Peer2Peer Finance News August 2021 by Alternative Credit Investor

>> 7

ETHICAL INVESTING

P2P platforms support green labels

OPEN BANKING

>> 10

The initiative is taking off

AxiaFunder chief Cormac Leech on litigation funding >> 16

ISSUE 59 | AUGUST 2021

Industry blasts proposal for P2P development loan marketing ban

PEER-TO-PEER lending platforms, trade associations and other stakeholders have hit back at the Financial Conduct Authority’s (FCA) proposals regarding the marketing of P2P property development loans to retail investors. The City regulator is considering tougher financial promotion rules for “high-risk” investments, including P2P lending. It noted similarities between P2P agreements – using the example of a property development loan – and speculative illiquid securities (SISs) and asked whether this should impact the marketing of such products to retail investors. "Where a P2P agreement has similar features to a SIS (for example where it is a loan to a property developer) there is the possibility for arbitrage,” the FCA said in the discussion paper. Industry stakeholders submitted their feedback to the FCA ahead of the

1 July deadline. Peer2Peer Finance News understands that the FCA is likely to publish a consultation paper next, although a date has not yet been confirmed. The 36H Group submitted feedback on behalf of its six member platforms. Mike Carter, head of platform lending at the 36H Group, said the trade body’s members support the FCA’s work to protect investors from potential harm but were concerned about the impact the proposals would have on

the industry. “Our members are concerned that recategorising P2P property loans as SIS investments will unnecessarily significantly reduce investor liquidity for this product, penalising the platforms which have demonstrated positive investor returns, and could make the retail operations of some platforms unviable,” he said. “Instead, they believe the focus should be on making sure the risk management framework is adequately implemented at platforms

rather than preventing those platforms who have good risk management from being able to offer the product to existing investors as they do currently.” 36H Group members believe that P2P property platforms are materially different from other lenders that may fall within the SIS category because of the introduction of the risk management framework for all P2P platforms in 2019. Carter said this framework, if implemented properly, ensures that a platform has skilled staff who know how to originate good quality loans; can assess the risks of the loan and the underlying property development projects; execute lending agreements appropriate for a property loan and take security; and after the drawdown they monitor the loan and if necessary exercise security on behalf >> 4 of investors.

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EDITOR’S LETTER

Published by Royal Crescent Publishing

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

unning a peer-to-peer lending platform that accepts retail investors must be a character-building experience. Those that have been operating in the market the longest will have gone through a lengthy authorisation process, complied with the tougher regulations introduced in 2019 and are now potentially facing another whip from the Financial Conduct Authority. Could the City watchdog’s recent proposals to strengthen financial promotion rules for “high-risk investments” including P2P be the final nail in the retail investor coffin? As our front page story shows, P2P property development loans in particular are facing scrutiny. Obviously it’s incredibly important that P2P platforms are behaving responsibly and that everyday investors know the risks involved, so I’m in full support of stringent oversight from the regulator. But cutting retail investors out of P2P entirely would be bad for everyone. Diversification benefits both parties. Retail investors can make money away from the volatile stock market and low-yielding cash savings accounts, while platforms have another funding source alongside institutions, family offices or high-net-worth individuals. I really hope that the FCA gets the balance right, or it will be to the detriment of the industry and consumers.

SUZIE NEUWIRTH EDITOR-IN-CHIEF

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NEWS

cont. from page 1 “Taken together, all of these elements of a risk management framework should minimise potential harm to investors by delivering good loans for investment,” said Carter. Stuart Law, chief executive of one of the UK’s biggest P2P lenders Assetz Capital, said there are strong controls already in place. He argued that the FCA should focus on supervision, rather than going ahead with these proposals that would lead to the collapse of many platforms that do not have institutional funding to lend if there were a ban on retail.

“I think it’s ridiculous, it’s implying that there’s no due diligence already in place,” he said. “The FCA should enforce the rules it already has in place to ensure there’s no arbitrage.” Other P2P platform bosses, including Loanpad chief executive Louis Schwartz and LandlordInvest managing director Filip Karadaghi, similarly expressed concerns about a blanket ban and suggested the FCA should instead focus on the individual platform’s management and processes. Dena Chadderton, partner at compliance

consultancy Adempi Associates, said she was concerned about the FCA’s direction of travel in relation to consumer investing for P2P and the wider alternative investment market. “The recent consultation paper and interactions by the FCA with our clients, very much point to the FCA increasing the restrictions and/or frictions for consumers to invest in alternative products and that includes P2P development loans,” she said. The UK Crowdfunding Association (UKCFA) surveyed 2,512 investors on their view of the asset

class as part of its response to the FCA and found that the majority have a good understanding of the risks when investing in regulated platforms. “We took the view that the FCA’s data showed arbitrage was not towards P2P but towards unregulated investments and our own survey of P2P and crowdfunding investors showed that the involvement of a regulated platform appeared to show a good understanding of risk with regulated platforms, so we don’t see the need to apply a marketing ban to P2P platforms,” said a UKCFA spokesperson.

