Peer2Peer Finance News January 2021 by Alternative Credit Investor

PEERING INTO THE CRYSTAL BALL

>> 10

Industry experts predict the future of P2P

IS THERE STILL LIFE IN THE IFISA?

>> 18

The outlook for the tax wrapper

4th Way’s Neil Faulkner on P2P risks and ratings

>> 16

ISSUE 52 | JANUARY 2021

P2P sector blasts “disappointing” plans for new consumer investment rules INDUSTRY leaders have slammed proposed new consumer investment regulations, warning that they may push yieldseeking investors into the unregulated space. The UK Crowdfunding Association (UKCFA) has responded to the Financial Conduct Authority’s (FCA) call for input on consumer investments on behalf of a number of peer-to-peer lending platforms and crowdfunding firms. It has raised concerns around the FCA’s proposals, which suggest 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. The UKCFA has warned that any effort to further restrict investor options in the P2P lending space could result in a binary

choice between cash-like, low-risk products, and high-risk investments which are marketed in a way that is intended to keep retail investors at bay. Bruce Davis, founding director of the UKCFA, said that the P2P sector has already implemented a number of regulatory

measures which have improved the safety and transparency of consumer investments. He has written on behalf of the UKCFA to express his disappointment in the new proposals. “It is both disappointing and concerning that there is no mention of the 10 years of work done to develop the regime for non-readily realisable securities,” Davis said. “The FCA’s own review showed that those rules have been effective and have provided a new middle ground for retail >> 4 investors with

Investors undeterred by appropriateness tests STRICTER peer-to-peer lending regulations have not deterred investors from the sector despite initial fears, Peer2Peer Finance News analysis suggests. Since 9 December 2019, platforms have been restricted to mar-

keting to those who are certified or self-certify as sophisticated investors, those who are certified as high-net-worth (HNW) investors, people receiving regulated investment advice, or those who certify that they will not invest more than 10 per

cent of their net investible portfolio. All new investors must complete appropriateness tests to show their understanding of the risks of P2P lending. There were initial fears that the additional requirements would deter new in-

vestors but industry analysis by Peer2Peer Finance News has found that the investor base has remained steady and platforms are recording pass rates of 80 to 90 per cent. David Bradley-Ward, chief executive of P2P >> 4 business lender

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 UKâ&#x20AC;&#x2122;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 ÂŁ1.95 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

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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.

t the time of writing, the UK was heading towards crunch time for an eleventh hour Brexit deal, after years of highly charged debates about fisheries, the Northern Ireland border and financial passporting. Whatever the outcome, the UK is set for an unpredictable year, as it starts to find its footing outside of the EU. So what does this mean for the peer-to-peer lending sector? The UK has long held an enviable position as one of the world’s fintech hubs and prides itself on creating a regulatory environment that supports innovation. These are factors which helped to support the growth of the P2P industry and I’m hopeful that the UK will be able to hold on to these attributes after its divorce from the bloc. Conversely, widespread predictions of a prolonged economic downturn are concerning to say the least and will act as a hefty tailwind for nearly all facets of the financial services industry. A continued recession would likely lead to increased borrower defaults and tighter consumer purse strings, which would create challenges for the P2P sector. However, as we all know the P2P industry was borne out of the last financial crisis, so there could be opportunities too. For example, a credit crunch among the banks could funnel more customers towards alternative lenders. Furthermore, the recent participation of some P2P lenders in the government’s Covid-19 lending schemes means that the sector is better recognised for its abilities to play a part in the nation’s recovery than it was at the time of the last recession. No-one knows what the future holds, but I feel confident that the P2P industry is poised to make the most out of whatever opportunities it brings.

