Peer2Peer Finance News August 2019 by Alternative Credit Investor

>> 8

UNTANGLING THE RED TAPE

Coverage of P2PFN’s regulation event SUPPORTING THE INDUSTRY

>> 24

Read our special report on P2P and blockchain supported by

Varengold’s Alison Harwood on helping P2P lenders

>> 16

ISSUE 35 | AUGUST 2019

Platforms may be forced to favour high net worths due to incoming 10pc rule RETAIL investors are at risk of being shut out of the peer-to-peer lending sector due to the so-called 10 per cent rule that will come into force this December. The rule change is part of investor marketing restrictions introduced by the Financial Conduct Authority (FCA) to protect consumers. The new rules say that platforms can only offer products to sophisticated or highnet-worth investors or everyday investors who certify they will not put more than 10 per cent of their portfolio in P2P. However, a number of P2P lending platforms have a minimum investment of £1,000, which would mean that individuals must have at least £10,000 in total to invest across a variety of asset classes. Official statistics indicate that most UK adults do not have this amount of money to invest, which could effectively bar them from certain platforms.

P2P lenders such as Zopa, Funding Circle and ThinCats require a minimum investment of £1,000, but the FCA’s latest financial lives survey shows that 49 per cent of UK adults, equating to 25 million people, either have no such assets or have less than £10,000 in value. This suggests some existing and new investors on these types of platforms may struggle to meet the 10 per cent threshold and the firms may have to favour or rely

on sophisticated or highnet-worth investors. It is understood that the FCA was warned at the time of the consultation that the 10 per cent rule could stop ordinary people getting a decent return on their investments. Funding Circle and ThinCats declined to comment. Zopa said the 10 per cent limit would reflect how its investors already operate. “We have seen that

Zopa customers typically fund an initial amount and then build up their portfolio as they get more comfortable with how the product works,” said Natasha Wear, chief executive of Zopa’s P2P operations. “Reflecting this, the new investment limit remains in place until a new customer funds their P2P account twice in the first year – at which point it is removed. “It’s also important to note that it does not impact existing P2P customers, who are deemed to already have a good understanding of the product.” John Goodall, chief executive of P2P property lender Landbay, which has a minimum investment of £100 for its standard product and £1,000 for its Innovative Finance ISA, said he did not believe investors would be restricted. “Most P2P lenders’ target investor >> 4 demographic

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

www.facebook.com/p2pfinancenews @p2pfinancenews

@p2pfinancenews

www.linkedin.com/company/peer2peerfinancenews/

EDITOR’S LETTER

Published by Royal Crescent Publishing

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

egulation has been a hot topic for the peer-to-peer lending industry ever since I launched Peer2Peer Finance News two-and-a-half years ago. The Financial Conduct Authority (FCA) finally released its updated rules for the sector in June, with some of the changes set to come into effect this December. As the industry’s only dedicated title, it made perfect sense to hold a Regulation Breakfast Briefing to cover the regulatory landscape in more detail. I’m pleased to say the event was a great success, with a betterthan-expected turnout (standing room only). Our expert speakers and panellists, including a representative from the FCA, provided valuable insights into the current and future regulatory landscape to a packed room of P2P platform executives. And of course, a special thank you to our sponsors Bovill, Equitivo and Quantuma. Make sure to check out the coverage of our event on page 8! SUZIE NEUWIRTH EDITOR-IN-CHIEF

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

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

NEWS

cont. from page 1 would have more than £10,000 in investable assets,” he said. “I think that the FCA is comfortable with that – it naturally sees P2P as a more sophisticated investor product.” Jonathan Minter, of analysis firm Intelligent Partnership, said the restrictions could end up limiting access for some investors. However, he added that the sector is not homogenous as there are already different minimum investment levels available. “The restrictions don't apply to those who have received investment advice, potentially increasing the importance of advisers to the P2P sector,” he said. “The FCA figures show that those P2P platforms

with a £1,000 minimum investment will still have access to a market of more than 25 million UK adults.” Other major players in the market such as Assetz Capital and RateSetter require lower minimum investments, at £1 and £10 respectively. Mario Lupori, chief investments officer at RateSetter, said the lower amount lets investors “dip their toe into P2P lending.” “People like to try before they buy,” he said. “If the minimum investment on one of our competitors is £1,000 then the buy aspect will be a lot higher if it needs to be in that 10 per cent bracket. “It’s a fair assumption that it is likely to affect their attractiveness to

general retail investors. “Others will have to rely on institutional money.” Iain Niblock, cofounder of P2P analysis and investment platform Orca, suggested some platforms may be tempted to lower their minimum investment to attract new customers. “P2P platforms need capital to match funds to borrowers,” he said. “It is the capital that fuels their business model, not the number of investors. If reducing the minimum investment limit generates more capital from more investors, we may see this strategy being implemented.” He warned that the operational and customer service cost of managing lots of small investors may

outweigh any benefits. Niblock added that the 10 per cent rule will be hard to police. “It will rely on the individual investors being forthright in their position,” he said. “From a strategic standpoint, an arbitrary 10 per cent figure might feel sensible but from a user experience standpoint it’s relatively complicated and confusing. “Peoples’ wealth changes drastically over time particularly at low levels of wealth and it may not be clear what should be included in the calculation. “I think common investors will either ignore the statement by simply clicking yes and for newer investors it may act as a deterrent.”

Personal Finance Society publishes P2P guide following uptick in queries MEMBERS of the Personal Finance Society (PFS) have been showing an increased interest in peer-to-peer lending, leading the PFS to produce its own ‘good practice’ guide to P2P. The financial planning trade body has partnered with Octopus Investments to create the guide, which tells advisers that recommending P2P products could help them to increase

their own assets under management, adding that “for suitable clients, it could prove a useful vehicle for excess cash holdings which may currently fall outside of the adviser’s view.” It also lists some ways in which the customers of these advisers may use P2P. These include: clients who are nearing retirement and wish to reduce their exposure to equities; landlords

looking for an alternative way to make a yield, or a vehicle they can put money into before making their next real estate investment; companies looking to boost returns on their excess balance sheet capital, to which they don’t require instant access; and self-employed clients with limited companies looking for a way to get excess cash in their business working harder.

