Peer2Peer Finance News February 2022 by Alternative Credit Investor

>> 6

RISING RATINGS

Securitised P2P loans get upgrades

STATE-BACKED LENDING

>> 16

The impact of Covid loans on P2P

The P2P investing guide

>> 10

ISSUE 65 | FEBRUARY 2022

FCA shelves P2P development loan ban after industry feedback

EER-TO-PEER lending industry stakeholders have praised the City watchdog for taking feedback into account when tabling stricter financial promotions rules, and for shelving a proposed ban on the marketing of P2P property development loans for the time being. Last year, platforms hit out at a Financial Conduct Authority (FCA) discussion paper that proposed a mass marketing ban be extended to P2P agreements which share the relevant features of a speculative illiquid security (SIS) and carry the “possibility for arbitrage”. In January, the regulator published its latest consultation, ‘CP22/2: Strengthening our financial promotion rules for high-risk investments, including cryptoassets’, in which the proposed marketing ban on P2P development loans has been removed. “We understand respondents’ concerns about the potential impact of extending our SIS rules on firms legitimately

raising capital from retail investors,” the FCA said in its paper. “We also understand concerns that not all P2P lending models present the same risks to retail investors. We published a discussion paper before consulting precisely to better understand the potential impact of these proposals and avoid unintended consequences. “To fully address the issues that respondents raised, we do not propose to extend our SIS rules in this consultation. We intend to revisit this issue later in the year.”

P2P platforms and stakeholders were pleased that the FCA took industry feedback on board and made these changes. “It’s good to see common sense has prevailed,” said Lee Birkett, chief executive of JustUs. Stuart Law, chief executive of Assetz Capital, said that the fact the regulator listened to the industry and removed the potential ban on P2P development loans is “amazing, correct and very important”. “Very little that goes into an FCA consultation paper gets deleted so it’s

very good the FCA has decided not to include it in this paper because it would have been very unlikely to have been removed afterwards,” he said. Filip Karadaghi, co-founder of LandlordInvest, was pleased with the FCA’s change of heart regarding the potential ban and said the platforms which are currently engaging in development lending appear to be acting responsibly. “Development finance is riskier than bridging finance as it requires more specialist knowledge and those engaging in it in P2P are doing well,” he said. Bruce Davis, co-founder of crowd bonds platform Abundance and director of the UK Crowdfunding Association (UKCFA) said he was pleased the FCA listened to feedback and even referenced UKCFA research showing investors’ understanding of the sector, in the paper. He said before submitting formal responses in a few months’ time, the trade >> 4 body will attend

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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.

opened an email from the Financial Conduct Authority with trepidation on 19 January, as I knew it would be their long-awaited consultation paper on strengthening the financial promotions rules for high-risk investments. Peer-to-peer lending industry stakeholders had been concerned that the City watchdog, in its zest to rein in the cryptoasset space, may have used the paper to put unfairly onerous restrictions on the sector. But I was pleased to see that this was not the case. In fact, as our front page story shows, the regulator took feedback from the industry on board and has shelved proposals for a P2P development loan marketing ban. While the plans will get revisited later this year, the fact that the FCA has shown it understands the nuances of the P2P sector and has not made a knee-jerk reaction in its regulation is extremely reassuring for the future of the industry. Now that we can move on from regulatory worries, I’m excited to see how the sector will grow and evolve this year. 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 any roundtables that it is invited to by the FCA in order to discuss the proposals, and question members on any unintended consequences of the regulator’s plans. “We were pleased to see the FCA referenced our research and took it into account and we’re looking at whether we should do a follow up survey to look at the proposals in more detail,” he said, speaking in a personal capacity.

Mike Carter, head of platform lending at the 36H Group, was also positive about the regulator’s plans. “We cautiously welcome some of the proposals in [the consultation paper] and also that for now P2P property loans won't be included within SIS investments, although this door remains open as the FCA say they will be looking at this again later in the year,” he said.

Under the proposals, the FCA also wants to put P2P agreements under the banner of ‘restricted mass market investments’, alongside cryptocurrency and non-readily realisable securities. The City watchdog said this was to rationalise its current rules after firms said its handbook was difficult to navigate. For financial promotions for high-risk investments, the FCA

is planning to ban the promotion of investor incentives, such as new joiner or refer-a-friend bonuses, and will improve risk warnings on ads. It has also outlined plans to strengthen appropriateness tests, for example by removing the ease of retakes. The regulator is inviting feedback on its proposals by 23 March and plans to confirm its final rules this summer.