EU cross-border rules set to benefit investors NEW EU cross-border crowdfunding rules that are set to come into effect later this year have been heralded as a huge advantage for investors. Crowdfunding and peerto-peer lending regulations currently differ across the bloc, but the new legislation will introduce harmonised rules across every member state. Oliver Gajda, executive director of trade body EuroCrowd, said the rules will allow lenders and borrowers to access platforms in different EU

countries and will ensure that all platforms are regulated and supervised to the same standard. Gajda said the rules will improve standards and safety for investors, while reducing fraud, and that investors will be given

more information from platforms. He said the regulations are likely to come into force in member states with no existing regulatory framework on 10 November 2021, while countries with existing

rules have an extra year to comply. “It is utterly beneficial for investors because you deal with counterparties that are all subject to similar rules,” Gajda said. “For me, the rules are about ensuring consumer protection, ensuring as little fraud as possible, creating trust and taking comparable business practices across the union, and as an investor, you’ll be presented with a fairly similar, if not equal, set of information during the investment process.”

NEWS

P2P default rates near zero after pandemic year DEFAULT rates for the majority of peer-to-peer lending platforms fell dramatically in 2020, with several platforms reporting zero losses on their loans since the start of the pandemic. New data analysis by Peer2Peer Finance News found that bad debt and default rates both dropped to near zero last year, as many platforms ceased new lending and offered forbearance schemes to borrowers. Proplend saw zero defaults in 2020, with no lender losses. This compared with five loan defaults in 2019. EasyMoney reported no

actual defaults for loans originated in 2020. The platform also reported a zero per cent default rate for loans originated in 2018 and 2019. CrowdProperty has a projected default rate of one per cent but has reported zero losses since inception, while Kuflink had an actual default rate of 0.4 per cent in 2020 – down from 22.6 per cent in 2019. However, in both years its actual percentage of write-offs was zero. LandlordInvest had an expected default rate of between 0.28 per cent on its least risky A loans, to 4.48 per cent on its higher risk D loans. The actual

default rate on its A, B and D loans was zero per cent, while the default rate was 3.91 per cent on its C-rated loans. Meanwhile, Rebuildingsociety has reported no bad debt on its business loans for 2020, compared with a bad debt rate of 1.27 per cent in 2019. And Ablrate has a projected default rate of four per cent per annum, but its actual default rate has been zero per cent since the start of 2020. Among those platforms which offered government-backed loans, default rates were similarly low. For the whole of 2020, Funding

Circle has estimated that its projected bad debt rate will fall within the 1.4 per cent to 2.4 per cent range. Assetz Capital recently told Peer2Peer Finance News that its default rate on government-backed loans was expected to be very low. In 2020, Assetz’ default rate was 1.4 per cent. LendingCrowd’s actual default rate was between 1.02 per cent (on its lowest risk A+ loans) and 5.63 per cent (on its highestrisk C+ loans). This was significantly lower than its expected default rates of between 2.77 per cent on A+ loans and 10.6 per cent on C+ loans.

Open banking provider in talks with UK P2P platform OPEN banking solutions provider Salt Edge is in talks with a UK peer-topeer lending platform to improve its affordability assessments, Peer2Peer Finance News can reveal. The European fintech already works with P2P platforms on the continent such as Zlty Melon, based in Czech Republic and Slovakia, Levenue in the Netherlands and Estonia’s Fagura. Lisa Gutu, head of business development at Salt Edge, said the software provider works with platforms

to implement the datasharing technology to improve their affordability assessments by giving them access to real-time transactions of borrowers, improving processes via automation and for payments. “We’re in talks with several more platforms, our primary and ultimate goal is linking more banks and platforms for open banking,” said Gutu. “We’re in the final stages of finalising an agreement with both UK and European platforms. In Europe we have more, in the UK we hope to

connect our first platform by September, it depends on the integration on their side. “We offer open banking for platforms for affordability checks – it’s critical to assess whether potential borrowers can repay. With open banking, P2P platforms can get open access to financial

statements directly from the bank accounts, so they are on top of spending patterns and income and can mix it with their internal algorithms. “And using open banking payments, investors can invest, and the borrower can repay, directly from the bank account, without cards.”

NEWS

P2P lenders urged caution with stock market floats PEER-TO-PEER lenders have been warned against rushing to go public. Zopa and Shojin Property Partners are the latest P2P lenders to have signalled intentions to launch an initial public offering (IPO). But Alex Green, cofounder of Globacap, which helps private companies raise funds, warns that firms should not rush into a stock market debut. Research by Globacap found half of UK businesses have changed their IPO plans as a result of the administrative burden associated with it. Its analysis also found that despite 25 per cent of firms currently moving towards an IPO, 90 per

cent of chief financial officers want to remain private. “One of the main benefits of maintaining a private company is that there is less administration and fewer reporting requirements,” Green said. He said companies such as Zopa are large and successful enough to do well with an IPO but warned all firms should be aware of the risks. “There are some

potential problems for IPOs,” he said. “You only have to look at the experience of Deliveroo which listed and its price dropped. “An IPO can perform poorly for a variety of reasons such as the market, company specific sentiment or sometimes it can be mispriced. “An IPO isn’t a bad thing but firms should be aware of the alternatives.” Zopa, the world’s oldest P2P lender, said in June

that it was planning to list in London next year or in early 2023. Shojin Property Partners has also said an IPO could be part of the platform’s roadmap. Speaking at the P2P Investing Summit, a virtual event hosted by Peer2Peer Finance News and AngelNews last month, Jatin Ondhia, Shojin’s chief executive, said the platform plans to go public or get bought out in three years’ time. Funding Circle is the only UK P2P lender to have gone public to date. It entered the London Stock Exchange in 2018 with an IPO price of 440p but was trading at around 128p in mid-July.