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 top of page 1 the right balance of protections. “So the characterisation of the choice for retail investors as essentially between cash-like products and then high risk investments is something we do not recognise or agree with and we have communicated that to the FCA.” Peer2Peer Finance News understands that the Investment Association has taken a similar stance to the UKCFA in its feedback to the FCA. “If in five years’ time we are limiting retail consumers to low-risk products then there is a real danger that people

will be pushed into the unregulated space in the search for an investment,” Davis said. “The whole tone of the call for input document suggests that the industry has not been successful as a whole and we disagree with that.” Meanwhile, several P2P lending platforms told Peer2Peer Finance News that they are worried that the FCA’s call for input could lead to further tightening of marketing restrictions in the alternative lending sector. The City watchdog has been showing its teeth in its regulation of the alternative finance space.

In December 2019, it introduced stricter P2P rules and last month, it confirmed its ban on the marketing of mini-bonds to everyday investors. However, some industry stakeholders supported the FCA’s latest proposals. Nicola Horlick, chief executive of P2P lending platform Money & Co – which is a member of the UKCFA – said that she agrees that “P2P lending is high risk and should have lots of caveats and warnings surrounding it.” “It is down to all P2P lenders to make sure that the risks are properly explained on their websites,” she added. “I

agree with the changes and feel that P2P lending should be confined to more sophisticated investors.” The FCA said in its call for input that its intention is to “deliver a consumer investment market that works well for the millions of people who stand to benefit from it, and the businesses in the real economy for which it provides essential funding.” The call for input closed on 15 December. The FCA is set to release its findings later this year and the results will be used to shape the FCA’s work over the next three years.

we concluded that they were unsuitable or vulnerable either from their pattern of investing or from questions received.” Similarly, Brian Bartaby, founder of P2P commercial property lender Proplend, said investors have a typical pass rate of 85 to 90 per cent. “We have been relatively lucky that given our minimum investment is £1,000, this tends to mean the majority of our lender base has always been able to classify as either sophisticated or HNW,” he said.

And rural business lender Folk2Folk said it has a “very high first-time pass rate” due to clearly communicating the risks to investors when they sign up, although it did not disclose the exact percentage. Investor knowledge also seems to be improving. P2P property lender LandlordInvest said 84.4 per cent of investors pass the test first time, up from 80 per cent at the start of the year. “This is a small but meaningful improvement in test outcomes, suggesting a possible increase

in new investor's knowledge,” Joe Vallender, chief technical officer at LandlordInvest, said. The largest segment of its investors, 39.7 per cent, are classed as sophisticated, while 33.5 per cent are restricted and 26.8 per cent are HNW. Ian Anderson, chief operating officer at business lender ArchOver, said all investors can pass if they read the available guides on its website. He said 80 per cent of users on the platform are either sophisticated or HNW.

cont. from bottom of page 1 Ablrate, said the platform’s pass rate is around 80 per cent. Half of its investors are self-certified sophisticated, 24 per cent are HNW, 10 per cent are certified sophisticated and 16 per cent are classed as restricted or retail. “The appropriateness test is a barrier for some investors but we think it is absolutely necessary,” he said. “We have gone further and refunded and closed a small number of accounts where they have passed the test but subsequently,

NEWS

JustUs targets £1.2m fundraise for P2P mortgages and SBILS JUSTUS is looking to raise over £1m through the government’s future fund to finance its Small Business Interruption Loan Service (SBILS) and peer-to-peer mortgages. JustUs founder Lee Birkett said the platform will complete the future fund process this month, raising £600,000 through shareholders with the other £600,000 matched by convertible loans under the scheme, to make £1.2m in total. He said JustUs will then embark on a separate funding round on Crowdcube, after it was approached by the equity crowdfunding platform.