EasyMoney: Retail investors were “best thing” during pandemic EASYMONEY has said that remaining open to retail investors during the pandemic was the best thing for the platform and provided opportunities for experienced lenders. Jason Ferrando, head of lending at EasyMoney, told Peer2Peer Finance News that during the first lockdown in March 2020 the platform had a series of conversations about whether or not to continue to accept retail money. Around the same time, several other peer-to-peer lending platforms opted to pause their retail lending business, citing market instability and rising withdrawal requests. Funding Circle temporarily closed to retail investors in April 2020 and has yet to reopen,

while Crowd2Fund, Assetz Capital, and LendingCrowd were among the platforms which paused their retail offering in the early days of the Covid-19 pandemic. Zopa also stopped offering retail investments as a temporary measure, before opting to close its P2P business entirely by 31 January 2022. “We had some internal

battles, a lot of heavy discussions about whether we should follow everybody else or whether we should buck the trend and stay open,” Ferrando said. “In the end, we decided to stay open. And it worked out really well because even though we were seeing a huge amount of money being withdrawn, we wanted to

save the money coming in. That was where our networks really did become a big help because when everybody was withdrawing, our experienced P2P investors saw the opportunities available and began investing more. “I think staying open through lockdown was the biggest, best thing for us,” he added. Earlier this year, EasyMoney reported that it had passed the £150m lending milestone and returned £10m in interest payments to its investors. Last year, the platform announced that it had made a profit of £269,000 and paid out an average interest rate of 7.4 per cent during 2020, despite the impact of the Covid-19 pandemic.

NEWS

Zopa officially exits P2P lending THE WORLD’S oldest peer-to-peer lending platform officially closed its P2P business on 31 January 2022, returning all investment funds to its retail lenders. Zopa will no longer allow retail investors to fund consumer loans on its platform, for the first time in the company’s 17-year history. Instead, the Zopa brand will focus on developing its banking business and a

forthcoming public float. Zopa Bank won its full banking licence in mid2020 and started offering savings accounts in August of that year. By January 2022, the bank reported that it had attracted more than £1bn in deposits to its fixed term savings account. Within 18 months of its launch, the bank had more than £1bn of loans on its balance sheet, and it had issued more than 200,000 credit cards, becoming a

top five credit card issuer in the UK. Last year, a $300m (£220m) fundraise valued Zopa at $1bn, making it the latest UK-based fintech unicorn. Zopa is expected to go public on the London Stock

Exchange later this year, following in the footsteps of other alternative lenders such as Funding Circle and LendInvest. Zopa was founded in the UK in 2005 by Richard Duvall, James Alexander, Giles Andrews, David Nicholson, and Tim Parlett. Andrews is the only co-founder still involved with Zopa’s operations, as a board member of both Zopa Bank and Zopa Group.

How to benefit from multiple IFISAs THERE are only a couple of months left to make use of your ISA allowance before the end of the tax year but you do not necessarily need to choose just one Innovative Finance ISA (IFISA). Savvy investors are able to open multiple IFISAs by transferring tax-free savings from previous years and it could quadruple the interest you earn – here is how. Your annual £20,000 ISA allowance can be used in a variety of ways to earn interest tax-free. It can be put in cash ISAs, stocks and shares ISAs or you can back P2P loans using an IFISA. Under HMRC rules, you can only contribute new ISA money to one type

of each tax-free account during a single tax year. However, there is nothing stopping you from finding a better place for your old ISA money. ISAs from previous years retain their tax-free status but you do not have to stick with old cash ISA rates and can instead transfer it to accounts with more attractive interest rates such as an IFISA. An IFISA is different to a cash ISA as there is no Financial Services Compensation Scheme protection and the rate is not guaranteed. But in return for this extra risk, you could earn a better rate and make your old ISAs work harder. Analysis by Peer2Peer Finance News has shown

that IFISAs returned an average of 9.01 per cent during 2021, while cash ISA savers have struggled to get a typical rate above two per cent since May 2013. ISA transfers are treated separately to your annual allowance so there is nothing stopping you from opening multiple IFISA accounts just to hold ISA money from previous years where the targeted rates of return could be higher than what you are earning in old cash ISAs. P2P analysis firm 4thWay suggests this could be a good way of diversifying your P2P investments. “You can transfer money from cash ISAs,

stocks and shares ISAs and IFISAs that you contributed to in previous tax years into any number of new IFISAs that you like,” the firm said. “That includes any gains you made on money that was contributed in previous tax years. “Some ISA providers allow you to partially transfer funds you contributed in previous years and IFISA providers usually allow you to transfer in partial transfers. “This means that if you have, say, £30,000 in a cash ISA prior to 6 April this year, you could open six new IFISAs right now and put £5,000 in each of them. Instant diversification.”

