Peer2Peer Finance News February 2021 by Alternative Credit Investor

>> 05

PRUDENT CBILS LENDING

Assetz does not expect wave of defaults

DISTORTING THE MARKET

>> 08

The impact of government loan schemes

Sourced Capital’s Stephen Moss talks to P2PFN >> 12

ISSUE 53 | FEBRUARY 2021

Vaccine roll-out could be a shot in the arm for IFISA inflows PEER-TO-PEER lenders are hopeful that the coronavirus vaccination rollout will inject new life into the Innovative Finance ISA (IFISA) market, as investors will feel more confident about the pandemic coming to an end. Platforms have said subscriptions during the 2019/2020 ISA season were more subdued as it coincided with the height of the pandemic but most have now seen a return of positive investor sentiment. Investment into IFISAs could be held back due to big players such as Funding Circle suspending new retail loans as it focuses on the coronavirus business interruption loans scheme (CBILS), while RateSetter has been sold to Metro Bank so new investors cannot set up a tax wrapper with the platform. However, other players such as Assetz Capital are expecting a boom if there is sustained positive news on the pandemic.

“Even during a global pandemic there was a negligible impact on the funds in our ISA accounts,” Martin Heelam, director of investor relationships at Assetz Capital, said. “Given this resilience we're confident that if infection rates reduce and the vaccine roll-out continues apace we will see a very positive ISA season – maintaining the year-on-year growth we've enjoyed so far. He said investor sentiment hinges on

infection rates, the vaccine rollout and “an acceleration towards some kind of normality.” ArchOver has also seen an uplift. “We have seen investors’ confidence rise over the past months and we hope this continues and will have a positive effect on our IFISA registrations and transfers in,” Charlotte Marsh, managing director of ArchOver, said. “We had a slower IFISA intake during March-April 2020 due to the uncertainty and we

believe that this year will look more like MarchApril 2019.” Other platforms such as HNW Lending and Proplend are also seeing more IFISA money coming in, with the latter seeing transfers from other P2P lenders no longer offering the product. Meanwhile, Abundance, which spent much of last year helping to push community municipal investments on behalf >> 4 of local councils,

It has never been more important to keep up to date with the latest peer-to-peer lending news. These are extraordinary times and our team is working hard to keep you informed about how the UK’s P2P sector is responding and what new trends are starting to emerge. If you want to be the first to learn about the latest developments in the world of P2P, please purchase a subscription today. We offer a range of subscription options, starting at just £1.95 a week. Please go to www.p2pfinancenews.co.uk/subscribe to buy a subscription today, so that you can enjoy unlimited digital access to P2PFN, with the option of a monthly print magazine. For more information on subscriptions, including overseas queries, please email tehmeena@p2pfinancenews.co.uk.

EDITOR’S LETTER

Published by Royal Crescent Publishing

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

he future of retail investment in peer-to-peer lending is a recurring theme at the moment. Some stakeholders have expressed concerns to P2PFN about the regulator’s approach to protecting consumers, which they fear could result in retail investors being cut out of P2P entirely. While the industry embraced the tougher rules that were implemented in December 2019, subsequent Financial Conduct Authority warnings about “high risk” investments (including P2P) and rumours of tougher restrictions to come have raised the questions of whether compliance costs will become unviable for smaller platforms and everyday investors will be put off P2P. The other side of the vice is government-backed loan schemes, which cannot be funded by retail money. As a result, some of the sector’s largest P2P lending platforms have shut off to retail investors, albeit temporarily, diminishing choice in the market. However, as our front page story shows, there is still some optimism that retail will retain a role in the P2P sector despite the challenges. Platforms are hopeful that the coronavirus vaccination rollout will boost investor confidence, leading to higher inflows into the Innovative Finance ISA market. And our feature on page 14 shows that the industry sees the benefits of diversified funding sources, including “stickier” retail. The government schemes will come to an end eventually, hopefully to the benefit of retail investors in P2P, but the question of the regulatory direction remains unanswered. This is an issue we will be exploring more deeply in the coming months, so keep reading Peer2Peer Finance News for the latest updates.

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

NEWS

cont. from page 1 said demand has been strengthened by more investors seeking investments aligned with their values including tackling the climate crisis. The IFISA market is believed to have broken the £1bn barrier in the 2019/2020 tax year, according to data from

The Investing and Saving Alliance (Tisa). The total amount invested in the IFISA tax wrapper, based on figures from its own members, reached £1.14bn by February 2020. P2P lending members of Tisa include Zopa and RateSetter. No further statistics

have been published from Tisa members since the pandemic hit the UK. In contrast, the latest HMRC data released in June 2020 – based on ISA manager returns for the 2018/2019 tax year – shows £328m was invested in IFISAs from 38,000 accounts. This is up from £277m invested

in the 2017/2018 tax year but there were 49,000 account openings during that year. The figures take the total invested in IFISAs to £641m across 92,000 accounts. However, HMRC is still claiming the subscription figures are unreliable due to a low level of data.