Birkett said all the funds will go towards investing in new technology and staff for SBILS and the launch of P2P mortgages, which the platform has called the People’s Mortgage. The People's Mortgage will allow lenders to fund 2.5 per cent fixed interest rate owner-occupied mortgages and the investment can be held in an Innovative Finance ISA. JustUs plans to launch the new product even if the platform does not receive the exemption for P2P mortgages from the government. Birkett said launching it without the exemption

will mean JustUs must follow heavy regulation and the funds raised will cover this cost. He said the People's Mortgage will help millions of mortgage prisoners – those trapped on a deal and unable to remortgage. Meanwhile, SBILS, which opened up for applications in September last year, is aimed at borrowers unable to secure government-backed emergency loans. Prospective borrowers can download and apply for the scheme on the Moneybrain app, a sister brand of JustUs, and raise money through crowdfunding, which the

company starts repaying a year later. Birkett said he believes the government’s successor scheme will be less generous so SBILS will prove to be an attractive alternative. “All the funds raised are going into SBILS and the People’s Mortgage,” said Birkett. “SBILS is a genuine alternative for businesses, we hope it won’t be needed but I hazard a guess it will, while the People’s Mortgage is needed more than ever with the number of mortgage prisoners in the millions, not the thousands.”

Landbay chief: I don’t regret leaving P2P LANDBAY boss John Goodall has said he has “no regrets” about exiting the retail peer-topeer lending sector. The buy-to-let mortgage lender shifted purely to institutional lending in December 2019 and a year on has seen its loanbook grow by 50 per cent to approach £650m by the end of 2020. Goodall (pictured) acknowledged that the lower interest rate environment that has emerged since Landbay closed to retail investors

may have made his platform more attractive but told Peer2Peer Finance News that it still would have been challenging to grow the business. “Our yields are relatively low because of

our type of lending,” he said. “The average rate we are lending out at to borrowers is probably at 3.6 per cent. “For P2P lending to work we would need a margin on that so it would be hard to offer anything above three per cent.” Goodall said the pandemic and lockdown would have added another complication, as some P2P lenders have found, due to requests for payment holidays by borrowers and increased

withdrawals by investors. “That would have been quite hard for retail investors if they were reliant on the interest,” he added. “There would, I suspect, have been a serious liquidity issue. “It would have been a challenging task to manage customers.” Goodall said five per cent of its lending was retail-funded before it exited the P2P market but the amount of time and effort was “a lot more than five per cent.”

NEWS

Varengold expects to see open banking growth and innovation over this decade VARENGOLD’S London boss Alison Harwood has predicted open banking to be at “the front and centre of the 2020s”, adding that it will allow borrowers who were previously unable to secure affordable loans to access finance. Harwood said the institutional funder, which has backed several peer-to-peer lending platforms, has partnered with a fully digitalised lending platform in the Netherlands which was built around leveraging open banking. Speaking at the FinTech Connect conference last month, she said that

through the data sharing initiative there will be great developments coming out to unlock segments of customers who were previously unable to access affordable finance for a variety of issues, such as having a thin credit file. Harwood added that there will also be

developments via open banking for business lending to very small companies. “Whilst open banking has been around for a while it will be at the front and centre of the 2020s in terms of showing what lending can really do and offer to borrowers,” Harwood said at the

virtual conference. “If you do not have a digitalised lending process it’s very difficult to price every small ticket price loan in a way that adequately reflects the risks of borrowers. “Add to that a faster and more seamless onboarding process and the ability to leverage open banking to assess affordability, and it’s a really powerful combination. “That kind of approach can be used to unlock hidden credit segments of the market. “Open banking will be very important. We’re only beginning to see its potential in lending.”

Invest & Fund achieves busiest few months

THE PAST few months have been the busiest on record for peer-topeer property lending platform Invest & Fund, due to pent-up demand and a huge take up for its Homes England partnership. In September, the lender embarked upon a seven-year partnership with Homes England to increase the amount of finance available to small- and medium-sized enterprise developers.

At the time, the platform said the partnership will create a £25m revolving fund which will be used to provide construction loans of between £400,000 and £2.5m at up to 80 per cent loan-to-cost. “We’ve seen the platform’s volumes rocket and we’ve never been busier,” said David Turner, co-founder and chief executive of Invest & Fund. “Since August and September, it’s absolutely

been the busiest few months we’ve ever had. “I think there’s been a lot of pent-up demand in the industry because of Covid-19. “Homes England has been immense and it’s really encouraging seeing the number of enquiries. If they fit its criteria the loans are funded through that but if they don’t fit the criteria, such as due to the geography of the loan, we’re comfortable listing it on the platform and

funding it. “It’s been absolutely fabulous for us as a business and a brand.” In June, the platform officially launched its Innovative Finance ISA which offers investors target returns of 7.5 per cent from residential property developments. Since then the platform has reported huge demand for this product from new investors to the platform, with most investing the full £20,000.