NEWS ANALYSIS

Securitised P2P loans see wave of ratings upgrades SECURITISED peer-topeer loans are performing well on the capital markets despite navigating Brexit and the pandemic in recent years. Analysis by Peer2Peer Finance News has found that ratings agencies such as Moody’s, DBRS Morningstar and Fitch have regularly upgraded P2P securitisations issued since 2016 as loans continue to be repaid early or on time and default expectations either stay the same or improve. It comes amid increased regulatory scrutiny of the P2P lending sector due to worries about investor understanding of the level of risk. Here is how P2P securitisations have performed. Funding Circle Funding Circle was the first platform to securitise P2P loans, beating Zopa to the debt capital markets in May 2016 with a £129m transaction called the Small Business Origination Loan Trust 2016-1. The deal was arranged by Deutsche Bank and sponsored by KLS Diversified Asset Management. Many of the loans have since been paid off but in 2018, Moody’s upgraded each class of notes. Moody’s said the loans

were upgraded as more of the portfolio has been repaid and defaults “have remained at lower levels than Moody’s initial forecasts.” The P2P business lending platform also secured a £206m deal in April 2018 and a £187m transaction in April 2019, supported by Londonlisted trust P2P Global Investments (P2PGI). P2PGI has since been acquired by Waterfall Asset Management. The 2018 transaction was upgraded in 2020 by DBRS Morningstar, which cited the “timely payment of interest and the ultimate payment of principal on or before the legal final maturity date.”

Another two rounds of loans were securitised by Funding Circle in July and November 2019, respectively. One was worth £232m and the other £198m. Two years later in November 2021, Moody’s upgraded the three transactions, attributing this to a large amount being paid ahead of schedule. “The upgrades are primarily prompted by a significant increase in credit enhancement for the affected tranches following large amortisation of the portfolios through unscheduled principal payments, as well as the contribution from excess

spread partially offsetting increased defaults,” Moody’s said. Zopa Zopa took part in the first ever securitisation of unsecured consumer loans in September 2016. It was named Marketplace Originated Consumer Assets 2016-1 PLC or MOCA. The £138m transaction was led by investment trust P2PGI. The most recent upgrade to the notes came in April 2019 by Moody’s which cited a “high level of prepayments.” Another £208.9m of Zopa loans were securitised in October 2017.

NEWS ANALYSIS

Securitisation

Issued

Rating upgrades

May-16

Class A - Aa2 to Aa1 Class B - A1 to Aa1 Class C - Baa1 to Aa2 Class D - Baa3 to Aa3 (Moody’s 2018)

Apr-18

Class B- A to AAA Class C- BBB to AAA Class D- BB to AA (DBRS Morningstar 2020)

Apr-19

Class B - A to AAA Class C- BBB to AAA Class D- BB to A (DBRS Morningstar 2021)

Jul-19

Class B - Aa2 to Aaa Class C- Baa1 to Aaa Class D- B1 to A1 (DBRS Morningstar 2021)

Funding Circle Small Business Origination Loan Trust 2019-3

Nov-19

Class A - Aa2 to Aaa Class B - A1 to Aaa Class C - Baa3 to Aa1 Class D - B2 to Ba1 (DBRS Morningstar 2021)

Zopa Marketplace Originated Consumer Assets 2016-1

Sep-16

Class A, B, C - Reaffirmed at AA2 Class D - Aa3 to Aa1 (Moody’s 2019)

Oct-17

Class A - Aa1 to Aaa Class B - Aa2 to Aaa Class C - A1 to Aa1 Class D - Baa2 to Aa4 Class E - B1 to Baa1 (Moody’s 2019)

Dec-19

Class A, B, C- Reaffirmed at AAA Class D - BBB to A Class E- BB to B+ Class F - B- to BBB(Fitch 2021)

Funding Circle Small Business Origination Loan Trust 2016-1

Funding Circle Small Business Origination Loan Trust 2019-1

Funding Circle Small Business Origination Loan Trust 2019-2

Zopa Marketplace Originated Consumer Assets 2017-1

Zopa Marketplace Originated Consumer Assets 2019-1

The transaction was again led by P2PGI and arranged by Deutsche Bank. Two years later in November 2019, Moody’s also upgraded these notes, stating that fears over Zopa’s business model and lack of track record had been overcome by the loan performance. Zopa’s third

securitisation was in December 2019 and was worth £244.7m. It was sold by London Bay Loans Warehouse 1 Limited. Last month, Fitch reaffirmed its triple A rating for the securitised A, B and C notes and upgraded the D and E notes. Fitch said the remaining

life default assumptions on the loans remained unchanged, with the average default base case at 9.1 per cent. The ratings agency said there was enough liquidity to cover any shortfall from payment holidays and said the portfolio withstood its tougher default assumptions that were revised during the

pandemic. “The transaction’s liability structure is able to withstand the elevated default assumptions that we revised in response to the outbreak of the coronavirus and reflect risks of potential asset performance deterioration, which justifies the upgrades,” Fitch said.