Plend mulls IFISA and SIPP ahead of July launch NEW peer-to-peer lending platform Plend intends to launch an Innovative Finance ISA (IFISA) after its launch in July 2021, while a SIPP offering may follow. The consumer lending platform has also unveiled more details about its “modern” credit checking process, which will be led by RateSetter’s former risk officer, Kevin Allen. Speaking exclusively to Peer2Peer Finance News, Plend’s co-founders James Pursaill and Robert Pasco said that they want to do “true P2P” with a credit process which is more suited for millennials. This will involve de-weighting factors “which are not relevant to the modern, young borrower” such as how many times a borrower has changed their address. Instead, the platform will place more emphasis on factors such

as gambling activity. “Our philosophy is that we want to judge you on your affordability right now and not penalise you on the mistakes of your past,” said Pursaill. “There are some things right now which we think have been weighted too heavily and don’t give a good idea of the affordability.”

Plend will not offer auto-investing options. Instead, investors will place their money into individual loans, with individual provision funds offering a safety net in the event of a default. However, investors will be “strongly encouraged” to diversify their money across a range of loans in order to minimise the risk

of capital loss, Pursaill and Pasco said. Target returns will be between 10 and 25 per cent, with a default rate of up to seven per cent forecast. Plend is operating as an appointed representative of Rebuildingsociety’s sister company White Label Crowdfunding. It is currently undergoing beta testing.

NEWS

Assetz Capital chief does not expect wave of CBILS defaults ASSETZ Capital chief Stuart Law has said that his platform is not expanding its recoveries team in anticipation of a wave of defaults from the coronavirus business interruption loan scheme (CBILS). The peer-to-peer lending platform was accredited for CBILS in May – a government-backed lending scheme to support smallto medium-sized businesses struggling during the pandemic. 80 per cent of the value of each loan is underwritten by the government, leaving the lender exposed to just 20 per cent of the loan's value.

Law (pictured) highlighted that CBILS is very different to the bounce back loan scheme (BBLS) – a 100 per cent government-backed loan scheme designed to get money out quickly to microbusinesses, which Assetz is not participating in. “I don’t think CBILS is anyway comparable to BBLS and I think the thinking is different particularly for our secured lending,” Law said. “We’re not expecting a dramatic increase in our recoveries team in the slightest, but I can definitely see that will be essential

for BBLS without a doubt. “It was a necessary result of the ease of which BBLS loans could be applied for, the application process wasn’t watertight, but if it had been BBLS loans would not have reached the businesses it should have reached.” Another P2P lender, LendingCrowd, was

accredited for CBILS in July. A spokesperson told Peer2Peer Finance News that the platform has been very prudent in its risk mitigation. “We were very prudent and adopted some principles of credit valuations, ensuring deals were affordable for the businesses,” the spokesperson said. “Our first CBILS loan was in September so our first repayments won’t be until September, October and in the meantime we’ll be keeping a close eye on the lenders that offered CBILS first to see the trends.”

4th Way to widen scope to mainland Europe PEER-TO-PEER lending analyst 4th Way is set to start reviewing European platforms this year. Some continental Europe-based P2P lenders will allow UK-based investors to register and have not changed their policies despite Brexit. Neil Faulkner, head of research for 4th Way, said some Europefocused platforms offer an excellent riskreward balance and the analyst is working on understanding regional differences to provide reviews of the best platforms in the region. A number of European

platforms such as Robo. cash and EstateGuru let UK-based investors lend on their platform. However, some platforms, such as France’s October and German P2P lender Auxmoney, require all investors to have a euro-denominated bank account. European platforms tend to offer higher returns than the UK, often in the double digits, but the level of regulation varies, as well as the risks, and there have been instances of alleged fraud at Estonia-based platforms Envestio and Kuetzal. “Higher rates aren't always linked solely to

higher risks and can be caused by other factors,” Faulkner said. “For example, some countries in Europe with smaller populations have banking oligopolies, whereby very few banks offer loans. “New banks don't tend to open in these countries because the potential customer volume/ population is too low for major banks. “This means that borrowers don't see a lot of providers competing and pushing interest rates down. P2P investors can therefore offer lower rates to borrowers than they usually get, but still

earn rates considerably above the risk-reward threshold.” He said there is a lot more for investors to understand as they need to know the regulatory and corporate governance situation in the countries where the platforms and borrowers are based. “They might need to understand a little about conveyancing law and what typically happens after a default,” Faulkner added. “They will also need to be aware of the substantial risks involved when lending in another currency, and how to mitigate those risks.”