NEWS

British Pearl nears completion of portfolio sale BRITISH Pearl expects to complete on the sale of its portfolio in February but has said that investors with equity in the properties are unlikely to get all their capital back due to falling prices. The property investment platform was launched in 2018, backed by former Conservative Party treasurer Lord Stanley Fink, and lets investors fund property developments through either a loan or equity. Its portfolio was listed for sale with online agent Vesta Property in April to preserve its value. A buyer has now been

found, so British Pearl has closed its secondary market and has continued to let interest and dividend payments accrue, rather than repay investors, until the sale completes. “In October we came to an agreement with a credible buyer who will be buying the entire portfolio as a single transaction,” Ali Celiker, founder of British Pearl, said. “Consequently, the resale market has been suspended. “The transaction is currently with lawyers and we expect the purchase to be complete by the end of February.”

Based on the current terms of the purchase, Celiker said loan investors should expect to recoup their original principal investment including accrued interest. Investors with shares in the properties should not expect to receive their original investment capital in full “owing to the softening of achievable property prices, transaction costs and leverage,” Celiker said. “At this stage it is difficult to determine the final share price since all expenses and accrued returns are unclear,” he added.

British Pearl is still seeking new investments and Celiker said the platform will not be closing down. “The board remains convinced that the sale of our property portfolio is the correct response to current real estate market conditions,” Celiker added. “We have continued, as in previous months, to manage the portfolio prudently towards the best achievable exit for investors by seeking to ensure that all special purpose vehicles are solvent, occupied and well maintained.”

Investors and regulators urged to focus on green credentials INVESTORS and regulators can help the UK reach its ambitious goals to cut carbon emissions by being more curious about where their money is invested, Abundance founder Bruce Davis has said. The UK last month announced new plans to reduce carbon emissions by at least 68 per cent by 2030 compared with 1990 levels. This forms part of the country’s commitment to reach net zero emissions by 2050. But Davis has suggested that the financial sector could do more to help by

looking where the money in savings is being invested by banks. “Money is never idle, whether in cash form or in a cash deposit but with the legislation now in place committing the UK to net zero by 2050 we should be asking how our money is being used to help or

hinder that aim,” he said. “We are similarly lacking in curiosity about the almost £200bn which has been put in the savings account of the UK government from quantitative easing and which is used to fund a range of investments and infrastructure.”

Davis said the Financial Conduct Authority (FCA) should be focusing on both the function and purpose of money. “The FCA should be worrying much more about whether finance is also achieving the common purpose we have for our money and not simply focus on narrow concepts of individual financial need,” he said. “The danger is that they create a paradox of thrift which means the whole of the economy and the consumers they are seeking to protect are actually worse off.”

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JOINT VENTURE

P2P platforms urged to secure funding lines and assess risk management procedures Trevor O’Sullivan, partner, financial services restructuring at Grant Thornton, tells platforms what they can do now to survive in the post-pandemic economy

EER-TO-PEER LENDING platforms should act now to secure the funding lines that they will need in the event of a postpandemic spike in loan defaults. Trevor O’Sullivan, a partner in the financial services restructuring team at Grant Thornton, has warned that defaults are set to rise sharply when government lending schemes and other support measures come to an end in 2021, and small businesses have to start repaying their debts. “The economy is currently shielded from what's going on,” says O’Sullivan. “But this is the time for lenders to start looking at their processes and seeing what they can do to strengthen themselves now, before it’s too late. The stronger lenders will come out the other side and will be more resilient as a result.” O’Sullivan notes that restructuring and turnaround teams across the board are not currently as busy as they were this time last year, most likely due to the volume of state support which is being offered to struggling businesses. However, in 2021, when government support comes to an end and businesses must make any deferred tax and rental payments as well as start to pay down their government-backed debt, defaults are expected to spike and lenders could be faced with some difficult decisions. “If you look at the major retail banks or larger commercial