More platforms embrace open banking SEVERAL peer-to-peer lending platforms are looking at adopting open banking, as the datasharing initiative gathers pace in the sector. Kuflink is working on implementing open banking for real-time borrower verification, payments and to improve processes, while Lendwise is looking to use it to help assess creditworthiness. Invest & Fund and Simple Crowdfunding have also expressed interest in the scheme,

which uses APIs to open up consumers’ financial data to third parties. Meanwhile, new P2P consumer lending platform Plend is launching with the requirement that borrowers and investors both opt in to open banking. It plans on using it for credit scoring, fraud prevention, verifying information quickly and collecting payments faster. “The potential of open banking is huge; it can’t be

understated,” said Helen Child, co-founder of Open Banking Excellence, an industry community that looks to raise awareness of the datasharing initiative. “By laying the foundations for better affordability assessments and improved credit risk management, it allows P2P lenders – and indeed all lenders – to further extend their services to existing customers, attract new customers and grow their businesses

more profitably. “I think lenders and P2P platforms are well aware of the benefits that open banking brings into play. Many have been watching how the open banking movement develops, and now that their customers are getting to grips with it, and becoming more comfortable with sharing their data, I expect more and more lenders to get involved.” For more on open banking, read our feature on page 10.

NEWS

P2P platforms back introduction of green labels PEER-TO-PEER lenders are in support of introducing green labels on their products as part of efforts to help the UK economy reach net-zero carbon emissions by 2050. The Treasury and the Financial Conduct Authority (FCA) are currently working on requirements for businesses and investment firms to disclose sustainability information using environment, social and governance (ESG) labels. These could show how environmentally friendly certain products are and the level of carbon emissions in someone’s pension or investment portfolio. It is unclear if this will include P2P lenders but the industry may make its own efforts to demonstrate the green credentials of its products and support investors who want to invest sustainably. City superwoman Nico-

la Horlick, who heads up P2P business lender Money&Co, said she would support the introduction of green labels. “I would be happy to do this,” she said. “However, I don’t think that the majority of our investors would be influenced by how green the underlying borrower was. They are driven by the need for income.” Crowd bonds platform Abundance already

enables investors to fund renewable energy projects and has worked with councils to provide community municipal bonds that support renewable energy projects in a local area. Its managing director Bruce Davis said standardised labels could help tackle “greenwashing,” where a product isn’t really as environmentally friendly as it is claimed to be, and would

make platforms more transparent. “There is a significant opportunity for both P2P and investment-based crowdfunding platforms to fund the transition to netzero,” he said. “The simplicity of the P2P model means that transparency is probably more important than labels or traffic lights, which are more applicable to the more complex offerings from investment funds.” The use of green labels is also supported by Ablrate but its founder David Bradley-Ward warned that it must not create more costs for investors. “Inevitably a third-party assessment will be needed and that cost will only be absorbed by the investor reducing returns or restricting access,” he said. “I am for sustainability in the investment world but not at the cost of access for customers.”

Sancus Lending Group gears up for strong second half of 2021 SANCUS Lending Group is readying for a strong second half of the year, following the alternative finance group’s rebrand and streamlined strategy. Dan Walker, UK managing director and deputy chief executive, said that Andrew Whelan left the firm in a good place when he

stepped down from the helm in June this year. “There was a lot of change to absorb when your chief executive leaves, there’s plenty to manage,” he said. “There was a lot of hard work in the first half of the year and we’re in a good stage for the second half, we think

we’re well set as a result of the changes we made, streamlining into four silos of operations that allow us to be focused on property finance.” Sancus Lending Group has rebranded from GLI Finance and has been simplifying the business into four main areas: origination; co-funding

or loan management; finance; and operations, with a bigger focus on property finance. “We see the UK and Ireland as huge growth opportunities and are pleased with the progress in those markets and have made hires across those jurisdictions,” Walker added.

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

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

JOINT VENTURE

Successful CBILS repayments expected to continue for Assetz Capital after excellent start Mark Standley, national commercial director at Assetz Capital, reveals the success of its coronavirus business interruption loan scheme, and the platform’s plans to scale up in the months ahead

SSETZ CAPITAL’S borrowers are already starting to pay back their coronavirus business interruption loan scheme (CBILS) loans, with over £11m already repaid just one year after the loans were taken out. This early repayment is a ringing endorsement of the peer-to-peer lending platform’s credit checking process, says Mark Standley, national commercial director at Assetz Capital. “The thing to bear in mind is we apply the same level of due diligence in terms of borrowers that we are working with, and the nature of the proposal,” Standley explains. “The government guarantee schemes did provide a comfort to the unknowns of the pandemic, but everything that was known, we were able to review with the same level of detail and care that we would have normally. As it turns out, the property market has held strong, and actually, things are looking robust.” Even before the Covid-19 pandemic, Assetz Capital was in a position where it was able to adapt to market demand, and to deliver loans quickly to pre-approved borrowers. When the platform was authorised to deliver CBILS loans in August 2020, it was able to get much-needed funds to businesses quickly and effectively with new systems and processes put in place in a matter of weeks. “We are a dynamic business and