NEWS

Cost of being an AR rises as principal market reshuffles THE RISING cost of maintaining appointed representatives (ARs) has led to a shift in the principal market, Peer2Peer Finance News has learned. Over the past few months, tightening regulatory restrictions from the Financial Conduct Authority (FCA) have forced several principal companies to increase their prices, or to stop offering AR services altogether. Last year, ShareIn decided to stop taking on ARs after a regulatory clampdown on speculative securities made it too costly to continue. ShareIn’s chief executive Jude Cook told Peer2Peer Finance News that “the FCA’s expectations on a principal are so onerous it doesn’t stack up for us financially anymore.” She added that ShareIn would not be offering AR services to any new clients, and will be retaining just five clients as ARs. ShareIn recommended compliance specialists I-Fact as an alternative principal, and it is believed that a number of former ShareIn clients are in the process of migrating over. However, they will likely see their monthly fees rise as a result. I-Fact’s director John Derry-Collins said that

his firm has always charged higher fees than its competitors, and added that he believes that most principal firms have been undercharging for their services. He warned that the cheaper providers “haven’t really been delivering a high enough service.” “The reality of what it’s going to cost them, to have the research and the highly-paid people you need to offer services to the ARs, can be a bit daunting,” explained Derry-Collins. “So really the economics haven’t quite worked out for them. “ARs have got to think about paying thousands of pounds to get to a higher standard because that’s what they need.” A number of P2P lenders have also raised concerns about the cost

of being a principal in the current regulatory environment. They have warned that ARs are at greater risk of failure due to their size, and this risk is effectively absorbed by the principal. Lee Birkett, chief executive and co-founder of JustUs, said that “the costs of getting approved by the regulator and getting a license are too restrictive”. “There’s no value as an appointed representative,” Birkett added. “All the value is in the principal business because the principal holds the clients and revenues. They are just a broker for the principal.” Mike Bristow, chief executive and co-founder of CrowdProperty, pointed out that smaller platforms are less robust, which

increases the risk of failure. “I personally think all platforms should be directly regulated,” he said. “Platform don't fail because they are ARs, they fail because they’re small, under-resourced, do not have enough capabilities and can’t make their capabilities work. This is more likely to happen to an AR because they’re smaller.” “I think ARs carry a lot of risk,” said Stuart Law, chief executive of Assetz Capital. “There’s an ocean between the skill sets in an FCA-regulated firm and the skill sets in an AR relying on a top company overseeing them. “In one case it’s the FCA and other case the firm. I think that carries enormous risks for the sector.”

NEWS

P2P is ‘number two target’ for money launderers PEER-TO-PEER lending platforms are increasingly being seen as a target for money launderers, as platforms are warned to take extra measures to protect themselves from the risk of fraud. According to the National Crime Agency (NCA), P2P lenders are the number two target for fraudsters, second only to payment service providers. “Money laundering crooks do a lot of research on how to integrate money, and they’re looking for a soft target,” explained John Derry-Collins, director at compliance specialists I-fact.

“P2P platforms don’t tend to ask where the money is coming from – they might check that deposits are coming from a UK bank account holder, but it’s not difficult to open one of those.” Derry-Collins has worked with the NCA on anti-fraud measures, and he has outlined three key stages of money laundering. “The first part is to get the money into the system, then the second part is layering as many deals as you can in between the crime and taking the money for your own,” he told Peer2Peer Finance News.

“The third stage is integration where you accept the money and use it.” He pointed out that the P2P model lends itself particularly well to this type of transaction, and the size of the P2P industry means that criminals can scale up these transactions by using a number of different accounts and

platforms. While this kind of activity is difficult to spot, there are ways to uncover links between potentially fraudulent accounts. “You are looking for the unusual activity,” said Derry-Collins. “Almost always a money laundering event is a significant event and it is recognised as being something out of the ordinary – something suspicious.” He advised platforms to act quickly when suspicious account activity is noticed, and alert the NCA, in order to avoid culpability.