“As the P2P market continues to grow, it is vital that advisers and their clients understand these products,” said Keith Richards, chief executive of the PFS. “We recommend advisers read the PFS’s good practice guide to make sure they understand the different providers and products in this market and how to identify suitable options for their clients.”

NEWS

Auditors under scrutiny after investment firm failures THE FINANCIAL Conduct Authority and the Treasury Select Committee have been urged to investigate the role of auditors as concerns grow about accounts being signed off for companies that are nearing collapse. The UK Crowdfunding Association (UKCFA), which represents a number of peer-to-peer lending and crowdfunding platforms, has raised concerns with both bodies about the role of auditors in overseeing companies. Companies House documents show that the auditor of collapsed P2P lending platform Lendy signed off its annual accounts in August 2018, at the same time that a significant number of its loans were underperforming. Lendy’s 2017 accounts were audited by Moore

Stephens LLP, which has since merged with BDO. The accounts showed that Lendy’s profits dropped from £2.6m in 2016 to £605,000 in 2017. The firm’s co-founder Liam Brooke said in the report that the platform’s balance sheet was “robust” and that growth has been “closely controlled.” Moore Stephens did not raise any concerns in the report and confirmed that the financial statements gave a “true and fair view” of the state of the company’s affairs as of 31 December 2017. However, a report by Lendy’s administrator

RSM, after the platform’s collapse, found that the level of non-performing loans had “steadily increased” over the period and noted concerns from investors since early 2017. A spokesperson for BDO declined to comment. Lendy was put under increased FCA scrutiny in September 2018 – a month after the 2017 accounts were signed off – due to concerns about non-performing loans and subsequent borrower disputes resulting from Lendy being unable to meet its commitments. Lendy’s previous

auditor, Rothmans, resigned in 2017. It said at the time that there were no circumstances connected to the resignation that should be reported to members or creditors of the company. Rothmans did not respond to requests for comment. “The UKCFA has raised concerns with both the FCA and the Treasury Select Committee not only about the enforcement of financial regulations in this case but also the role of audit and enforcement of company law,” said an emailed statement from the UKCFA to Peer2Peer Finance News. “The market depends on trust to thrive and grow, and regulation properly enforced – both of ourselves as companies and also as financial institutions – is essential to maintaining that trust.”

Rising number of cash ISA providers blocking IFISA transfers INVESTORS are being prevented from transferring money from investment ISAs into some cash ISAs, with experts warning that this could result in them taking unwanted risks. Analysis from Moneyfacts shows that there are 55 fixed-rate cash ISA products, out of 232 on the market, that will

not allow transfers from stocks and shares ISAs, up from 38 in 2017. This restriction typically applies to Innovative Finance ISAs (IFISAs) as well. There is nothing stopping firms from blocking ISA transfers as HMRC guidance says there is no obligation to accept transfers in, but they must al-

low savers to move money out to any wrapper. Andrew Hagger, founder of comparison website Moneycomms, said this could mean savers and investors having to take extra risk in stocks and shares ISAs or IFISAs when they do not want to. “Restricting the flow of funds from stocks and shares and IFISAs isn't

what the government had in mind when it introduced simple tax-free savings,” he said. “Limiting the choice of cash-based options for those looking to switch out of IFISAs or equity ISAs when markets are volatile could see people sticking with what they have and taking greater risk with their investment.”

NEWS

Lending charity raises money for vulnerable children in Somerset LENDING charity AFPA Trust is working to promote the public image of the alternative lending sector by raising money for good causes through sector-specific networking events. AFPA hosted a 4 July fundraiser (pictured) for at-risk children in Somerset, raising more than £6,000 from lawyers, brokers, accountants, lenders and funders who specialise in alternative lending. “We know that all financial services firms do not have a very good reputation on the lending side,” said Stephen Bassett, chairperson of the AFPA Trust. “We want to change that. Each AFPA event has a charitable element to it so members can nominate charities that they’d like us to support – usually smaller charities where the impact is greater and less money is taken out for administration. All of the money

that we raise through membership or events goes to charity.” As well as raising money for good causes, AFPA’s events offer networking opportunities and past events have led to many new partnerships and career opportunities being created, according to Bassett. “The main purpose of these events is to create a network in the lending sector,” he said. “Although we were born out of asset finance and leasing, it has expanded beyond that now to include the world of peer-to-peer lending and crowdfunding as well.” Bassett hopes that by raising the profile of the sector in a positive way, more young people may be encouraged to begin a career in lending, and he is working with a number of employers and universities on a long-term strategy to raise awareness of the opportunities available.

The next AFPA event will take place on 17 October in Bristol, while the charity’s annual Beaujolais Day fundraiser will be hosted on 21 November in London.

JOINT VENTURE

Investing for income

Frazer Fearnhead, chief executive of The House Crowd, explains how peer-to-peer property lending can be a great tool for income-seeking investors

ANK SAVINGS RATES are at an all time low and stock market returns are volatile to say the least. So it is no surprise that investors are looking at alternative options. Since it was founded in 2012, The House Crowd has been offering an attractive alternative for frustrated investors. The majority of The House Crowd’s investors are now income-seeking and they have earned more than £40m in consistent returns over the past seven years, by investing in secured property loans and development finance. “People invest for different reasons,” says Frazer Fearnhead, chief executive of The House Crowd. “There are those who would argue if it's best to invest for capital growth or for income, but my view is that capital growth is speculative. “You can look at the housing market for example and you may consider that properties always go up in value – and they may do over a sufficient time frame, but it's speculative. You're at the mercy of the marketplace. “Whereas investing for income is putting money into assets that pay out on a regular basis, regardless of whether the underlying value of that asset is going up or down.” Of course, that doesn’t mean that investing for income is immune from risk. There is always a possibility that the borrower will