were ready to make adjustments in terms of scale and volume to effectively manage the level of demand that we experienced,” Standley says. “In terms of the origination pace, we leaned quite heavily on our established network. The brokers we work with are very experienced in their own right, and they provided a pre-filter on lending opportunities to help us manage high levels of demand with efficiency.” Standley confirms that Assetz has delivered approximately £370m of loan facilities via CBILS, and the platform has been authorised to deliver the recovery loan scheme, in parallel to retail funded loans also now being originated again. In the meantime, the platform is scaling up and looking at new market segments in response to borrower demand. Standley is currently hiring a number of relationship directors across the UK, who will play a key role in the company’s in-person service delivery and due diligence checks. Bridge lending is a new area of focus for Assetz, and the company is working on some modified work practices which will allow it to handle volume in a better way. The platform is also changing its pricing to make it more competitive with challenger bank products. But for Standley, the priority is maintaining the platform’s high

standards of professional service with strong credit checking processes, and reviving the retail arm of the business. “The retail platform is incredibly important us,” he says. “It is something we see in our ongoing future. We are currently originating volumes of loans which will work for the retail platform. “You should see those coming through fairly soon. It might be a trickle initially, but we expect to see it grow and grow. This is the message that’s core to our business – fairer growth together. “It’s about making sure that all stakeholders are regarded in equal measure. Institutional and retail.”

OPEN BANKING

Open banking’s coming of age moment Open banking has been slow to take off, but in an increasingly digital world, it is rapidly winning new fans. Michael Lloyd asks why peer-to-peer lending platforms are embracing open banking technology – and why some are still resisting…

PEN BANKING SHOULD have been an easy sell. Yet three years after the data sharing initiative was first launched, just three million people have opted to use it – that’s less than five per cent of the UK’s population. More surprisingly, only a handful of peer-to-peer lenders are utilising open banking to date, although this number is rapidly rising.

The idea behind open banking was simple. By opting into the scheme, consumers could access a galaxy of financial choices every time they applied for credit or searched for a new savings option. Meanwhile, lenders could use it to reduce fraud, improve their processes and offer faster lending decisions. They could also better assess borrowers’ affordability by

using real-time data rather than relying on old bank statements. While uptake has been slow, the global pandemic looks set to bring open banking into the mainstream. Over the past 12 to 18 months there has been an increase in P2P lending platforms using – or planning to use – the data-sharing initiative as its benefits are realised. In 2018, Lending Works partnered

OPEN BANKING

“ It’s about reducing the number of

manual processes and open banking creates opportunities

”

with Credit Kudos to use open banking for its credit applications. In 2020, ArchOver started utilising open banking and Rebuildingsociety rolled out the data sharing initiative for itself and its appointed representatives. Then in January last year, Leap Lending launched with the USP of requiring all its borrowers to use open banking. And now, even more platforms are looking to adopt open banking solutions. Kuflink is building real-time borrower verification, testing its payment facility using open banking on the investment platform in closed beta mode to allow users to transfer funds to their e-wallet instantly using bank transfer. It is

also working with an open banking provider to allow clients to send funds to the platform in real-time. “This is a step forward in reducing paperwork and unnecessary communication thereby improving efficiency in the process,” says Narinder Khattoare, chief executive of Kuflink. “All in all, we should in theory gain access to all necessary information through a simplified online process as opposed to numerous phone calls, email chasers etc.” Plend is a new P2P consumer lending platform that plans on launching later this year with the requirement that borrowers and investors both opt in to open banking. The platform plans on using it for a range of purposes, such as credit scoring, fraud prevention, verifying information quickly and collecting payments faster, which is also a lot cheaper to do through open

banking than direct debits. “Our intention at Plend is to be end-to-end open banking,” says Robert Pasco, chief operating officer and founder of Plend. “We’re open banking mad so our solution is the underwriting, the credit side is the main thing we’re getting sorted. The payment side cuts costs and makes it easier.” A more established platform, Invest & Fund, is also now looking at open banking. Finance director Matt Thorbes says the P2P property lender has not adopted it yet but is talking to API providers about integrating the technology. He says the platform could use it to improve many of its processes, reducing borrower onboarding time and quickening customers’ deposits and withdrawals. “We are saying Invest & Fund is definitely considering the available tech as part of an open banking

OPEN BANKING

system which will allow us to deliver growth in a fast and secure way,” he says. “It’s about reducing the number of manual processes and open banking creates opportunities.” P2P education finance provider Lendwise also intends to incorporate open banking in the not-too-distant future. “It is slowly becoming more common as a concept (whether it is used to make payments or whether it is used to access information) and it is an additional tool to help augment the information lenders use to assess credit worthiness of their customers,” says Rishi Zaveri, chief executive of Lendwise. “Amongst other aspects, this is important from a responsible lending perspective of course.” Meanwhile, Atuksha Poonwassie, co-founder and managing director of Simple Crowdfunding, says that her platform is interested in using open banking, but has not yet had the opportunity to put it in place. “Ultimately, we think that’s where it’s going and it does make a lot of sense, it streamlines the process,” she says. “For us it’s important to look at. We are very aware of it and it’s waiting for the right opportunity to use it.” Open banking take-up has only increased over the past year, no doubt boosted by the pandemic which forced businesses and consumers online. Glen Keller, chief product officer at open banking-backed credit risk firm CRIF Realtime, notes that P2P

platforms have always been quite progressive and more agile than traditional lenders, and this has given fintech lenders an advantage. “It’s important to be competitive and to differentiate from banks and to lend to more people otherwise people wouldn’t be able to get finance,” says Keller. “It’s a great tool for differentiation.” The take-up journey is nowhere near finished, and the consensus among industry stakeholders is that the open banking revolution is only just beginning.