JustUs sister company to launch simplified IFISA JUSTUS sister company Moneybrain is set to launch a simplified Innovative Finance ISA (IFSA), in response to the City regulator’s proposals in its call for input on consumer investments. In its call for input, the Financial Conduct Authority (FCA) proposed that investment products should be simplified, while higher-risk products should be labelled with traffic-light colour coding, in an effort to better communicate risk. Lee Birkett, founder of peer-to-peer lending platform JustUs and

personal finance app Moneybrain, said JustUs already has traffic light colour coded products of red, amber and green to represent low, medium and high risk. In response to the FCA’s proposals, Moneybrain will launch a simplified IFISA later this month. Birkett said it will be an auto-invest IFISA, available on the Moneybrain app only, providing returns of three per cent per annum by investing across a portfolio of JustUs loans. He said this will operate in a simple two-click process, once investors

pass the appropriateness test, which Moneybrain is working to streamline to make simpler. This contrasts to JustUs’ other IFISAs which have about 20 different risk options of loans that investors can select. Birkett said that all of JustUs' products are currently on the Moneybrain app as well, but he will review whether to remove the other JustUs IFISAs from the app when launching the simplified one. “It’s just a simple, easy way to get exposure to great asset-backed P2P loan units,” Birkett said.

“We already have the traffic light colour coding for our products and proposed it to the FCA a few years ago. “And some people want it even simpler. A simplified IFISA is something people want, it’s making investing easier, not more difficult, people just want to click on the app to invest. “Our objective is to provide access to liquidity, so people have access to funds at a click of a button, something only a handful of P2P operators have been doing including JustUs.”

GOVERNMENT LENDING SCHEMES

How the government distorted the P2P market

A series of emergency government-backed loan schemes have upended the P2P sector, for better or for worse. Michael Lloyd investigates…

OR YEARS, PEER-TO-PEER lending platforms, industry bodies, and Peer2Peer Finance News have been lobbying the UK government to ‘back our industry’. What we wanted was more recognition of the role that P2P can play in supporting British businesses and small- and mediumsized housebuilders, while offering inflation-beating returns to retail investors. But almost a year on from the introduction of the government’s emergency loan schemes, there is a sense that we should have been more careful what we wished for. By 13 December 2020, £69.13bn had been handed out via government-backed loan schemes, as part of an unprecedented push to save small- and medium-sized enterprises (SMEs) during the Covid-19 pandemic. Theses included the coronavirus business interruption loan scheme (CBILS), the coronavirus large business interruption loan scheme (CLBILS) and the bounce back loan scheme (BBLS). There has never been an SME lending roll-out on this level in the history of UK finance. The message from the government was clear – businesses need money and they need it quickly. This is what P2P lenders were built for. Yet to date, just four P2P lending platforms – Funding Circle, Assetz Capital, Lending Works, and

Folk2Folk – have been approved to offer CBILS, and just one platform – Funding Circle - has won approval to offer BBLS. Some industry stakeholders have said that this is simply not good enough. David Bradley-Ward, chief executive of Ablrate, says that his platform did not gain accreditation for CBILS as it was unable to secure the institutional funding required by the government before the original 30 September deadline. The deadline was later extended to 30 November, and then to 31 March 2021. “The British Business Bank (BBB) was very upfront with us and explained we couldn’t take part in CBILS because we weren’t able to get the institutional funds in place to lend under the scheme by its thendeadline of 30 September,” he says. “But with the extensions it turns out we could’ve done it.” The requirement to secure institutional funding lines has prevented many P2P lending platforms from taking part in the government lending schemes. Property-backed P2P lending platform Proplend wanted to launch a CBILS Innovative Finance ISA whereby the crowd could fund emergency loans via the tax-wrapper, but this idea had to be scrapped when the government confirmed that only institutional funding was allowed for the scheme. It is believed that retail investors

were excluded from the scheme out of an abundance of caution – one year into the pandemic, the economic cost is still not clear, and it is understandable that the government would want to protect retail investors from facing a potential cliff-edge of defaults. Stuart Law, chief executive of Assetz Capital, believes that the government opted to exclude retail investors from the schemes in order to avoid it becoming political football. “There will always be arguments from people, but when you’re trying to save the economy the last thing

GOVERNMENT LENDING SCHEMES

“

We couldn’t take part in CBILS because we weren’t able to get the institutional funds in place

”

you need is reputational risk from people who have a voice and can get too close to the government,” he says. “Similar to Brexit, the government knows half would support retail involvement and the other half

would cause a headache for politicians. Institutions are not the type to complain unlike people.” But finding suitable institutional investors can prove difficult. Although Folk2Folk was accredited to the CBILS scheme in July 2020, it has not yet been able to start lending due to the challenge of finding the right sort of institutional funding. Although the platform has continued its non-CBILS lending throughout the pandemic, and it has institutional backing for non-CBILS lending, it says that partnering with institutions for CBILS has proved more difficult.