default on a payment, which can reduce or even eliminate your returns. And then there is the issue of capital preservation. “Preservation of capital in many ways is more important than the overall return you get,” says Fearnhead. “One of the biggest strengths of our investment model is not just delivering great returns when things go well but the safety net that is in place to protect your capital if things don’t go to plan.” The House Crowd does this by lending money only to property owners and property developers and by taking a legal charge over each and every one of these properties. This means that if the borrower doesn’t pay back the loan, the platform has the legal right to repossess and sell the property to try and obtain

its market value. As a result of this rule, The House Crowd has recorded no capital losses in respect of its loanbook to date. “Of course people have to choose their own criteria for risk and reward and assess those risks,” explains Fearnhead. “It's always best to diversify your available capital over a wide spread of investments, because, with the best will in the world, there is always a risk, and something can go badly wrong with one particular investment.” The loans on The House Crowd’s platform offer target returns ranging from six per cent to more than 10 per cent, but Fearnhead warns prospective investors to resist the allure of the double-digit returns, especially when they are investing for income. “It does frustrate me when people see the headline interest rates and just go with the highest interest returns,” he says. “There is a correlation between the interest rate you're getting paid and the risk. You should only put a small amount of your available capital into higher risk loans and accept that there are likely to be more problems in delays and recovery than with lower LTV loans.” By doing all they can to mitigate their clients’ risks, The House Crowd is able to give them peace of mind, so they can benefit from the best ratio of risk and reward, with minimal fuss.

EVENT

Peer �Peer Finance News Regulation Breakfast Briefing From platform collapses to regulatory changes, there is a lot to keep up with in the peerto-peer lending sector.

With this in mind, Peer2Peer Finance News hosted a Regulation Breakfast Briefing at The Soho Hotel in London with a panel comprising Nike Trost, senior manager at the Financial Conduct Authority (FCA), Atuksha Poonwassie, managing director of Simple Crowdfunding and director of the UK Crowdfunding Association (UKCFA), Andrew Holgate, chief executive of Equitivo and Frank Brown, managing consultant at Bovill. The panel and Q&A session delved into the current and future regulatory framework and provided a practical insight into how to address any challenges ahead of imminent rule changes. Additionally, Bruce Davis from the UKCFA, the FCA’s Trost and Brown of Bovill made speeches, giving the audience their take on the current state of P2P regulation. The invite-only event – attended by chief executives and compliance heads from P2P platforms – was supported by headline sponsor Bovill and sponsors Equivito and Quantuma. It was also backed by the UK Crowdfunding Association. The breakfast event – held under Chatham House rules – provided delegates with plenty of food for thought, so how will the sector cope with what is being served? Reporting by Marc Shoffman

EVENT

OST PEOPLE WOULD associate December with preparations for the festive season, but the peerto-peer lending sector has its own regulatory gift coming that month when the Financial Conduct Authority’s (FCA) finalised rules for platforms go live. Platforms, consultants, analysts and regulators gathered at a Peer2Peer Finance News briefing on 27 June to discuss how to get ready in time for the 9 December deadline. The biggest talking point on most people’s lips was appropriateness tests. The FCA has introduced new marketing restrictions and appropriateness tests as part of its long-running review of the sector.

Under the City watchdog’s rules, platforms will be restricted to marketing to sophisticated and highnet-worth investors, people receiving regulated investment advice and

those who certify that they will not invest more than 10 per cent of their portfolio in P2P loans. P2P platforms will need to carry out an appropriateness

SPONSORS

Bovill is an independent, specialist financial services regulatory consultancy. With offices in the UK, Asia and America, the firm offers a globally integrated service, covering all aspects of the regulatory landscape. Bovill has worked with crowdfunders and peer-to-peer lenders since the beginning. The firm’s consultants come from backgrounds in law, compliance and consulting and it employs a number of ex-regulators. The firm's advice is pragmatic, proportionate and commercial. For more information, please email pbarton@bovill.com.

Equitivo is a unique business consultancy dedicated to the fintech market. Founded by Assetz Capital co-founder Andrew Holgate and a team of expert consultants, Equitivo works with fintech businesses to develop and improve strategy, operations and performance. It consults at the very highest of levels and on all operational elements which determine success in this fast-paced and dynamic industry. The firm has expertise in all types of fintech businesses, with a particular focus on alternative lenders. For more information, please email contact@equitivo.co.uk.

Quantuma is an independent advisory firm serving the needs of mid-market and corporate companies and their stakeholders. Its experts advise clients on business transactions, resolving business disputes, mitigating risk and managing operational and financial challenges. Quantuma has deep experience and specialist expertise in corporate finance, forensic accounting and investigations, restructuring and insolvency. It works alongside lenders, peer-to-peer platforms, major law practices, private equity houses, accountants and regulators. For more information, please frank.wessely@quantuma.com.

EVENT

assessment that considers a clientâ&#x20AC;&#x2122;s knowledge and experience of the P2P investment before the platform can accept a subsequent instruction to invest. At the breakfast event, there were calls from P2P platform executives for more clarity over what an appropriateness test should look like. There were also queries regarding at which stage an investor would need to complete the test. For example, whether it would be when a potential customer registers on the website or when they are actually ready to invest. Some industry stakeholders warned that it could be difficult for all firms to get their systems prepared in time for the December deadline.

There were also worries that new customers could be deterred from the sector, as investors may look elsewhere if it appears too difficult to put money onto a platform. But consultants in the room said firms should be ok with the regulatory changes as long as they can show and explain their workings. Panellists agreed that the tests cannot just comprise yes/no questions and some suggested trade associations, consultants and regulatory feedback could help the market. There was also a concern that the 10 per cent rule could land platforms in hot water. One audience member suggested there could be issues if an investor lied

about complying with the limit and later complained. Questions were raised over whether completed appropriateness tests should be taken at face value or whether they would need independent verification. A comparison to the US was made, where accountants need to verify this sort of information. Another attendee questioned whether the 10 per cent rule would shut out most investors if a platform had a minimum investment of ÂŁ1,000 as that would require ÂŁ10,000 of savings, which many members of the public do not have. This would require platforms to instead favour sophisticated and high-net worth investors.