“The use cases continue to multiply!” exclaims Louisa Murray, chief operating officer, Europe at global open banking platform Railsbank. “The P2P sector increasingly understands the importance of open banking and its use will continue to grow over the coming years.” This certainly seems to be the case. At the P2P Investing Summit, a virtual event hosted by Peer2Peer Finance News and AngelNews last month, multiple platform heads and key industry players raved about the possibilities of open banking.

“ It’s important to be competitive and to differentiate from banks and to lend to more people otherwise people wouldn’t be able to get finance”

OPEN BANKING

“ The P2P sector increasingly understands the importance of open banking and its use will continue to grow over the coming years

”

They say that customer demand, and the fact it can be cheaper than alternative solutions, such as collecting payments via direct debits or manually monitoring borrowers, will drive platforms to take up the data-sharing technology. For instance, ArchOver uses open banking to analyse borrowers’ transactions to see if regular payments have been missed, to aid it in monitoring collections and repayments. Chief operating officer Ian Anderson says platforms would be foolish not to implement it. “Open banking is well established now, and we believe will become the norm for business lending – to be honest, we are quite surprised

(lenders) have not realised the value,” he says. “Monitoring borrowers and their loans is costly. For those platforms with a more hands on/regular monitoring regime then they would be foolish not to start adopting open banking now.” However, the open banking rollout still faces a few hurdles. Some platforms are still hesitant about adopting it, either claiming it is not a priority at the moment or saying that they are waiting for the market to settle. And others don’t plan on using it at all. Ben Shaw, chief executive of HNW Lending, says that his platform does not need open banking as it is an asset-based lender, so it is much more interested in the asset and security worth. He asks for bank statements that the borrowers can talk through, if needed. “We don’t need open banking, we can get bank statements if we ask the borrower for them,” he says. “We’re just a little different, we’re an asset-based lender, we generally are not lending on cashflow. If someone has a lot in their account, it’s not helpful unless you see the borrower explain what comes out.” Similarly, Filip Karadaghi, managing director of LandlordInvest, says it makes “less sense” for property lenders to use open banking as they rely on the security rather than the borrowers’ ability to service debt that is vital for business and consumer lending. “With property lending the

emphasis is on the security of the property itself and there’s much less emphasis on personal finances,” he says. CRIF Realtime’s Keller points out that with APIs transferring data of bank statements in real-time there’s no reason why it can’t benefit property platforms. “I definitely think it’d benefit everyone looking at it,” he says. Another roadblock is the rule that lenders must ask those customers that have signed up for open banking for permission to access their data every 90 days. This creates an administrative burden for platforms and may be off-putting to some consumers. “The 90-day consent is a pain and many don’t like it, people should be able to set the timeframe themselves,” says Daniel Rajkumar, managing director of Rebuildingsociety. “I hope the restriction will be lifted; a lot of people have been asking for it.” Despite these challenges, it seems inevitable that more platforms will adopt open banking in the future, especially as demand rises among credit-seeking consumers. The new generation of P2P lenders is leaning heavily on open banking as a revolutionary tool with myriad applications. Uptake may have been slow, but more and more P2P lenders are starting to realise the benefits of open banking technology, and how it can help to shape the future of P2P borrowing and investing.

JOINT VENTURE

Kuflink credits staff for record-breaking year Narinder Khattoare, chief executive of Kuflink, explains how his platform had a record-breaking year despite the pandemic

EER-TO-PEER PROPERTY platform Kuflink approved a record number of loans last year and repaid more than £25m to investors, in an endorsement of the company’s business model during a time of unprecedented economic uncertainty. Narinder Khattoare, chief executive of Kuflink, credits the dedication of his staff and the platform’s commitment to retail investors for the company’s success. “We've done tremendously well,” Khattoare says. “I thought at the time that the deals would have dried up, but what we found was – particularly when it came to development loans – we did better than we’ve done previously.” This was largely due to Kuflink’s established and experienced inhouse team of underwriters, credit experts, and directors, most of whom have a strong background in property development. Even after they were forced to work remotely, they were able to act quickly to approve creditworthy deals, as and when they emerged. “Our origination team was getting volume deals coming through and we were getting those through the system quicker,” he said. “So we ended up doing a record amount our business last year, and paying back a record amount of money back to our investors.” In a way, the pandemic has proven the viability of Kuflink’s business model. The credit team was able to approve a record number of loans, while the

