will result in any enforcement action.

It is different to when we started. We thought if a property loan went into default we could quickly go through the court process to get the asset back and ensure people got their interest and capital repaid.

That philosophy doesn’t marry well with the FCA rules from December 2019 and doesn’t work when court delays can be very substantial and courts aren’t as lender friendly as they used to be.

It is better to choose loans that don’t default. In the past we may have run a loan book with a 30 per cent default rate, now it is running at five per cent. The returns are higher for lenders in the current environment and it means we are manging risk and reward better.

MS: Who is your typical investor?

BS: Our typical Innovative Finance ISA (IFISA) customer is probably investing most of their £20,000

allowance with us and spreading it over four loans or in our autoinvest product. Outside of this, users range from our £10,000 minimum to some with more than £1m invested.

Our auto-invest product pays six per cent returns but we are going to try to push that up now that interest rates are rising.

So far only one loan hasn’t paid its capital in full. Some loans are paying more which helps create a surplus and covers others when there may be issues.

MS: Have investor attitudes changed?

BS: Bigger lenders tend to diversify more than they used to. People are now expecting more than they were six months ago in terms of interest, which makes sense as interest rates have gone up.

We have been moving up our pay-outs to lenders, the market has moved up, we have to try to get that off borrowers which isn’t always so easy. Borrowers are beginning to see they can’t get the cheaper rates they were getting a year or six months ago.

People think interest rates are going to peak so it is not a bad time to put your money into P2P lending as the rates now are probably at the peak of the cycle. If you can lock in a two or three yearloan you are probably doing well.

There is still quite a difference between what we are offering compared with a bank savings account. You may get four per cent at a bank and we are around nine per cent. There is a big premium for going to a P2P lender.

MS: How has the regulatory environment changed?

BS: It has got more difficult

as the risk warnings and the process you have to go through to onboard new investors are more onerous. That has made it more challenging to recruit new investors. It also doesn’t help that the regulator has lumped us in with cryptocurrency.

We have to make investors aware of the risks.

There are P2P lenders doing loans that arguably are far higher risk than others, but the FCA doesn’t differentiate.

MS: What do you think has driven some P2P lenders to leave the retail space?

BS: It costs more to deal with small individual retail investors than one or two big institutions. If you can get a funding line cheaply from an institutional investor, why would you worry about retail?

We think we have a good medium route with a minimum investment of £10,000 in each loan or £5,000 in the IFISA. Rather than hundreds of people in each loan, we get 10 to 20, that is not unmanageable. Having a lower minimum investment can create more of a headache. Our model allows us to give a personalised service, if the loan is in arrears, we try to answer queries the same day.

MS: What is your outlook for the sector?

BS: The sector will continue to grow. We offer good risk-adjusted returns, arguably as good if not better than equities and bonds, and far better than putting money into a bank.

More people are getting used to the sector and its track record. We have close to 500 loans and hardly any losses.

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

Folk2Folk is a profitable UK lending and investment platform. More than half a billion pounds has been invested via the platform with no investor losses to date. Loans are a maximum of five years, secured against land/property at a maximum 60 per cent LTV, with a fixed rate of between 7.5 and 9.5 per cent, per annum.

www.folk2folk.com

T: 01566 773296

E: enquiries@folk2folk.com

Invest & Fund is an established alternative finance platform that has deployed over £220m on clients' behalf and has repaid over £140m to lenders with zero per cent bad debts written off. Lenders can achieve a diversified, asset-backed portfolio with gross yields averaging from 6.75 per cent per annum with an option to lend through an ISA or a 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 more than £25m and paid more than £1.7m in interest to lenders to date. Investors can enjoy returns of up to 10.29 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 £245m 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 9.73 per cent (compounded) per annum, with an IFISA available.

www.kuflink.com

T: 01474 33 44 88

E: hello@kuflink.com

LANDE is a crowdfunding platform that gives investors access to secured agricultural loans. It has created a unique scoring model, accessible infrastructure, and a variety of products so that farmers are able to access financing quickly and easily. With LANDE and its investors as partners, farmers can become more independent and sustainable, while improving their yield, efficiency and profitability. Projects offer interest rates of up to 14 per cent per annum.

https://lande.finance

T: +371 20381802

E: info@lande.finance

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 earning average returns of up to nine per cent per annum.

www.lendwise.com

T: 0203 890 7270

E: lenders@lendwise.com

The European Crowdfunding Network (EuroCrowd) is an independent, professional business network promoting adequate transparency, regulation and governance in digital finance while offering a combined voice in policy discussion and public opinion building. It executes initiatives aimed at innovating, representing, promoting and protecting the European crowdfunding industry. www.eurocrowd.org

E: info@eurocrowd.org

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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