EVENT

“

There was a concern that the 10 per cent rule could land platforms in hot water.

”

A sophisticated investor is defined in the FCA’s conduct of business rulebook as someone who is either a member of a network or syndicate of business angels for at least six months, has been so for at least the last six months, has made more than one investment in an unlisted company in the past two years, has previously worked in a

professional capacity in the private equity sector or in the provision of finance for small- and mediumsized enterprises, or has been a director in the past two years of a company with annual turnover of at least £1m. A high-net-worth investor is defined as someone who had an annual income of £100,000 or more in the latest financial year or net assets of £250,000 or more. The shift in investor type wasn’t the only concern. There were also warnings that the level of work needed to create and manage appropriateness tests would sway the industry in favour of the big players with larger compliance teams, deter new entrants and result in a diminished sector.

Stakeholders generally agreed that there will be more barriers to entry but some also argued that more consolidation could be a positive outcome for the sector, leaving the best and brightest players. However, some noted that stricter banking regulations have not deterred start-ups such as Starling and Monzo, so refuted the idea that the updated rules would deter new entrants. There was also discussion of whether the regulations could have made distinctions between different business models and types of lending, but it was felt this would create more uncertainty and confusion. The rule changes come as the industry battles against the negative

EVENT

publicity of the collapse of Lendy and last year’s closure of Collateral. The FCA’s new rules have aimed to beef up platforms’ wind-down plans, as well as ensuring that there is more transparency over defaults and the risks being taken by investors. Some industry figures at the event warned that there was a danger of P2P platforms relying on continued growth and not paying enough attention to their wind-down plans. When it comes to managing risk, platform executives at the event were asked to consider if this was something they would let their granny invest in. It was also pointed out that many

“ It could be difficult

for all firms to get their systems prepared in time for the December deadline

”

EVENT

platforms aren’t lending their own money and are recommending loans despite not having ‘skin in the game.’ Some questioned whether independent and external verification was needed to assess the risk and safety of a platform, while others debated whether regulation solved this, although it was pointed out that regulated firms can still fail. It was concluded that the biggest test of the success of the regulations would be if any future platform failures are due to market dynamics rather than mismanagement. Platform executives were supportive of these changes, despite there being outstanding issues, but there were some areas of the FCA’s work that they were concerned about.

One of the biggest talking points was the City watchdog’s warning about the risk of Innovative Finance ISAs (IFISAs) and mini bonds that came out in peak ISA season. There was a feeling that the

announcement was poorly timed and the FCA was unfair to associate IFISAs with unregulated mini bonds, with some attendees noting that stocks and shares ISAs can be more volatile yet do not get such

EVENT

negative attention. Furthermore, stakeholders raised the point that the P2P loans in an IFISA are the same as those outside a wrapper so if it is high risk loans the FCA is concerned about, it should be talking to the platforms in question rather than criticising the IFISA wrapper. It wasnâ&#x20AC;&#x2122;t just P2P regulations that attendees were concerned about. Issues were also raised about firms operating in unregulated spaces such as bridging and business lending, which compete with P2P. It was warned that a lack of regulation for some types of firms created an uneven playing field and could be detrimental for borrowers. Others said it was difficult to fully regulate the bridging and business lending space. There were some suggestions that the FCA could

â&#x20AC;&#x153; Attendees highlighted that investors were putting debt recoveries at risk

â&#x20AC;?

introduce a regime similar to buy-to-let rules where consumer or accidental landlords get more protection than professionals. This, however, could mean appropriateness tests for the borrowers, which was seen as a step too far. Beyond regulations, delegates

expressed their views on how their investors behave, particularly when it comes to sharing sensitive information. Attendees highlighted that investors were frequently breaching terms and conditions and putting debt recoveries at risk by sharing information about loans that have fallen behind with repayments. Some asked whether forums should be regulated, but others said it was important investors had places to express their views or negative information would just end up in the press. It was even suggested that the issue of investors sharing private information could result in legal action. Some industry onlookers said that the industry should do a better job of explaining the debt recovery process to investors and be more transparent about the situation. Overall, delegates welcomed the tighter regulations and their impact on the sector. The changes were seen as a positive move that will help the market to develop and become more stable. The main concern is keeping investors interested and getting it right in time for the December deadline.

COMMENT

What we talk about when we talk about crowdfunding and P2P Following Peer2Peer Finance News’ Regulation Breakfast Briefing, UK Crowdfunding Association directors Bruce Davis and Atuksha Poonwassie explain the importance of nimble regulation in a growing sector...

T HAS BEEN 15 YEARS since the launch of Zopa and nearly 10 years since the idea of regulated crowdfunding was first introduced to the Financial Conduct Authority (FCA). We have come a long way since then. The recent Peer2Peer Finance News event on regulation provided an excellent opportunity to discuss the changes affecting the sector – and specifically, the recently completed review by the FCA. Since 2016, the FCA has worked hard to try to understand a sector which has innovated and grown hugely since 2014. The regulator has engaged independent researchers (including the Bauman Institute and the Cambridge Centre for Alternative Finance) and platforms have provided huge amounts of data and management time to make sure that any recommendations are based on solid evidence and an understanding of business impact. It is hard to think of another sector in the financial services world which has engaged so openly and willingly with the regulator – surely a reflection of its maturity and pro-regulation stance. At the P2PFN event, the panellists’ responses focused on the big discussion from the review, the application of categorisation and appropriateness for P2P

loans (already a requirement for investment in crowdfunding) and the additional guidance for wind down plans and target returns. We are sure that the debate and Q&A following the panel discussion gave the regulator and policy observers food for thought. At the UKCFA we fully recognise the efforts of the team to engage and understand this process as well as appreciate the often frank and candid discussions about the need for balance between consumer protection and innovation. We hope to continue that regular dialogue with the regulators, industry and government as we implement the rules and continue to develop the sector.