JOINT VENTURE

Kuflink hails organic growth as profits rise

AST MONTH, PEERto-peer property lending platform Kuflink announced that it had increased its profits in the 12 months ending 30 June 2021, despite the ongoing instability caused by the Covid-19 pandemic. Narinder Khattoare, chief executive of Kuflink, says that the platform’s ongoing success is a testament to its organic growth and focus on “pure P2P”. “The key thing is patience,” he says. “We've been a P2P lender since 2016 and we’ve always said we wanted to grow the loanbook organically. “We want to make profits, but that takes time,” he adds. “You're going to go through a period where you're spending money on marketing, on infrastructure, on costs, etc. So you're going to have to soak that up within the business. Some people get impatient with that process and want quick growth within 12-18 months, but that’s just not possible, because if you're looking to run a £200m loanbook, it takes years not months. “We’re living proof of that. We've made losses in the past and that was because of the money we had to spend on infrastructure and brand awareness. We don't have to spend that kind of money now because the business is established. For us now it's all about getting the money out the door and making money for our investors.” The platform’s statistics speak for themselves – at the time of writing, Kuflink’s loanbook was worth more than £156m, with over £96m paid back to investors since inception, and no investor money lost.

“We are going to continue to grow organically with the investor base that we have,” Khattoare adds. Kuflink’s organic growth model also applies to the business operations. Khattoare values experience and expertise above all else, and has built a strong team who want to stay with the company in the long term. Khattoare himself started as a salesman in Kuflink’s bridging business, before rising through the ranks to become chief executive. “Our staff are loyal to us,” he says. “We work really well together as a team. We prefer to promote people from within our team rather

than bringing in new staff. We tend to get people in, teach them the way we do things and then grow them into senior roles.” Over the next two months, Kuflink will be entering “innovation mode”, and Khattoare is excited to show investors what he has planned for the future of the business. The firm has already launched its first app, and hinted at future proptech partnerships, new product launches and carbon neutrality by 2030. For Kuflink and Khattoare, organic growth is the key to strong foundations and future success.

INVESTOR GUIDE

The ultimate guide to P2P investing

We present the top industry tips for making the most out of your peer-to-peer investments. Michael Lloyd reports

NFLATION HAS REACHED a 30-year high, piling pressure on savers and leading many to take on more risk in the search for yield. Even the Financial Conduct Authority (FCA) is actively encouraging savers to move money out of their stagnant bank accounts and to invest their funds instead. But the stock market is still filled with volatility and investors are understandably nervous about the possibility of losing money by making a bad equity bet. If only there was an investment solution

that offered inflation-beating returns at a relatively steady rate, with minimal risk of losses… Peer-to-peer lending has been around for more than 16 years, and aims to cut out the middleman by allowing investors to lend directly to borrowers, or to a range of borrowers via a P2P platform. The borrower pays interest on a monthly basis, and the platform takes a small share of this interest while investors keep the rest. This is similar to the structure of a traditional bank, except banks take a much larger

share of the borrower fee, due to the higher costs associated with running a banking business. The main risk in P2P lending is that the borrower will not be able to repay their loan in full or in a timely manner. However, the average default rate across the entire P2P sector since inception has remained relatively stable at around two per cent. And there are a few ways to reduce this risk through P2P lending. Before investing in P2P, it is important to have basic knowledge

INVESTOR GUIDE

of the sector, how platforms operate and what sort of things an investor should look out for. P2P platforms are regulated by the FCA, and prior to investing in a P2P

New investors should seek platforms with transparent data showing a good lending record with low rates of bad debt, as well as attractive yields which are

“ Do your homework, do your research, spread your risk across multiple asset types and lastly pick up the phone and speak to the platform

”

platform, investors should check that their lender of choice is on the City watchdog’s register of regulated financial services businesses. Some P2P firms may appear under their business name, rather than their trading name – for instance, JustUs may appear under its official business name of eMoneyHub. If you are looking at opening an Innovative Finance ISA (IFISA), check HMRC’s list of approved ISA managers to ensure that your platform of choice has been authorised to offer the tax-free wrapper on its investor accounts. Filip Karadaghi, co-founder and managing director of property lending platform LandlordInvest, says that regulated, directly authorised platforms have a “badge of honour” after passing through the regulator’s due diligence. “Once a platform becomes authorised, they’ve gone through a process where the regulator reviews all aspects of the business, from its technology, scale of team and brand,” he says. “It took us two years to go through the application and the FCA asked us every possible question and more.” Once you have confirmed that your platform of choice is properly regulated, it is time to do your own research.

approximately in line with the borrower rates on offer. “Do not invest in something you do not understand,” says Karadaghi. “You should treat it exactly the same as making any major purchase in your private life, like buying a car, and I feel some investors are missing that point.” Ian Anderson, chief operating officer of ArchOver, highlights that investors should do their own research, diversify their investments and speak to platforms

to ask any questions they have. “Do your homework, do your research, spread your risk across multiple asset types and lastly pick up the phone and speak to the platform,” he adds. Most platforms will include an office number or customer service line on their website, while other platforms have a chat box function which allows prospective investors to ask questions online. It is also possible to source third party information by reading TrustPilot reviews or accessing expert analysis from sites such as 4thWay. 4thWay reviews platforms for investors and can thus provide a good source of information when they conduct their own research. Managing director and head of research Neil Faulkner says that investors should primarily look for extreme transparency with lots of data, information about lending processes, bad debt recoveries and the people behind the platform.