“Any arrangement we enter into with an institution has to be on the right terms for them, us and our borrowers so it’s not as straightforward as with retail investors,” says a Folk2Folk spokesperson. “Institutions have their own complex requirements which is why conversations are ongoing. “Any conversation with an institution about CBILS would have evolved to talk about nonCBILS. It’s harder to agree terms when it’s CBILS.” The institutional-only bias in the government lending schemes

GOVERNMENT LENDING SCHEMES

has already changed the P2P marketplace. Funding Circle and Lending Works were two of the most popular retail-focused P2P platforms prior to CBILS. But after they were approved for the scheme, both platforms paused retail lending. Meanwhile, alternative lenders in the unsecured SME space have been unable to compete with incredibly cheap bounce back loans being offered to businesses. After the schemes distorted the cost of credit for SMEs, Rebuildingsociety adapted to its new normal by onboarding more appointed representatives last year. More recently, Crowd2Fund has blamed its reduced deal flow on this market distortion. Despite these negative effects on non-accredited lenders, most lenders understand that the schemes were essential for the economy, and any market distortion is a temporary unintended consequence

that will end when the schemes close for applications. “The schemes were 100 per cent essential, making sure business lending carried on at required levels, rather than an immense collapse of funding that would have decimated the UK economy,” says Law.

with Law that urgent, governmentbacked SME funding was necessary. However, he warns that the rapid deployment of these funds may have unintended consequences for CBILS-approved lenders. “There will be huge number of defaults and some individuals

“ There will be huge number of defaults and

some individuals have abused it with no intention of paying it back “Regardless of some difficulties, they were incredibly effective, well-designed in the short time available and had the effect of continuing finance to the UK SME economy which would have dried up and vanished without the government support.” Adam Tavener, chairman of Alternative Business Funding, agrees

”

have abused it with no intention of paying it back,” Tavener says. “But they needed to get the money out of the door.” Business processing and software provider Target Group has predicted that up to 60 per cent of bounce back loans will never be repaid. Since these loans are 100 per cent guaranteed by the UK government, this means that taxpayers could be left with a £29.5bn bill from bad debts caused by BBLS defaults. CBILS loans only come with an 80 per cent government guarantee, meaning that CBILS providers will have to shoulder the responsibility for the remaining 20 per cent of any defaulted CBILS loans. Funding Circle has provided approximately 25 per cent of the CBILS market. By mid-December 2020, £19.64bn had been distributed via the CBILS scheme. 25 per cent of that figure is £4.91bn. If 10 per cent of these loans default, Funding Circle would be left with a £98.2m bill. “I have huge concerns about the high levels of default being predicted,” says Brian Bartaby, founder and chief executive of Proplend. “What this means is that once the 12-month interest free period is over, lenders and platforms who

GOVERNMENT LENDING SCHEMES

have facilitated these loans will need to allocate a huge amount of time and resources in chasing bad debts.” Several platforms – including Funding Circle – have expanded their collections team in recent months, and there have been reports of government officials contacting private debt collection companies to see if they could take on loans to seek repayment, in return for a fee. Historically, the average default rate across the entire P2P sector has remained fairly consistent at around two per cent. The P2P sector has worn its low default rate as a badge of honour, but there is a fear that a series of CBILS and BBLS defaults could artificially push this sector’s average default rate up, compounding the trust issues already experienced by a sector which is frequently mislabelled as ‘high risk’. And then there are the businesses which have been left out of the government’s lending schemes. The approval rate for CBILS has continually been around 50 per cent, which suggests that a large proportion of companies are missing out on funds that they desperately need. These same firms

may turn to alternative lenders for funding, which may encourage some platforms to relax their credit requirements in order to maintain a healthy deal flow. In less than one year, CBILS, CLBILS, and BBLS have completely changed the P2P landscape, both for borrowers and for lenders.

been successful in encouraging SME lending during the crisis. And the BBB seems to have been equally impressed with the alternative lending community’s ability to rise to this challenge and help UK businesses. “Marketplace lenders, including P2P platforms, remain an important part of the finance landscape for smaller businesses, both within the emergency schemes and in the market more generally, offering greater choice and often streamlined application processes,” says a BBB spokesperson. Only time will tell how effective the government lending schemes have been at supporting the UK economy and saving SMEs from failure. In the meantime, every P2P lending platform deserves credit for reacting quickly to a rapidly changing economic environment. Funding Circle and Lending Works