“ It is important that the implementation of the rules does not become a prescriptive exercise

”

The important thing now is that the implementation of the rules remains true to the original spirit of the UK’s crowdfunding regulations, which are principles based. It is important that the implementation of the rules does not become a prescriptive

exercise and keeps as much as possible the responsibility with platforms to deliver. In particular this means making sure that the appropriateness test is carried out in a way that is meaningful to the particular investment process of an individual platform and not a tick box exercise for all to comply no matter what business model is being used. There was also some debate about the recent issues at London Capital & Finance and Lendy and no small frustration that those who follow the regulations (and actively work to support their development) would be affected by the failure to identify and act on situations of potential lack of competence or even alleged fraudulent activity. All markets are based on confidence and we need confidence that the regulator has the resources and the powers to act if individuals or companies break the rules or the law. No doubt there will be issues arising as platforms understand the detail of the recommendations, and the devil is always in the detail. Hopefully, the sector can continue to grow and innovate in the interests of customers, to keep the crowd in crowdfunding and ensure platforms build their businesses in a way that puts the appropriateness of their investments front and centre.

BLOCKCHAIN

Blockchain benefits

Blockchain has been touted as the technology set to transform financial services as we know it – but could it do the same for peer-to-peer lending? Andrew Saunders investigates

IVEN THAT ITS MOST famous – or infamous – application is as the technology underpinning wildlyfluctuating cryptocurrencies such as Bitcoin, Litecoin and Ripple, perhaps it is not surprising that the blockchain has taken quite a while to start making inroads into the comparatively sober world of peer-to-peer lending. After all, it’s tough enough for platforms to persuade investors to put their hard-earned money into what is still a relatively novel market, without also having to explain the inevitable associations

of high-stakes gambling that accompany any mention of blockchain technology. But image problems aside, the technology does have its appeal for both investors and borrowers, promising a new generation of faster, cheaper and more efficient services – in theory at least. The number of platforms which are either using or looking into blockchain technology is on the rise – even if overcoming that whiff of the Wild West in investors’ minds is one of the first hurdles they face. “The problem is that the vast

majority of people think that Bitcoin is the blockchain and the blockchain is Bitcoin,” says David Bradley-Ward, founder of Ablrate, an asset-backed lending platform which has developed a blockchainpowered secondary market in partnership with tech provider ASMX. “But that’s like saying that Google is the internet – it’s not, it’s just something on the internet, like Bitcoin is just something on the blockchain. “When I make a presentation the first thing I say is that we operate on the blockchain for a reason. We’re not issuing a token, we’re

BLOCKCHAIN

not Bitcoin and we don’t have any cryptocurrency.” For Bradley-Ward, that reason is that the blockchain is good for competition, enabling multiple smaller platforms to get together and behave like one big lender, writing loans that they would not be able to fund alone. “Very soon I can see a time when the same deal will be on several platforms – it will be a £2m deal and each platform will have £500,000 of it,” Bradley-Ward predicts. “That’s going to be the trajectory in my opinion.” He believes the technology will eventually be used for primary loan origination too, but is initially best suited to the secondary market, where liquidity – the ability for lenders to sell loans before they mature – is at a premium. Ablrate’s tie-up with ASMX will provide a collaborative secondary market for P2P platforms and has already signed up Huddle Capital and The House Crowd. The central feature of all blockchain platforms is that they provide a distributed secure and immutable record of transactions and they do it entirely automatically. “The challenge is always going to be the issues that arise between platforms,” says

“

The vast majority of people think that Bitcoin is the blockchain and the blockchain is Bitcoin

”

Bradley-Ward. “Whose ledger is the proper ledger? The blockchain provides an immutable and perfectly trusted ledger between all the parties on a network. Noone can faff about with it and people can buy and sell loans on different platforms knowing that a proper ledger is being held.” If it’s been a slow burn for B2B non-crypto blockchain applications, it will be even slower for consumer ones, says Tyler Welmans, UK lead at Deloitte’s blockchain lab. That’s because the level of regulation that applies to retail products mean that the technology is not a simple plugand-play option. “The reality is that it will take time,” he asserts. “Digital ID is the foundation for many blockchain platforms. At the regulated end of the spectrum we can’t start enabling consumers to hold or trade digital assets in their accounts until we know

exactly who they are. If you are talking about a big global insurer or a major bank getting involved in this technology, there is a big overhead of compliance.” But once the foundations are in place, he thinks there is potential for the blockchain to live up to its hype as a transformative solution. “We will see unbundling of what banks and financial service providers do, analogous to what happened with the telecoms providers 15 years ago,” he adds. For example, getting new customers onto a lending platform will be substantially quicker and cheaper to do in a world where everyone already has a pre-verified digital ID. “The indications are that the blockchain could well end up changing the way that consumers think about and access financial services, and the sort of organisations they look to as providers,” says Welmans. Another blockchain-related development that has been heralded as opening up the market for financial services applications is tokenisation. In its simplest form, a blockchain token is a digitalised representation of something that has value – an asset, shares in a company or a financial instrument for example. The token enables that value to

THERE ARE THOSE SHOUTING ABOUT BEING THE BEST SECURED LENDER. TRY US. ABLRATE.COM STRAIGHT TALKING, TRANSPARENT LENDING FOR QUALITY BUSINESSES

Capital at Risk

BLOCKCHAIN

be traded electronically on a blockchain exchange. In theory, just about anything can be tokenised, but the practical and legal realities of doing so can be substantial, as Radko Albrecht, founder of Berlinbased small- and medium-sized enterprise (SME) lender Bitbond, explains. Bitbond – which uses the Stellar blockchain for payments processing to facilitate faster and cheaper cross border lending – has just made German financial history, raising $2.3m (£1.9m) in July via the first ever securitised token offering (STO) to be approved by the country’s financial regulator, BaFin. “The legal challenges were way bigger than the technological ones,” he says. “We wanted to go to the capital markets to diversify our refinancing, so we thought why not do a bond offering which from a business perspective is a normal bond offering, but from a technology standpoint the ownership is represented by a digital token rather than by a conventional paper certificate?” It was easier said than done – having developed a complex and expensive legal concept for the trading of a digital security, it took several more months of back and forth with BaFin before the prospectus for the BB1 token was approved in January this year. Albrecht says they only found out afterwards that their proposal was the only one approved out of 130 similar applications. The bond is an auto-diversified product aimed at smaller retail investors. Investors from 87 countries were invited to take part in the issue, and Bitbond’s existing loans platform is now open only to institutional investors.