INVESTOR GUIDE

“You want to be sure that bad debts are not being hidden by extending or refinancing loans, and that the people behind the platforms genuinely have the specific skills and experience they should have for the kinds of loans they are doing,” he says. “You need to lend where you can spread your money over a large number of loans and you need to lend where the borrowers are typically going to repay in the timeframe where you will want your money back, because early exit options are not always going to be available, even at the very best platforms. “You need to feel that you truly understand the loans you're lending in and the profile of those loans, such as the proportion of them that turn bad, how long recoveries take and how much is typically recovered, so that you can decide whether you're comfortable with that. “In deciding where to invest, you should be looking at a variety of different accounts and different types of lending, to spread your risks widely.” Investors are also recommended

and that the asset is familiar,” a spokesperson from Invest & Fund says. “Make sure the underlying asset type is long established and the sector very large – so that there is a clear picture of how it performs over a long period and against large volumes.” The majority of P2P platforms and stakeholders agree that track

“ You need to feel that you truly understand

the loans you're lending in and the profile of those loans to look at the underlying nature of the loan and whether there is an asset being offered as security against a default. This means that if the borrower cannot meet their repayments, the P2P platform can take charge of the asset and sell it off to repay investors. “Make sure you understand the nature of the underlying asset

”

record is a vital component that investors should research. Lenders can find statistics and information on platforms’ loanbooks on their websites. Lee Birkett, chief executive of JustUs, says that although it does not indicate future performance, track record is important and financial advisers only point investors towards

lenders that have been trading for five or more years. He also adds that during the current economic climate investors should seek asset-backed lending over unsecured lending. “Track record of consistent positive returns is key,” he says. “If there’s no track record, you’re putting your money on a roulette wheel. “And ideally, I would suggest asset-backed lending, as unsecured lending has been found out particularly in the current stormy financial waters. “Any firm operating today that came through the crisis and the evolving FCA scrutiny and due diligence process is pretty sound.” As well as seeking a track record of the loanbook, platforms and industry stakeholders suggest investors should also research the track record of P2P lenders’ management teams. They should look for highly adaptable management teams, with multi-sector experience and strong financial and operational

INVESTOR GUIDE

“ Any firm operating today that came through

the crisis and the evolving FCA scrutiny and due diligence process is pretty sound

”

controls in place. The key decision maker in the lending team, such as the head of credit or head of risk, should have plenty of experience related to the specific types of loans the platform is offering. Stuart Law, chief executive of Assetz Capital, says that governance is extremely important and warns that some platforms are only run by one or two directors or have one majority shareholder controlling the business. “The two main reasons platforms fail is lack of experience in lending and credit and lack of governance,” he says. “One of the biggest common factors with P2P platforms failing is they are run by one person or one person and their wife or school friend.”

Lenders should look at platform websites to find information on the management team and the platform’s track record, as well as statistics on their average and target returns and their default rates. “The headline rate of return and even the actual return should not be looked at in isolation, it is much more appropriate to look more broadly at how the underlying P2P investment performs as a distinct asset class and the characteristic of the assets,” says a spokesperson from Invest & Fund. “Do not be seduced by the interest rate… if it’s very high, there will be a reason for it!” Similarly, Nicola Horlick, chief executive of Money&Co, says that investors should seek as low a default rate as possible and

reasonable rates of interest while being aware of excessive returns. “They should be suspicious of very high rates of interest,” she says. “Investors need to look at the statistics page on each site and take account of bad debts. They should not be lured by excessive returns as it is likely that too much risk is being taken.” Some industry stakeholders go one step further and suggest investors should be wary of platforms that offer cashback deals in an attempt to recruit more sign-ups. Assetz Capital’s Law says investors should be careful as it implies the platform “does not have enough investors” and the margins do not add up. “I’d be a bit careful,” he says. “Giving everyone cashback puts the platform in danger of not making enough money to stay in business because the margins are quite thin.” The FCA appears to have similar concerns. Last month, it outlined plans to ban investor incentives within promotions for high-risk investments. Ultimately, all that stands between a P2P novice and their first P2P investment is a few clicks of the mouse. But before rushing into a new asset class, investors should do plenty of research and only invest when they are completely comfortable. Luckily, P2P platforms make it easy to check their track record and regulatory status, and most brands are committed to educating their investors on the risk and rewards that they can expect. A little bit of time, a little bit of effort and a willingness to take on a little bit of risk could help investors beat inflation and make their money work harder.