“ Marketplace lenders, including P2P

platforms, remain an important part of the finance landscape for smaller businesses There are now fewer options for retail investors to access P2P loans, while borrowers are less likely to consider P2P platforms as their first port of call when cheaper, easier government-backed loans are also available. Instead, there is a risk that P2P lending platforms could become the lenders of last resort – competing with the full might of the UK government for access to good quality SME loans. Assetz Capital’s Law has praised the BBB – which oversaw the schemes – and the Treasury, for their quick response to the SME lending crisis, and says that the schemes have

”

have both pledged to reopen to retail investors as soon as they are able to, and other platforms have expressed an interest in taking part in any post-CBILS funding scheme. When the pandemic is over and the costs have been tallied, there is every reason to believe that P2P could emerge stronger than ever before, with a queue of eligible institutional investors and a track record of government co-lending. Until then, P2P lending platforms will just have to keep doing what they do best – providing life-saving loans to SMEs, funded by savvy, yield-seeking investors.

PROFILE

Sourcing opportunities amid the Covid-19 crisis

Sourced Capital founder and managing director Stephen Moss talks to Marc Shoffman about how has managed to recruit staff and build a successful pipeline of development opportunities despite the challenges of the pandemic.

OURCED CAPITAL founder Stephen Moss built a name for himself after launching Legal for Landlords in 2008, which offered products such as tenant agreements and referencing. It expanded by enabling others to sell the legal services as franchisees across the country and now Moss is bringing that model to peer-topeer property lending. Sourced Capital is a P2P property lender that sits within a wider group that sells off-plan developments, finds development opportunities and funds care home properties. It has 150 franchisees who use the brand name to help originate development opportunities that can then be funded by P2P investors who can target returns of up to 12 per cent, with investments eligible to be held in an Innovative Finance ISA. Sourced Capital completed its first full year of trading in 2020, funding £10m of opportunities despite a global pandemic and lockdowns. Marc Shoffman: Has P2P lending become overcrowded? Stephen Moss: Technology and property have always excited me and I have always thought P2P lending would be a game changer.

I have been in the property sector for 20 years and had a chain of estate agencies and development properties. There are lots of different lenders coming to the market with different twists. This year we will see a growth in current lenders, consolidation and some transforming into banks. A lot of the smaller players are struggling.

It is difficult to operate if you only work as a lending platform. You have a better chance if it is combined with something else. We are fortunate that Sourced has other aspects. There is a development arm that we would like to grow and we have started operating in the care sector. P2P lending is a big focus on our business.

PROFILE

Our franchisees spend their days finding development opportunities to be funded. We want more than 300 franchisees and would like to hit £20m of lending this year. MS: How did you cope through the first lockdown? SM: The pandemic was a big shock. We started in 2020 with a million and one great ideas of what we can do and how we can do it. We had hit £1m in the first month but then it all stopped in March. It affected us from a capital point of view but we looked at it positively as an opportunity to take stock and look at our systems and processes and what training we could add to the team. The lockdown became an opportunity to make sure all our processes were correct and to add new benefits to the platform. There were three months where we didn’t lend anything but we have come back at a reasonable pace and now have a healthy pipeline. One of the challenges is recruiting. You can’t carry out face-to-face interviews in a pandemic but we still managed to recruit three extra members of staff and now have 11 working in our P2P lending team. Luckily, we were not the same position as other platforms as we didn’t have a large loanbook so there were no issues of large withdrawals. SOURCED CAPITAL IN NUMBERS Net return: 12.38 per cent Loans completed: 34 Loanbook size: £10m Products: IFISA, SIPP, autoinvest product launching soon

STEPHEN MOSS CV 2000-2002: Manager for estate agency Sequence UK 2002-2008: Director of the Letting Shop 2008-2015: Founder of Legal4Landlords 2015-2017: Chief executive of investment property platform Pring 2017- present: Managing director of Sourced Capital