“

Blockchain can increase security, and it is much more auditable

”

It sounds complicated, and it is, admits Albrecht. But now other platforms are keen to use Bitbond’s STO model, so the firm is planning to start white labelling its tokenised asset technology alongside issuing more of its own bonds. “We are already working with a real estate platform that will go live in four to six weeks – all the investments on it will

be tokenised,” says Albrecht. “I believe we will see a lot more assets being tokenised.” Chris Hancock of Crowd2Fund also sees a bright future in the blockchain – his new business FinBlocks aims to tackle the problem of identity fraud online. The idea was born out of the need for better fraud protection, AML and ID services online. “We thought there must be a better way,” says Hancock. “And there wasn’t much competition that we could identify.” FinBlocks is a blockchainpowered payments processing platform which can be used by lending businesses to provide cheap, automated and above all,

BLOCKCHAIN

“

I expect the blockchain to keep growing

”

secure payments services. “The FinBlocks system securely holds client funds in a regulated way and means that a marketplace business doesn’t have to build that capability themselves,” Hancock explains. “They can outsource it

to us so they can focus on serving their customers.” Having tested the concept on the Crowd2Fund platform, FinBlocks was launched as a standalone business last month. Hancock says that concerns over the viability of cryptocurrency should not obscure the value of the blockchain itself. “I am still very sceptical about cryptocurrencies, but what I do believe in is the engineering methodology of the blockchain, and we have to be very clear about the differences,” he explains. “The blockchain can increase security, and it is much more auditable [than existing ledger technology]. You can go back and see what the status of the data was at any given point in time.” For Martins Liberts, founder of Lithuania-based Debitum Network, the theoretical value of the blockchain to lenders is currently hampered by a lack of affordable and lender-specific blockchain platforms. Like Bitbond, Debitum is a crossborder SME lender, but it currently

uses the Ethereum blockchain to process payments, which he says has turned out to be too costly. “It is so expensive to do every small transaction on the blockchain – we do some but have not fully implemented it,” says Liberts. “The commission can be up to a dollar on a $10 transaction – that’s useless. Even 50 cents is no good.” The search is on for a more suitable platform, says Liberts, but Debitum’s approach – which includes an innovative standard risk assessment score for borrowers in different countries – remains blockchain inspired. “We follow the decentralised philosophy – we don’t believe that the company should control every step of the process, or that it can be the best at everything,” he states. Despite these teething troubles he believes that the blockchain’s advantage will be realised in the long run. “It’s new technology and there is a lot of experimentation, but I expect the blockchain to keep growing,” he says. “There is a lot of money in Asia and many small businesses in Europe, and it can make international transactions cheaper and faster. “If you want to be one of the first you have to be there moving it forward. That’s what we are trying to do.”

THERE ARE THOSE SHOUTING ABOUT BEING THE BEST SECURED LENDER. TRY US. ABLRATE.COM STRAIGHT TALKING, TRANSPARENT LENDING FOR QUALITY BUSINESSES

Capital at Risk

THERE ARE THOSE SHOUTING ABOUT BEING THE BEST SECURED LENDER. TRY US. BUT FIRST WE HAVE TO BE UPFRONT WITH YOU... YES WE ARE A FINTECH FIRM BUT; we have no slides, no pool tables, we don't even have a gaming console. There is no coffee machine (to be fair it broke) and no bean bags. We have no piercings (that we know of.. er hmm), we have one tattoo between us and there are no exposed bricks in our office, or metal posts, or concrete pillars, or neon signs.

We have rented a real office in a real building and we don't share desks. The only 'hot desk' we have is in the corner of the main office when the sun comes in it gets sweaty. We do have an air conditioner for those times, we call it 'Pengu'. We take real security against real companies and we don't call this an 'algorithm'

Yep. As a Fintech firm we are pretty rubbish at being hipsters. Sorry. What we do have is a great platform, giving returns of over 11% to lenders, an Innovative Finance ISA and ÂŁ48 million in loans under our belt. We have a great team that can understand your business and get it financed and if things don't go to plan, we know what to do. So if you are looking for slides, exposed bricks and avocado on toast when you visit, we are not for you. Sorry. (Our CEO does have a beard if that helps?)

ABLRATE.COM - STRAIGHT TALKING, TRANSPARENT LENDING FOR QUALITY BUSINESSES Up to 15% in interest Innovative Finance ISA available online Secondary market where you can buy and sell with ease keep an eye on your portoflio with credit reports available online updated monthly

FCA AUTHORISED AND REGULATED Instant Returns, earn money from the moment you bid Underwriter program for HNWI

WHERE LENDERS COME TOGETHER WITH BORROWERS FOR ASSET BACKED TRANSACTIONS Your capital is at risk and interest payments are not guaranteed even where security is available. Investments not covered by the Financial Services Compensation Scheme. Selling on the secondary market is based on demand and there is no guarantee you will find a buyer for your loans. Tax rules are based on individual circumstances. Past performance is not a guarantee of future performance (We also cannot guarantee our CEO will keep his beard).

JOINT VENTURE

Redefining liquidity

Ablrate will give lenders much more choice when it launches its blockchainpowered secondary market. Chief executive David Bradley-Ward explains how it will work

IQUIDITY IS ONE OF THE biggest challenges faced by any market and the peer-topeer lending sector is no different. But Ablrate is working on a solution. Last year, the platform began working towards the launch of an ambitious blockchainpowered secondary market which will also be made available to all P2P platforms. The aim is to make the secondary buying and selling of loans more efficient and therefore improve liquidity across the sector. “This is cooperation, not aggregation,” said David BradleyWard, chief executive of Ablrate. Ablrate has partnered with blockchain provider ASMX, a company started by David BradleyWard, to create this marketplace, and it is due to launch in the fourth quarter of this year. “The idea is to provide a service for platforms’ internal markets, but also to connect all platforms on the ecosystem,” explains BradleyWard. “To do this you have to have a ledger system that books all settlements accurately, securely and in a way that all platforms can agree is correct. The cost of doing this would traditionally render smaller trades unprofitable for all and, effectively, you would not be able to create a market. So that's how we hit upon using blockchain technology which uses cryptography and user consensus to secure and accurately record and settle transactions.”