So many reasons to feel good Invest in property that provides homes to some of the most vulnerable groups in society and build a diversified portfolio on our investment platform. • • • • •

Long term, stable, monthly income Capital return Inflation linked IFISA Yields typically over 5%

assetzexchange.co.uk info@assetzexchange.co.uk

This is an investment in peer-to-peer loans and is not a direct property investment or a savings account. Your investment is not protected by the Financial Services Compensation Scheme (FSCS). Your capital is at risk. Past returns should not be used as a guide to future performance. Assetz Exchange Limited is authorised and regulated by the Financial Conduct Authority under firm registration number 668931. Registered in England (Co. No. 09285310) with registered office at Assetz Exchange Limited, Assetz House, Manchester Green, 335 Styal Road, Manchester, M22 5LW.

JOINT VENTURE

Assetz welcomes inflation-squeezed investors

EER-TO-PEER PLATFORMS are braced for an influx of new retail money in the coming months and years, as rising inflation, stock market volatility, and a new campaign by the City regulator make P2P investing even more attractive. But Stuart Law, chief executive of Assetz Capital, has urged incoming investors to choose their P2P partner wisely. This means that before investing any money in a new platform, investors need to look at the company’s management structure, and its ability to grow slowly and sustainably. “At Assetz Capital, we’ve always invested – at great cost to our profits – in our team, in our processes, and all the systems so that we've got a better chance of being around in the future,” says Law. “That's how we've always done it and it's a very expensive approach. “P2P investing is a bit like running across a battlefield with or without a suit of armour. What are the chances of you running across that field of battle without a suit of armour and surviving? Minimal. When you wear the suit of armour, your chances of survival are a lot better, but you can’t go as fast. “That's how I see the governance, the board of directors, the investment in credit and the experience of P2P platforms. It's about putting on a really good, solid suit of armour to protect both yourself and your stakeholders.” Good governance has helped Assetz to become the largest and most popular retail lending platform in the UK, with almost £1.5bn loaned. The Assetz Group now employs 130 people, managing hundreds of millions

of pounds of individuals’ money, as well as hundreds of millions in institutional money. And against a backdrop of rising inflation, low cash savings rates and stock market volatility, Law is anticipating a rush of new retail money to come onto his platform. Law believes that inflation has not yet peaked, and he can’t see a return to two per cent inflation in the near future. He has predicted that base rates are likely to peak at one per cent at the highest, which means that savers face at least another few years of stagnating savings. In response to this, the Financial Conduct Authority (FCA) is encouraging more people to actively invest their money, rather than allowing it to passively lose value in a cash savings account. “One of the FCA’s main purposes is to avoid consumer harm,” explains Law. “It's very harmful for consumers to leave too much money in savings accounts because

they are going to lose so much money against inflation. “We are in a strong place, and as the largest retail platform, we would welcome plenty more investors on.” Assetz was one of the few P2P platforms which was approved to offer both the coronavirus business interruption loan scheme and the recovery loan scheme, which means that it has gone through a strict due diligence process by the governmentowned British Business Bank. “Those institutions never lend money to people they don't trust,” he says. “They lift all the floorboards up and check you out. All those things should give investors comfort.” In the months ahead, Assetz plans to ramp up its retail opportunities and start raising money to grow the platform even more. For intereststarved investors, Assetz can offer a home for their money, on a large and growing platform that will always prioritise good governance.

GOVERNMENT-BACKED LENDING

Hey big spender It has been two years since government-backed loans were introduced to help business owners access quick finance during the pandemic. But those two years may have created a permanent shift in the peer-to-peer lending landscape, Michael Lloyd discovers…

HEN THE STATEbacked lending schemes were introduced at the beginning of the Covid crisis, they were seen as an emergency measure, designed to prop up the economy during a time of unprecedented instability. Two years on, governmentbacked loans have become part of the UK’s lending ecosystem; a first port of call for any small- and

medium-sized enterprise (SME) in need of financing. For alternative business lenders, this has created distortion in the marketplace. There has been a noticeable split between those peerto-peer business lending platforms which have been authorised to offer state-backed loans during the pandemic, and those which have not. And while it would be easy to assume that authorised platforms

have had the advantage over the past two years, others disagree. P2P platform Folk2Folk won approval to offer the coronavirus business interruption loan scheme (CBILS) but ultimately decided not to participate, saying it did not want to dilute its focus on retail investors. The state-backed loan schemes can only be funded by institutions. Folk2Folk also opted not to apply for the follow-on recovery loan

GOVERNMENT-BACKED LENDING

scheme (RLS), stating that “we don’t want to distract ourselves in any way or push out retail to one side instead. “We have a loyal retail investor base, so we owe it to them to pay them attention and try to give them what they expect from us.” Meanwhile, JustUs opted to launch its own small business interruption loan service (SBILS) to provide funding for businesses

although Folk2Folk did not go on to lend any funds under the scheme. The coronavirus large business interruption loan scheme (CLBILS) worked in a similar way, but for loan facilities up to the value of £200m. No P2P lenders were approved to deliver CLBILS. Meanwhile, the future fund allowed innovative companies to claim government support worth