platform’s hybrid investor base ensured that the demand for loans did not dip. “If we had only had institutional money on the platform, at the start of the pandemic that money would have stopped straight away because they're going to panic,” Khattoare explains. “They don’t want to lend any more money until they know what's going on in the world. So in a way, it gave us more power because we have sophisticated retail investors sitting at home, not leaving their houses, with a lot of

money sitting in the bank. They became a bit more active than they probably would have been otherwise, because they wanted to get a return on their money. So we saw an influx of money come from that side, which is fantastic. And they're helping developers to develop more properties and commercial units going forward for the UK economy, which is great.” Last December the platform reached its £100m lending milestone. Six months later, the platform has just under £140m. But Khattoare is most proud of how his teams have come together. “I think we've gelled better as a team than we ever have done over the years,” he says. “There's more of a togetherness within the business. And our investors feel that as well, because we go over and above.” Kuflink is now looking at launching a number of different types of products. The platform will soon be offering more term loans, and investors will be able to compound their interest rather than having it paid back to them monthly. The platform has seen record IFISA inflows, particularly from former RateSetter investors, and it recently announced plans to make the ISA wrapper available for individual deals. “We're very much in it for the long haul,” says Khattoare. “We’re here to provide a great platform for investors to get a good return on their money.”

PROFILE

The letter of the law

Cormac Leech, chief executive and founder of AxiaFunder, talks to Kathryn Gaw about litigation funding and the importance of doing your due diligence

ITIGATION FUNDING is a complex area, but the potential returns are astronomical. At the time of writing, AxiaFunder had successfully funded – and won – five legal cases, with another seven cases pending. Its investors have earned just over 50 per cent in returns thus far, although the platform’s chief executive and founder, Cormac Leech, estimates that average annualised returns will eventually even out to around 20 per cent. Leech tells Peer2Peer Finance News how AxiaFunder spotted a gap in the market, and how litigation funding is about more than doubledigit returns… Kathryn Gaw (KG): Why did you launch AxiaFunder? Cormac Leech (CL): We saw litigation funding as a commercial opportunity that had good prospects of success. This is a new asset class that has traditionally not been available to investors and therefore, returns are higher than they otherwise would be. At the same time, it is fulfilling a social need because these are cases that would be very likely to win in the courtroom if they had the capital. The missing element is the capital, so it seems to me that litigation funding can create value both for investors and claimants. The initial motivation was that I had a personal need for some litigation for several years and felt there should be an alternative finance solution for people who

need litigation funding. Looking at litigation, the returns are quite high, therefore there is an opportunity to set up a platform which can charge higher margins. There seemed to be an opportunity to create a profitable business. KG: Has it become profitable? CL: Not yet, although we’re making a lot of progress. In the last couple of months, we have seen a big increase in the volume of cases on our platform. So in the last three months, we have launched approximately £1.3m worth of cases, which is a big increase. To put that in context, the volume to date was about £1.5m, so

if we fund all of the cases we have just launched, we will effectively be doubling the volume on the platform in the space of three months. KG: What is behind the recent rise in cases? CL: Well, I think as we’re getting established, we’re getting more direct enquiries, more claimants. We’re also building the investor base. We have more than 1,000 registered investors on the platform. We’re building both sides of the business, we’re getting increased claimant enquiries and also increased investor interest. It seems to be making progress, quite organically.

PROFILE

KG: Could you explain litigation funding? CL: Essentially, a claimant will be willing to share some of the upside on a case, but does not want to have any downside if the case loses, so we will provide non-recourse finance, which is to say if the case loses, there is nothing payable to us. Before we do that, we will vet the case quite carefully across 10 criteria. We will look at the case based on the merits, whether the case has some prospects of success, whether the defendant has the ability to pay a settlement, if we think the case is large enough to justify the cost of litigation. We always need to have an adverse cost solution. In the UK, litigation pays the costs of the other side and if you fund the case for a claimant and the claimant loses the case, the funder can sometimes be liable to pay costs, therefore you need to have that in place to protect investors from that potential liability. So we always make sure there is adequate insurance. We also look very carefully at who the legal team is running the case. We want to make sure the case is operating in a jurisdiction where litigation is legal and that the case is fully funded right through to the end of the trial. We want to make sure the price is appropriate given the risk, so that the investors are getting paid for the risk they are taking. Some cases are riskier than others. If the case checks out on all those different dimensions, then we will look to enter into a funding agreement with the claimant. We will prepare a very detailed 40-page offer document that we put to our investors to source the capital for the case. Once we’ve raised the money,

we set up a special purpose vehicle (SPV) to finance the case and as and when the case wins, the share of the proceeds comes back to that SPV. That’s the basic life cycle of a case. KG: Why aren’t more alternative lenders tapping this part of the market? CL: I think it’s quite a complex market and quite a high-risk product. If you lose a case, the insurance will cover adverse cost risks, but theoretically there is a risk that the insurance won’t pay because the insurance company becomes insolvent or repudiates a contract. So there is a theoretical, very remote risk that you can lose what you invest, so that may be putting some people off. It’s almost like a derivative product. It’s also quite a niche product because it’s quite difficult to find many cases that qualify. If we look at about 20 cases, we might find one case to put on the platform. Yes, returns are high, but it is quite niche. KG: AxiaFunder recently funded a case in Barcelona – what were the challenges of branching out into the Spanish legal system? CL: The cost of lawyers in Spain is lower, so the cost of pursuing litigation is lower. That makes it a lot easier to make the numbers work because it vastly improves the ratio of the claim value versus the cost to litigate. But on the negative side, Spanish lawyers are less familiar with litigation funding and they don’t have client accounts in the same way UK lawyers do, which creates its own challenges. By and large, it seems there is an untapped opportunity for litigation funders in continental Europe that we are exploring.