banks, they are all increasing their collections teams and distressed business support because they are expecting a significant increase in defaults in their portfolios at some point in 2021 or 2022,” says O’Sullivan. “That’s when you will start to see a lot of companies really suffering.” In order to survive this period, P2P lenders will need to have access to funding channels which can be tapped if needed. “Sometimes, as part of restructuring, you have to lend the borrower even more money,” explains O’Sullivan. “And if you don't have access to that sort of funding, then the borrower may

fail, and ultimately that could put you as the lender at risk.” The Covid-19 pandemic represents the first time that many P2P platforms have had to operate in an economic recession. This brings challenges, O’Sullivan says. “These newer P2P firms will have never gone through a downward cycle or a stress cycle,” he warns. “P2P lending platforms should invest in their process for identifying and dealing with borrowers in distress before things reach a point of no return.” When speaking to lenders, Grant Thornton asks: what are you starting to do now to protect yourselves? What kind of credit process are you putting in place? And do you have access to people who have experienced a downturn and really understand how to protect the borrower and the platform as well? “If you do this properly, both your borrower and the platform will come out stronger,” he says. “It's a fundamental reality that platforms have to have the firepower to weather the economic storm. “Even if you don't think this applies to you, you still need to be aware of the risks to your business.” The Covid-19 vaccine may be on its way, but nobody is immune from the economic aftershocks of the pandemic. However, prudent risk management can go a long way towards securing the future of the P2P sector.

EXPERT VIEWS

Peering into the crystal ball We find out what the peer-to-peer lending industry expects – and wants – to see in 2021…

Stuart Law, co-founder & chief executive, Assetz Capital

Natasha Wear, chief executive P2P, Zopa

What predictions do you have for the P2P lending market this year? Retail investors will have a greater understanding of the risks involved. I think net balance investor demand will swing from tightly negative to positive and rise from there. Investors will decide there is nowhere better to put some of their money. The number of platforms will drop further, we saw a shake up this year with companies experiencing problems with their credit, money or funding or their cost of acquisition being too high. We will probably see an end of the shake up next year and I think appointed representatives will be found to be a bad idea for the sector. Platforms with multiple funding sources will massively outgrow those that are just [retail] P2P funded. The gap will continue to widen substantially and create market scale efficiencies. That will make the bigger platforms even more efficient and competitive. I think we’ll end up with a model of very large platforms with multiple funders, while pure P2P players will find a way to be profitable and compliant or disappear.

What predictions do you have for the P2P lending market this year? 2020 has been an extraordinary year and one that nobody could have predicted. In the world of P2P we are now a full year on from the FCA regulations having been put in place, bringing consumer confidence and further credibility to the industry. One path to resilience was our diversification of funds, and this was seen industry wide as providers increasingly looked to combine retail, institutional, government backed schemes and bank licences – all enabling the industry to continue to lend when customers needed it most. Diversification is something we believe we will see more of as we enter the new year – you’ll have heard the phrase don’t put all your eggs in one basket – so if P2P providers want to keep their ships on an even keel then they too need to keep this in mind.