It has made it easier to manage everything in a more sensible way. MS: How have the new year lockdown restrictions affected you? SM: We came into the beginning of the year thinking we could hit the ground running. It was helpful that we had already introduced tech such as Zoom and remote logins but it does make it harder to train people and induct new staff members. We think we are in a relatively more stable situation as our loans are long-term and are just at the start. The stamp duty holiday is having a positive effect on the market There has been a huge rush of people buying properties and we are expecting that to dip if the holiday isn’t extended after the end of March. The end of the stamp duty holiday could also have a positive effect though, as a reduction in prices could create buying opportunities. A lot will also depend on how and when lockdown restrictions are eased. MS: What is your lending criteria? SM: We will look at the location as well as how much experience the developer has got and their level of deposit. Our maximum loan-to-value is 70 per cent. One of the struggles last year was getting materials. Our experienced developers didn’t have

these issues as they had suppliers giving them resources quicker but newer developers found this takes more time. We will also look at the exit strategy. Will a property be sold or rented out? We have developments all over the UK. The North is easier as it is cheaper and London is its own market, but every area comes with its own challenges. MS: What is your focus for 2021? SM: We are aiming for £20m of lending and plan to launch an autoinvest product in the middle of this year. This is based on demand from current investors. People like the functionally of it but it does come with extra compliance and management issues that we are well placed for. MS: You called for ISA season to be delayed amid the pandemic last year, would you still like to see that happen? SM: I don’t think a delay is needed as much this year. There is life at the end of tunnel with the vaccine rollout. ISA season could potentially be two seasons in one go as people have had time to reflect and look at their investments since last March. Ultimately people have a better grip and know the vaccine is coming so that will be some comfort. We think ISA season will be busy.

RETAIL INVESTMENT

The return of retail money

Retail investors have taken a back seat over the past year, but as the vaccine roll-out gains pace, Michael Lloyd asks when retail investment will take centre stage again…

“H

OW WE ATTRACT retail capital is our KFC secret recipe,” says Mike Bristow, chief executive of peer-to-peer lending platform CrowdProperty. “We have many different ways. I’d love to tell you, but I can’t.” Acquiring retail investors has always been a costly challenge for P2P lending platforms, and over the last year it has become even more difficult, thanks to tighter

regulations, marketing restrictions, and of course, the pandemic. When the Covid-19 crisis struck, investors panicked and started withdrawing their funds – a trend seen across the board in different asset classes. Innovative Finance ISA provider Orca closed its investment aggregator model to retail customers in February; Growth Street initiated a liquidity event in March before beginning its wind-

down in July; and in June, Propifi suspended its P2P platform and closed its IFISA. Funding Circle and LendingCrowd both paused retail lending in order to focus on offering loans under the coronavirus business interruption loan scheme (CBILS). Then in September, RateSetter – once the largest IFISA provider in the UK – shut its doors to new retail investors following its acquisition by Metro Bank. Although existing

RETAIL INVESTMENT

lenders can continue investing in P2P loans on the platform, it has stopped accepting any new IFISA clients. “Retail-focused P2P lending, like the stock market and most other asset classes except savings, has seen a big retreat, as those who want to sell their investments outweigh those who want to buy,” says Neil Faulkner, managing director of P2P analysis firm 4th Way. “Some platforms have also temporarily stopped new lending and many reduced new loan approvals, which also lowers the

tests, reinforcing the argument that P2P’s retail investors are more savvy and informed than the regulator may realise. Faulkner cites 4th Way data which suggests that although platforms continued to grow investor numbers after the new regulation was implemented in December 2019, it may have slowed in some cases. “This means platforms are likely have higher costs to attract investors,” he says. “Some platforms decided to close or to change their business models as a result, but the industry as a whole

“ There are not many places you can put your money and earn a decent return with a decent level of security over it

number of retail investors who have been able to lend.” Before the Covid crisis, retail investor numbers in the sector were growing, but there were other obstacles to deal with. New rules from the Financial Conduct Authority (FCA), introduced in December 2019, stated that P2P lending platforms could only communicate ‘direct-offer financial promotions’ to high-networth or sophisticated investors, those receiving regulated financial advice or restricted investors. P2P platforms also had to enforce appropriateness tests before onboarding new investors to quiz them on their knowledge, which left some platforms worrying about a drop in the number of new investors joining. As it turns out, a number of platforms have told Peer2Peer Finance News that the majority of new retail investors do pass their

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will be able to swallow the costs.” With retail investment taking a hit, nearly a dozen platforms have told Peer2Peer Finance News that they are still committed to the retail market. As the economy recovers, it is expected that investors will gain more confidence in investing

again. And this, coupled with stock market volatility and record low interest rates, makes the P2P sector even more attractive to yieldseeking investors. Both Funding Circle and LendingCrowd have promised to reopen to retail lenders once conditions start to normalise, although the platforms have admitted that this may take some time. There has also been some anecdotal evidence that investors in these platforms – along with Growth Street, Propifi and RateSetter – may not have completely left the sector but have instead moved their money to different platforms. Assetz Capital, CrowdProperty and Ablrate have all reported transfer-ins from RateSetter and others. This could lead to more competition in the sector, with P2P firms fighting for investors moving from platforms now closed to retail. And as every salesperson knows, it is cheaper and easier to keep an existing customer than to attract a new one. Atuksha Poonwassie, managing director of Simple Crowdfunding, predicts that retail investment in P2P