“ The schemes required the platforms to take the risks and we couldn’t afford that”

that missed out on finance under CBILS. Lee Birkett, chief executive and co-founder of JustUs, told Peer2Peer Finance News that this was in response to seeing hundreds of applications from businesses rejected for CBILS. JustUs made an initial application to participate in CBILS, but Birkett says that the platform was not able to progress with its application because of the requirement for lenders to take a first loss on loans before the government. “It wasn’t viable for us,” he says. “The schemes required the platforms to take the risks and we couldn’t afford that.” The state-backed lending schemes sound great on paper. For CBILS, the government would authorise a series of lenders to distribute funds up to the value of £5m to SMEs via term loans, overdrafts, invoice finance or asset finance. The lender would get a government-backed guarantee for the loan repayments to encourage more lending, although the borrower always remained fully liable for the debt. Four P2P lending platforms were accredited to CBILS: Funding Circle, Assetz Capital, LendingCrowd, and Folk2Folk,

between £125,000 and £5m, subject to at least equal match funding from private investors. Six P2P lenders benefitted from the future fund in the end: CapitalRise, Crowd2Fund, Assetz Capital, JustUs, FutureBricks and Propio. The most popular government support for businesses was the bounce back loan scheme (BBLS). Under the terms of the BBLS, SMEs could apply for between £2,000 and £50,000. No fees or interest would be paid for the first 12 months, and the interest rate would be capped at 2.5 per cent thereafter. The government offered a 100 per

cent guarantee on all bounce back loans, meaning that the lender would not lose any money in the event of a default. However, just one P2P lender – Funding Circle – won approval to distribute the BBLS, through a partnership with Starling Bank. The only government lending scheme still in effect today is the RLS, which just Assetz Capital and Funding Circle have been approved to offer. More than £1bn has already been loaned through this scheme, in addition to the £80.4bn of finance that was distributed through CBILS, CLBILS, BBLS and the future fund. So why have so few P2P lenders participated in these schemes, and what impact have the schemes had on the wider alternative lending market? According to a number of industry stakeholders, the first hurdle was the application process, as administered by the state-owned British Business Bank (BBB). Stuart Law, chief executive of Assetz Capital, says the BBB approval process is “very detailed”. He says that the platform’s strategy was always to work with the state development bank and even lobbied for housebuilding to be

GOVERNMENT-BACKED LENDING

added to CBILS. “It takes a long time to go through the process,” he says. “They look for absolutely everything, what you lend on, the security you take, how you lend, the experience and track record and how you approach the sectors you support. “It’s very detailed and particularly difficult if you haven’t had a relationship with the BBB before. We already did.” One accredited lender, speaking on condition of anonymity, told Peer2Peer Finance News that the approval process took longer than they would have liked, but appreciates that the government and BBB were “under considerable pressure to accredit as many lenders” as quickly as possible and did the best they could. However, another said the process was “very efficient” with a “helpful” BBB team. Starling Bank says it was able to deploy a huge amount of CBILS funding quickly through Funding Circle due to the P2P platform’s “established presence in lending to the parts of the SME market where CBILS is relevant”. Assetz Capital’s Law also points out the benefits of offering CBILS as a long-standing SME lender. He believes that the existence of CBILS allowed housebuilding to continue during the darkest days of the pandemic and meant that the platform could keep lending without worrying about “when the pandemic would slow down to allow building sites to reopen”. “CBILS helped housing supply

continue,” Law says. “We carried on lending in the same way, looking for and funding sensible housing projects with the same criteria and credit quality.” However, one unintended consequence of the Covid lending schemes was that they created a distorted SME lending market. While some P2P platforms participated in the schemes, those that did not participate struggled to compete against their low rates. Both Crowd2Fund and Rebuildingsociety have spoken of the challenge of competing with CBILS loans, while LendingCrowd, which participated in CBILS but not the RLS, has previously said the latest scheme played a part in its decision to remain closed to retail lenders. Similarly, since the state-backed lending schemes were introduced, Funding Circle has been closed to retail investors for the first time in its 12-year history. A Funding Circle spokesperson recently told Peer2Peer Finance News that it would not review its retail lending business until all state-backed lending schemes have come to a close at the end of June 2022. Nicola Horlick, chief executive of Money&Co, says that her platform has adapted to focus on deal-led loans and lending against music rights and litigation funding because it has become more difficult to find good quality companies that need to borrow via a P2P platform. “There are lots of governmentbacked loans currently and this means that those SMEs that don’t

have one are generally not suitable for us to lend to,” she says. “That’s why we are focused on SMEs looking to make acquisitions or fund management buyouts.” Ian Anderson, chief operating officer of ArchOver, says that his P2P

“ There is no doubt the state schemes have created an unlevel playing field and will probably continue to do so for some time”

GOVERNMENT-BACKED LENDING

businesses is an awful lot of money and is fantastic, but the downside is how much of that money will ever come back?” says Adam Tyler, executive chairman at the Financial Intermediary and Broker Association. “CBILS had tighter criteria and checks than BBLS. As the schemes matured it became harder to get

to see lower defaults and fewer instances of fraud. Their inclusion in the state-backed lending schemes – however limited – could help to shine a light on the efficiency and strength of the P2P sector. There are already signs that government bodies are working more closely with P2P lenders since the start of the pandemic.