KG: Are you looking at funding cases in any other countries? CL: Potentially, but for whatever reason, we seem to get more enquiries for Spain. We had some potential opportunities for litigation in the US, where the claimant is a UK resident, but the defendant is in the US. I would say Spain and the US would be our international countries. KG: What were the challenges of scaling the business during a pandemic? CL: It hasn’t really affected us too much because we have always tended to work from home. We are quite a lean team, so we work out of shared office space, and most of us were already working remotely before the pandemic. We had a dry spell in the fourth quarter of 2020 and the first quarter of 2021, with no volume whatsoever on our platform. We were unable to find cases we thought were good, but in the last three or four months, we’ve raised £1.3m across four cases. One of the offers we recently launched was to finance three cases and within three months, two of the cases had resolved positively. KG: What’s next for AxiaFunder? CL: We would like to launch a secondary market. If we could with confidence offer our investors the ability to sell in six to 12 months, that becomes more attractive to investors. Getting the returns over time, it’s entirely possible to invest in a case and then sell after six to 12 months with a 10 per cent or 20 per cent return. To get the secondary market working, the challenge is to determine pricing. The assets are complex and subject to uncertainty, so getting the pricing right is a challenge we’re having to focus on.

BLOCKCHAIN AND CRYPTOCURRENCY

Building blocks of the future Michael Lloyd explores the untapped potential of blockchain and cryptocurrency assets for the peer-to-peer lending sector…

LOCKCHAIN AND cryptocurrency are thrilling concepts that have the potential to pave the way for the future of financial services, including peer-to-peer lending, but all too often get confused. As a result, widespread adoption of the technologies is still slow. If you’ve been paying attention to pop culture, you will understand why. In the American TV series StartUp, a gangster, a hacker and a banker collaborate to create a criminal’s dream version of a

cryptocurrency. However, at various points in the show, the characters appear unsure about what it is they actually do, alternately describing their business as pure cryptocurrency and other times as crypto-backed lending or a payment services provider. The recent rush on Bitcoin and altcoins tapped into the ‘get rich quick’ mentality of most retail investors, while self-proclaimed crypto leaders such as Elon Musk have done their part to spread speculation about the

value of crypto assets, without actually clarifying the difference between crypto coins, tokens, and blockchain technology. As a result, blockchain technology and cryptocurrency often get lumped together and misrepresented. Blockchain is an online, immutable ledger system which records every transaction across several computers that are linked in a peer-to-peer network. Crypto coins such as Bitcoin are digital currencies in which

BLOCKCHAIN AND CRYPTOCURRENCY

transactions are verified and records are maintained by a decentralised system. This system is often underpinned by blockchain technology. Both crypto and blockchain have many uses and huge potential – blockchain technology can remove the need for third parties such as accountants, or reduce their time and costs. It

publicly available to look at on a blockchain that can’t be hacked. “Blockchain is the next level of the internet,” he says. “Everyone will say it’s a fad like they did originally with the internet. When I talk about blockchain to people right now it’s the same reaction unless they understand it. People that don’t understand it rope it in with Bitcoin and say it’s a scam

“ Crypto will be relegated to the point you can’t do anything with it”

can also be used to power P2P platforms’ secondary markets cheaply and more efficiently. Ablrate uses blockchain-backed ASMX for just this, to settle trades instantly and more efficiently on its secondary market without expensive legal settlements. It plans to connect ASMX with other P2P platforms to improve liquidity in the P2P sector at large. “Blockchain is an immutable ledger with no fraud or duplication that can’t be hacked and just replaces that trusted third party,” says David Bradley-Ward, chief executive of both Ablrate and ASMX. “It’s the ledger that’s updated by consensus – it’s a bit like triple entry bookkeeping. “Once you take out the thirdparty intermediaries, such as accountants, auditors, lawyers to a certain extent, everything can become more efficient, cheaper and more transparent, that’s the exciting thing about it.” Bradley-Ward says that blockchain has the potential to improve the process of identity management by having know your customer (KYC) and anti-money laundering (AML) information

and that’s nonsense. It’s very much the Blockbuster-Netflix story. “There’s no doubt in my mind that blockchain will utterly change the world.” Haydn Jones, director and senior blockchain market specialist at PwC, says blockchain presents many uses, such as underpinning decentralised finance, stablecoins and potentially the Bank of England’s central bank digital currency, as well as identity

credentials, provenance, contracts and for engaging people. He says blockchain could have huge potential for P2P via powering smart contracts whereby trust is enforced between lenders and the borrower. A platform can look at the credit risk scoring or the risk the borrower might be taking and the nature of the credit profile, and lock in specific targets through a smart contract. If these are met, the cash is released and there are rewards for the borrower such as an uptick in salary and additional funds. If it is missed, actions are taken, such as withholding an amount of cash. “I would argue blockchain can sit at the core of the new generation of P2P models,” says Jones. “It has all of that capability. I can create a programme which defines a relationship in P2P and run smart contracts so everyone knows what they’re supposed to do. “It’s about the programable nature of the way in which you manage the risk dynamic between stakeholders.” Moving onto cryptocurrency,