RETAIL INVESTMENT

will pick up to pre-pandemic levels this year and continue growing. “I think there is a place for retail investors in P2P,” she says. “I think P2P lending will do very well for a number of reasons – to provide fixed returns is beneficial, and if we move into negative interest rates then people will want to look at options to make their money work for them and that will also depend on what market conditions are. You would expect the market to start bouncing back

“The tide will turn,” he says. “There are not many places you can put your money and earn a decent return with a decent level of security over it. We definitely believe retail P2P will be back in force soon.” While there is still plenty of scope for growth in the retail market, industry onlookers believe that the success of retail-focused P2P will ultimately be dictated by regulation – and the next big regulatory challenge is the FCA’s consumer investment proposals.

“ If we move into negative interest rates then

people will want to look at options to make their money work for them once Covid stabilises.” Similarly, Stuart Law, chief executive of Assetz Capital, forecasts retail investment to return to prepandemic levels in 2021 and for his platform to start lending at decent volumes in its auto-invest accounts in the second quarter.

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The City watchdog is currently analysing the feedback from its call for input on the consumer investments market, which will be used to shape its work for the next three years. Within the call for input, the regulator proposed that investment

products should be simplified, while higher-risk products should be labelled with traffic-light colour coding in an effort to better communicate risk. Many platforms and industry stakeholders have raised concerns that this will deter retail investors from P2P. “It would scare people off well-managed investment houses and could put off platforms too,” Law says. “Without risk there is no return and very few people can live without a return. People will need to take risk and the FCA will cause a lot of poverty if it drives them away from making any sensible return.” Poonwassie agrees and says that if the country moves into negative interest rates, with the cost of inflation, people will get poorer and will need other places to invest their money. “If you then restrict retail investors from accessing investment opportunities in a regulated environment where they are exposed to risk, it reduces a huge

RETAIL INVESTMENT

avenue for them to learn about and access investments,” she says. “I think the platforms do highlight risks for investors already.” Poonwassie says that platforms have implemented risk warnings and appropriateness tests to weed out investors that do not understand P2P. This is something that has been highlighted by the UK Crowdfunding Association (UKCFA), which took part in the call for input. Bruce Davis, director of the UKCFA, is disappointed that the regulator did not mention any of the work the sector has conducted to protect retail investors. He is also concerned that the FCA was not clear on what it meant by simple investment products and says that retail investors should not be pushed into the unregulated space. “We’ve laid out the challenges here,” says Davis. “We need a system that protects against vulnerable consumers but does not stop retail investment

“ The platforms that offer investments to investors do highlight risks already

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being something where people have a degree of choice and control over where their money goes and aren’t just being given what might be considered vanilla products which might meet some of their needs but pushes them to find investments out of the regulated space.” However, others believe that the traffic light proposals would not deter retail investors from P2P, for example, those familiar with it, or that if it does, it would only be a positive and put off those who do not understand the sector and cannot afford losing their capital. “It’s going down the lines of food packaging which makes it clear what you are consuming,” says Mike Bristow. “If it stops people that shouldn’t be investing or makes people stop

and think a little more, that’s fine.” P2P platform JustUs has always worked on a colour-coded scale of low, medium and high risk, similar to how many other P2P lenders offer low, medium and high-risk products. “Wider acceptance of that would make the product more easily understood,” says Lee Birkett, founder of JustUs. “For me, it’s just a common-sense approach that wouldn’t deter investors, but may even encourage them.” Whether it be due to regulation or the high cost of acquiring retail investors, the consensus is that more platforms will leave P2P in favour of institutional funding. But that doesn’t mean that the days of the retail P2P investor are numbered. There are limitations for institutional-only funding models. Retail money is stickier, and offers the sort of granular diversity that institutions can’t always provide. And Covid-19 is only a temporary opponent – as the crisis ends with the vaccine rollout, retail investment should bounce back as well. Retail investors are still out there, searching for returns in a lowinterest rate environment, and they are prepared to do their own due diligence and educate themselves about the value of alternative investment options. The P2P sector was created to serve these people, and it will continue to serve them as long as the demand remains. There may be fewer retail-focused platforms than there were a year ago, but this is an indication of the resilience and flexibility of the P2P sector. This is a sector with a proven ability to create innovative, effective solutions to funding problems. That’s the not-sosecret recipe of retail P2P.