“ The future will be more government money into P2P platforms co-lending alongside the crowd”

platform was forced to “adapt and to some extent specialise” in its lending but is seeing strong demand. “There is no doubt the state schemes have created an unlevel playing field and will probably continue to do so for some time,” he says. The true impact of the government lending schemes is only just becoming apparent. “Putting £80bn into UK

a BBLS loan and became more difficult to get a CBILS loan towards the end when the allocations some lenders had were running out.” As we enter the final months of the state-backed lending schemes, we can start to see the impact of two years of government loans. Lenders expect to see rising defaults in the year ahead, as inflation and supply chain issues make it harder for small business owners to meet their payments. The first fraud calculations are beginning to emerge too. The Treasury recently confirmed that £5.8bn has been lost to fraudsters exploiting government grants and loan schemes during the pandemic. The government only expects to recover £1 of every £4 stolen from the public purse, writing off a massive £4.3bn. Analysts have blamed these issues on the speed at which government funding was distributed in the early months of the pandemic, which significantly reduced the amount of due diligence being done on prospective borrowers. However, P2P lending platforms pride themselves on their thorough due diligence, and they are expected

In November, Folk2Folk secured a £7m commitment from British Business Investments and in December, the BBB became a minority shareholder in JustUs, in a transaction which values the platform at £50m. “The future will be more government money into P2P platforms co-lending alongside the crowd,” predicts Birkett. Despite the difficulty of the authorisation process and a shortage of high-quality SME loans, the state backed lending schemes could ultimately be considered a success for P2P. These schemes have made household names of some P2P brands, and inspired others to offer similar types of products to their borrower base. They have given platforms an opportunity to show off their due diligence processes, and to scale up their lending; while making valuable connections at the BBB and other government agencies. As normal lending conditions return, the lessons of the statebacked lending years can help propel P2P platforms into a new era of lending, while delivering more choice and better deals for retail borrowers and lenders alike.

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JOINT VENTURE

JustUs says £50m valuation is “quite conservative”

ustUs recently welcomed the state-owned British Business Bank (BBB) as a minority stakeholder in the company, in a deal that valued the peer-to-peer lender at £50m. But JustUs chief executive and co-founder Lee Birkett believes that the £50m valuation is “quite conservative, when the global roll out of P2P digital currency provides a substantial international growth opportunity for our proven P2P platform”. Earlier this year, Moneybrain, the sister company of JustUs, confirmed its initial registration as a money service business in the US. Moneybrain is a multifaceted company which allows UK users to compare financial deals, including loans and investments. It also issues its own asset-backed cryptocurrency, BiPS. The firm has secured SEC approval to raise up to $10m (£7.34m) in the US to expand its American investor base and to fund the roll out of the JustUs platform in conjunction with its Visa Fintech Fast Track sponsorship. This represents a huge expansion for the Cheshire-based company, and Birkett believes that over the coming months and years the JustUs/Moneybrain brand will be worth much more than £50m. “We are in discussions with a number of strategic investors at the moment regarding our forthcoming $10m Series A investment round, so future valuations are commercially sensitive,” he explains. The BBB partnership came after JustUs’ lead investors applied to the government-sponsored future fund scheme, where the government matches a certain level of private

investment in the form of convertible loans with the objective to convert these loans into ordinary equity in a timely manner. The equity conversion process successfully completed in December 2021. By bringing on the governmentbacked BBB as a minority stakeholder, JustUs is demonstrating its ability to attract high quality institutional investors with detailed due diligence and ongoing reporting requirements. Birkett reveals that he is in exploratory discussions with other departments within the BBB about future working relationships, which is a testament to the platform’s reputation and ability to secure institutional backers. “The recent BBB co-lending investment with Folk2Folk is a great example of the evolving P2P landscape and one JustUs is keen to play a substantial role in delivering across the UK,” says Birkett. “The BBB backing enhances our capital adequacy surplus

considerably,” he adds. “It brings in a really powerful shareholder to the cap table alongside our existing 500 shareholders, and it makes the JustUs community even stronger.” In the year ahead, Birkett wants to roll out JustUs’ highly anticipated ‘peoples mortgage’ product, but cautions that the launch timeline depends on the regulator. “The Financial Conduct Authority authorisation team have a considerable backlog at the moment,” he says. “So we would hope to start offering the people’s mortgage within around 12 weeks, but it could end up being 26 weeks or longer. “We started the process last year and now it's full steam ahead. The demand is bigger than ever from retail borrowers and lenders.” With institutional backers, new product launches, a US expansion and a new funding round, £50m is just the beginning of the JustUs valuation story.

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