Three platforms are currently working towards integration with ASMX: Ablrate, Huddle Capital and The House Crowd. Discussions are also ongoing with a number of other platforms ahead of the secondary market’s launch later this year. “With all the regulatory changes that have come in recently, we believe that the wind is moving towards liquidity,” says BradleyWard. “The importance of liquidity to a marketplace cannot be overstated. We’ve originated around £50m in loans and around £39m of that is traded on the secondary market. So that gives you an idea of the importance of it to our lenders, there is no reason to assume that it is not the same on every platform, and some don’t even offer a rudimentary secondary market.” Ablrate’s own secondary market provided the inspiration for this

venture. It is extremely popular with the platform’s users, and currently trades around £30,000 to £40,000 each day, although it has traded upwards of £150,000 per day in the past. Ablrate’s secondary market is currently used by around 5,000 registered investors, and they are not shy about speaking up when they see a potential problem. “There was some criticism of how our market operated in the old days,” says Bradley-Ward. “We received feedback that a secondary market operating on a bid and offer basis would attract people flipping loans, i.e. buying large amounts in the primary market and flipping at a premium in the secondary market. “We’ve now added a delay on the amount of time before you can bid so other people have the opportunity to read the documents. “We've also got three tiers of bid limits, so for an hour there might be a £1,000 limit, for the next it might be £5,000 and so on. We don’t always deploy these limits but they are available if we need them. We are trying to create liquidity for the benefit of all lenders and not just a trading opportunity for market participants.” Through the integration with ASMX and by paying attention to the finer points of liquidity, BradleyWard may be creating something truly unique.

PROFILE

Serving the industry

Alison Harwood, head of Varengold’s London branch, tells Andrew Saunders what the German bank is doing for UK peer-to-peer lenders

NLIKE MANY LARGER, better known rivals, Varengold has no UK branch network and doesn’t indulge in slick advertising, but despite this undeniably low-key approach the German bank has quietly been building a name for itself as the goto funding partner for smaller peerto-peer and marketplace platforms looking to expand their lending. That’s due in no small part to the efforts of its London office head Alison Harwood and her team, behind deals such as the bank’s £45m investment in MarketInvoice in 2017 and an agreement with Assetz Capital announced in March this year. Although Varengold is based in Hamburg and funded by German retail deposits, Harwood’s London office is a vital part of its strategic mission – to be an expert partner for marketplace lenders, providing not just money but advice and insight too. “London is a location with some very highly skilled people, the industry here is highly developed and the rest of Europe takes its cues from what the larger players have achieved in the UK,” says Harwood. The idea is to team up with business lending platforms who have more good borrowers than they can service with retail P2P investments and provide them with a steady stream of funding – usually over three years – to write more loans more quickly. As Harwood explains,

Varengold acts as a kind of junior institutional investor bridging the gap between venture capital (VC) funding and larger institutions. “We’re a sort of hybrid providing the middle step between the VCs and

the larger asset managers, pension funds and so on,” she comments. “Our core aim is to be a partner for fintechs and a partner for the marketplace lending industry. We don’t have any aspirations to become

PROFILE

a direct lender ourselves – we don’t want to put ourselves in a position where we would be competing with our clients.” So what about that latest Assetz deal? Why choose a partner that is regionally focused and not part of the London fintech scene? “We like the UK property market, it allows us to generate a good risk adjusted return and helps our goals of lending into the real economy,” says Harwood. “Assetz has a good track record, it’s profitable, they have some very experienced people – in their loan management team, their recoveries team – and the structure that underpins their decision making is also very good.” But she also admits that a business providing bridging finance for small- and mediumsized enterprise housebuilders in the North West of England has a

“ Our core aim is to

be a partner for fintechs and a partner for the marketplace lending industry

”

certain post-Brexit-vote appeal. “It offers geographical diversity,” she says. “We were very focussed on London and the South East, and since the Brexit vote we have been highly engaged with clients on their management of the risks, and on managing the portfolio away from prime central London.” Although Varengold started out as an asset manager back in the 90s, it got its banking licence as recently as 2013, so it is unusual amongst

banks in that it is around the same age as many of its clients. Youth has its advantages, says Harwood. “We’re not all middle-aged men in bowler hats, like the bankers in Mary Poppins. At Varengold we’re quite entrepreneurial as an organisation because we are young. That does align us more closely with our clients.” But being entrepreneurial does not mean taking seat-of-the-pants decisions and simply hoping that they will come good, she adds. Investing in smaller fast-growing firms is an inherently risky business so both Harwood and Varengold believe in doing their homework. “The due diligence we demand is a very thorough process,” Harwood states. “There’s a desktop review with full documentation across all the operating areas of the business, and then there’s a full-on site

PROFILE

review including interviews with all senior management.” Then it’s over to Varengold’s inhouse PhD-level mathematician for a deep-dive into the validity of financial projections, and a stresstesting credit assessment. It’s a disciplined process of look-beforeyou-leap that can demand a fair amount of time and effort from clients but that pays dividends in the end. “When clients get funding from us as a first institutional investor, we really see some positive acceleration in the business,” Harwood reveals. That discipline extends to the way deals are structured and managed too. “We always require first loss positions, because clients need to be aligned with us on the downside, not only on the upside,” says Harwood. “They need to stand by the quality of the loans they are originating.” Its funds are deployed primarily for lending on partner platforms, but Varengold will take small equity stakes as well. “We often receive equity kickers as part of our funding package,” Harwood explains. “Minority stakes that we only ever hold passively, but it does incentivise us, where there is excess funding available, to deploy it where we are aligned on the equity side.” Harwood trained as a lawyer and after stints at Linklaters as a tax associate and in structured finance at Barclays, joined Varengold in November 2015 as senior VP of the London office. Why leave a good job at a brand name investment bank to join a small German outfit that few outside its sector have heard of? “At Barclays I was exposed to some really interesting financial structuring and technical work.