BLOCKCHAIN AND CRYPTOCURRENCY

JustUs’s sister company Moneybrain has its own cryptocurrency – BiPs – which generates returns for investors through its exposure to different asset classes. The platform has just started accepting deposits of Bitcoin in exchange for the value of a loan they want in BiPs through transactions that take less than a minute. It also has plans to start P2P lending BiPs. Founder of JustUs and Moneybrain Lee Birkett predicts that more platforms will adopt blockchain and cryptocurrency, particularly with the Bank of England consulting on a centralised digital currency. “P2P is happening on crypto – that’s what decentralised finance is, people lending to other people with crypto as the currency,” he says. “And it’ll be safer and better with the Bank of England digital currency. At the moment you need to cash out on the bank which takes days, while with a digital pound it will be immediate. “In 10 years’ time you won’t know the world without blockchain and internet money.” Katharine Wooller, UK managing director at crypto wealth platform Dacxi, which is applying for its own crowdfunding permissions, says crypto investors are a perfect fit for P2P as they are forward thinking and accepting of new technologies.

means of diversification, and to hedge against inflation. However, there is increasing institutional adoption from various banks, asset managers and hedge funds which now see digital assets as a genuine asset class.

“ Blockchain can sit at the core of the new generation of P2P models”

As a tech-driven industry, P2P should find this easier than most traditional finance businesses to use. Wooller believes that retail investors in the UK are increasingly purchasing cryptocurrencies as a

She predicts cryptocurrencies will in the near future be integrated into the current financial infrastructure and therefore should open up a substantially larger global audience to P2P, free of currency constraints.

“I would expect to see more platforms embracing blockchain and crypto; as a technology it is coming towards all financial subcategories with huge speed and in my opinion is unstoppable,” Woller says. “Compliance-wise it must be conceded this will be a significant overhead in the future as global regulators are getting more involved with crypto, to the obvious benefit of retail investors.” However, despite the forecasts, take-up of blockchain and cryptocurrency has still been slow in the P2P sector to date. Some platform owners and industry stakeholders predict that blockchain could become integrated

BLOCKCHAIN AND CRYPTOCURRENCY

However, he said that there’s no need to rush in and be pioneers because the Financial Conduct Authority (FCA) bundles this area in together with cryptocurrencies, and mentioning cryptocurrencies in an application causes them to panic. “And what if we accept Bitcoin and immediately convert it into money, that’s more marketing

market could be one of the applications but also information management, raising money for projects and other things.” However, despite the enthusiasm of some, the majority of platforms are reticent about implementing blockchain or cryptocurrency just yet, giving reasons such as they are focusing on P2P, it’s not their

“ P2P is happening on crypto, that’s what

decentralised finance is – people lending to other people with crypto as the currency

into financial services, while crypto’s place in P2P may mainly lie in accepting payments. “Cryptocurrency in P2P lending will remain a small part of the market, although it wouldn't surprise me if some platforms allow investors to pay for loans in cryptocurrency, even if the loans themselves are in sterling,” says Neil Faulkner, managing director of P2P analysis firm 4th Way. Speaking at July’s P2P Investing Summit, a virtual event hosted by Peer2Peer Finance News and AngelNews, Shojin Property Partners chief executive Jatin Ondhia said that blockchain will eventually be used to underpin platforms.

and sales, not underlying fundamentals?” Ondhia added. Bradley-Ward says that Ablrate will probably accept stablecoins at some point and believes there is a “good market for that”. He says platforms will likely implement blockchain, perhaps in order to accept stablecoins or to plug into a different business, but the FCA will crack down on cryptocurrencies, as evidenced by the regulator banning one of the largest cryptocurrency exchanges, Binance, from operating in the UK. “Platforms would be mental if they don’t use blockchain,” says Bradley-Ward. “But crypto will be relegated to the point you can’t do anything with it.” Atuksha Poonwassie, co-founder and managing director of Simple Crowdfunding, sees the benefits of blockchain but will not look at cryptocurrencies until regulators provide a clearer direction. “Blockchain makes a lot of sense, it’s just finding the best way to utilise it moving forward,” she says. “I absolutely see the benefits, it’s a number of things, the secondary

”

priority or the demand isn’t there. “At the moment builders aren’t crying out for loans in crypto for building houses,” says Matt Thorbes, finance director at Invest & Fund. “Until that changes, from our perspective the demand isn’t there.” Filip Karadaghi, managing director of LandlordInvest, says he does not see how blockchain or cryptocurrency can create value for the products the platform offers. “Essentially it would be very different, and we wouldn’t see any value in using them,” he says. “Property lending and crypto does not go well together, it’s a speculative tool essentially and property lending is much less so.” Blockchain and cryptocurrency have so much potential, but it is not surprising that P2P platforms want to wait a while before going all-in on this next frontier of technology. However, if used correctly, decentralised finance will have a huge role to play in the future of fintech lending. Perhaps then we will get a better representation of this exciting space on our TV channels and social media feeds.

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