EXPERT VIEWS

Brian Bartaby, co-founder & managing director, Proplend What predictions do you have for the P2P lending market this year? The success of the 2021 P2P lending market will be determined by how quickly the economy can restart post-Covid. England recently emerged from lockdown two, depending on the success of the various vaccines we could either be entering a ‘new normality’ or retreating back into lockdown three or local tiered lockdowns. I am very concerned about the current expected levels of defaults in bounce back loans and

Mark Turner, managing director, regulatory consulting, Duff & Phelps What predictions do you have for the P2P lending market this year? Assuming the vaccine is successful, then government support is likely to be slowly unwound so unfortunately it’s likely some customers will feel some stress and therefore firms are going to have to handle that. I think firms that come out of the other side of this, having demonstrated that they have managed their

coronavirus business interruption loans (40 per cent plus) and the knock-on effects it will have for platforms which have facilitated these loans. Whilst they may offer government guarantees, the special servicing workload required before the government puts their hands in their pocket, will be a monumental task. What is the biggest change you'd like to see in the sector? Better P2P education from both the P2P industry, the financial industry, the media and the regulator about the benefits of P2P for both borrowers and lenders alike. Unfortunately for the past 18 months or so the industry has only produced negative news stories, deservedly so in some cases, but it would be nice to read some positive news stories from and about this sector.

portfolios well and generated good returns for their investors, will prove they are fundamentally good businesses that can thrive next year. There’s no getting away from the fact there will be some economic pain next year, but a good business is a good business. What is the biggest change you'd like to see in the sector? Brexit won’t necessarily have a massive direct impact on every firm but if the government is able to push through things like levelling up in the North of England and getting infrastructure spending rolling, I imagine there will be big opportunities for the sector to get involved directly and indirectly in some of those schemes.

Narinder Khattoare, chief executive, Kuflink

What predictions do you have for the P2P lending market this year? I think we will go back to pre-Covid levels as an industry after the first quarter next year. I think there will be fewer players in the industry and rightly so. It’ll be a smaller community, but it will be a quality bunch of P2P lenders that are doing things right, offering realistic returns. Platforms can’t sustain double digit returns as a business model. What is the biggest change you'd like to see in the sector? I’d just like to see more backing from government. I think that’s key, getting the message out there that there are more avenues of investment. They introduced the Innovative Finance ISA themselves and it would go a long way for other people to know about it and that it comes from government.

EXPERT VIEWS

Mike Bristow, co-founder & chief executive, CrowdProperty What predictions do you have for the P2P lending market this year? I think the strong platforms will thrive, especially those which have proven themselves over a meaningful period of time and have performed well during Covid-19. I think we’ll see platforms disappear because they don’t have the track record capital at a cost that’s economic to maintain the platform. It’ll be an ongoing maturing of the sector to a point where winners will emerge, and platforms will disappear. I think with the mid and large-sized platforms we’ll start to see who’s getting their economic model right and who is profitable. I think we’re still going to see quite a lot of fallout from the impact of this year on underlying loanbooks. What is the biggest change you'd like to see in the sector? I still think it’s unlikely, but the entire financial adviser market needs to wake up to P2P lending as part of a diversified asset class and certain areas of the pension market too which will take time. We have millions of pounds’ worth of pension capital but it’s not whole of market and the best platforms will be supported more and more by institutional funding lines. And again, that’s good because of the economics of the sector and of the platforms that are good at doing what they do.

Gillian Roche-Saunders, partner, Adempi Associates What predictions do you have for the P2P lending market this year? 2021 is full of commercial and reputational opportunity for P2P. The search for yield will only increase, as will the search for lenders in a postpandemic climate. P2P is the space that can deliver. Furthermore, if the industry can show it can conduct itself to high standards in such a climate, it will be well placed to turn that opportunity into a long-term success. Critical to this will be making the risk-reward profile of P2P clear to the

Atuksha Poonwassie, managing director, Simple Crowdfunding What predictions do you have for the P2P lending market this year? From an investment standpoint, projects will still take longer because there will be a knock-on effect on valuations and sales, especially in the property market, in terms of existing projects. So, I think they’ll be a lag in that regard and that doesn’t take into account any

investor, and as part of that highlighting the risk of increased defaults in a struggling economy. What is the biggest change you'd like to see in the sector? If we’re dreaming big, I’d look for increased harmonisation between the P2P and the debt-based crowdfunding sector so that the experience of the consumer is driven by the loan and isn’t affected by the regime the platform facilitating that loan is subject to. I suspect there’s been enough regulatory change in recent times, but with the FCA’s plan to reimagine the consumer investments market, the new European regime for crowdfunding and increased freedom from MiFID following Brexit, 2021 could well be the moment that we see steps in that direction.