“ We’re quite entrepreneurial as an organisation”

But in a large bank there is always a huge amount of bureaucracy, and getting things done takes a very long time. I wanted to be somewhere a bit more nimble, where I could apply those skills in a more entrepreneurial way.” She also reckoned that her career would progress further and faster in

a smaller outfit. “I felt I wanted to move a bit quicker, which I have,” she explains. “I’m now head of the London branch in just four years.” Harwood is keen to do her bit to promote diversity in two sectors – banking and fintech – where women are still under-represented. “I feel privileged to be a woman in

PROFILE

“

It’s all about how we can serve our customers, not how they can serve us

”

a senior position in the industry, and it’s something that Varengold has been very supportive of,” she comments. “In the majority of the meetings I have I will end up being the only woman in the room. But I prefer to look at that as an opportunity. The perspective that being a woman can bring to banking and finance has been well documented since the crash.” With a revamped website and a new, more specific strategy of building long-term sustainable

partnerships with clients, Harwood has big plans to keep Varengold growing. Key amongst them is the development of new products and services such as its latest fronting offer, intended to make access to new European markets more straightforward by allowing clients to piggyback on Varengold’s regulatory infrastructure. “Fronting is a new product line we have spent quite a lot of time developing, and we’re just about to go live with our first very large client,” she reveals. “It’s something that I’m very excited about and that I think will be important for the development of the business.” By allowing clients to plug into the EU passporting rights that Varengold’s licence permits, the bank can act as a third party to ‘front’ operations in countries with differing regulatory regimes that clients would otherwise have to devote considerable time and effort to developing on their own. “As a bank with a full service licence that can be passported across Europe, to able to partner with clients so they can utilize that regulatory infrastructure is a powerful thing – especially when you can bolt it onto the funding side,” she says. The advantages of fronting are not purely about overcoming regulatory hurdles. It’s part of a drive by Varengold to become an operational as well as an investment partner with its clients. “It’s not just

the regulatory umbrella – we are a full service bank with front, middle and back offices that can be utilised by clients in a tailored manner to fit their needs,” she says. For example, rather than building their own KYC or onboarding teams, customers can use Varengold’s resources and technology to do it for them. It’s an approach that she hopes will help the bank not only hang onto existing clients as their funding requirements grow beyond its ‘first institutional investor’ sweet spot, but also to attract larger clients. “We've had a few conversations with some of the more mature platforms, where maybe we aren’t quite the right fit for them anymore on the funding side,” she states. “But this is a way that we can help facilitate the next step for their business.” Harwood is looking forward to the role she can play in moving the bank and its customers into those new markets and services. She will not only be delivering Varengold’s growth strategy but also providing the same kind of customer-centric approach to funding marketplace lenders, that those lenders already provide to their own customers. “I have a really interesting role working with dynamic clients, growing a business I’m directly responsible for,” she comments. “You do feel at the cutting edge of financial innovation, in an industry that is having quite an impact on where we go as a society for our financial needs. We’re coming out of an age where banks were almost there to regulate their customers. Now it’s all about how we can serve our customers, not how they can serve us.”

Maximise your capital

Competitive fixed rate bonds Invest The Wellesley Way

The Wellesley Way

Desktop www.wellesley.co.uk

Your capital is at risk and interest payments are not guaranteed. Investment in any Wellesley Listed Bonds are not covered by the Financial Services Compensation Scheme.

JOINT VENTURE

A year to remember

Wellesley has had a banner year, reaching a series of milestones while completely revamping its platform. Managing director Luke Madden tells all…

T’S BEEN A BIG YEAR for property lender Wellesley. Over the past 12 months, Wellesley has gained full regulatory authorisation, repaid all capital and interest on its existing bonds and undergone a revamp of its product offering. In February, Wellesley received enhanced permissions from the Financial Conduct Authority (FCA) allowing it to arrange investments and safeguard client money and client assets. This means that the platform can now distribute regulated listed bonds directly to its customers on its own fullyregulated platform and these listed bonds are ISA eligible. “We're always looking for innovative ways of serving our customers better,” says Luke Madden, managing director of Wellesley. “In the peerto-peer market you have had the evolution of the Innovative Finance ISA in the last two years which has been a great success. Our listed bonds themselves can also be held in a stocks and shares ISA. So, I think what you're seeing is platforms maturing in line with the market.” For Wellesley, that means putting the customer front and centre and responding to feedback regarding accessibility, risk and ease of use. Last year, Wellesley hired MIAC Analytics to conduct a series of stress tests on its loanbook. These tests were reassuring and showed only small losses in the very negative scenario where house prices fell by a third. This was part

of Wellesley’s efforts to “raise our standards in line with the new regulations and provide greater transparency of the loanbook for our customers so they can better understand the impact of an adverse economic environment,” Madden says. “Regulation is a good thing,” Madden adds. “It's a good thing for the industry and it’s a good thing for the consumers. It raises the minimum standards that all firms have to adhere to. It also raises the barriers of entry, and again, that's a good thing from a consumer perspective as long as the market remains competitive.” In many ways, Wellesley’s journey over the past year has mirrored the overall growth of the alternative finance sector. Enhanced regulations and a focus on customer safety will soon be the norm, but Wellesley has been preparing for

these changes even before they were announced by the FCA. In launching its own dedicated investment platform and stocks and shares ISA, Wellesley is anticipating the next big trend – usability. By creating its own investment platform, Wellesley has streamlined the investing process in a way that makes it a leader in the alternative finance space. In the year ahead, Wellesley’s primary goal is to be flexible so it can serve its customers better. “In a year’s time we would love to be able to say that the enhanced permissions and platform which were brought in this year have created a happy customer base,” says Madden. “Ultimately, we see relationships as the cornerstone of our business, both lenders and borrowers, and we will measure our future success on the growth of these relationships.”