additional time that will be added due to Brexit. A lot of the building supply comes from Europe and there might be delays and costs. But it’s all theoretical right now. From a finance standpoint of investment entering the UK from Europe, it’ll be interesting to see what happens in terms of passporting and whether there will be temporary agreements in place. What is the biggest change you'd like to see in the sector? I’d like to see more support for the regulators’ entities and also for the regulators to tackle the unauthorised rogue players.

EXPERT VIEWS

Mike Carter, head of platform lending, Innovate Finance

What predictions do you have for the P2P lending market this year? Demand for loans in 2021 will rebound as the economy recovers and I expect the P2P sector to benefit disproportionately from this. This is because there has

been a significant behavioural shift in the digital purchasing of goods and services by both consumers and small- and mediumsized enterprises as a result of the Covid-19 crisis, which I don’t expect to reverse, and the P2P sector is perfectly placed to

meet that increased demand. What is the biggest change you'd like to see in the sector? I’d like to see wider acceptance of P2P as an asset class that offers steady, low volatile returns for a suitable investor.

Andrew Holgate, chief executive, Equitivo

Frank Wessely, partner at Quantuma

What predictions do you have for the P2P lending market this year? 2021 will bring deeper and more scrutiny from the FCA. It has been caught out by several high-profile collapses and it will not want another one. The FCA has already been active with many lenders during the Covid-19 crisis and I think their work and stricter due diligence will increase. The market has been rocked quite heavily by the collapses of platforms such as FundingSecure and Lendy. Then Covid kicked in, along with the implosion of the economy. During 2021, platforms have to stabilise, rationalise and become profitable businesses. No P2P platform will be a unicorn, and in fact many won't achieve a £10m valuation. The truth is that scale only comes with institutional money and that generally leads to an exit of the market. Getting real growth from retail investment is extremely hard. But it also shows that market uncertainty and a sudden market shock such as Covid can quickly dry funds up. It shows that P2P remains a relatively small part of the financial services sector.

What predictions do you have for the P2P lending market this year? I think one thing we could see, and it depends a lot around Brexit, is greater visibility of European platforms in the UK P2P market. This is quite likely, as we are already seeing more of them. I get the feeling platforms in Europe are looking at penetrating the UK market and I think we might see a gradual move towards that next year. UK platforms may well get a greater foothold in Europe too, but I have not seen much evidence of that. It would happen both ways but it’s definitely subject to Brexit transitional arrangements. What is the biggest change you'd like to see in the sector? The sector being given more of an opportunity to participate in the dispersing of funds in future government loan schemes, if appropriate.

Formerly

FUTURE OF P2P

JOINT VENTURE

SoMo plans for a busy 2021 following rebrand Louis Alexander, chief executive of SoMo, explains why the platform rebranded, and what the future has in store for the lender formerly known as The BridgeCrowd…

OMO PLANS TO LAUNCH new products and has now moved into new premises, as it plans for the “busiest year in the company’s history” in 2021. This follows a high-profile rebrand, a 25 per cent increase in staff levels, and the announcement of a £300m funding line from Deutsche Bank. Despite a global pandemic and an uncertain economic environment, 2020 was a year of action for the specialist lender. When The BridgeCrowd was founded in 2012, it was the first crowd-funded bridging loan company in the UK and it was the first company to use open banking technology for anti-fraud measures. Since then, the platform has processed more than 650 loans with a combined value of £142m, with zero capital losses for investors. So why fix something that isn’t broken? “The SoMo brand is an evolution for the business,” explains Louis Alexander (pictured), chief executive of SoMo. “SoMo started as a family business and then from two people to 50 people in the last eight years, and we’ve attracted a wealth of expertise over this time to continue to deliver our customers the best

possible experience. “We began as a crowdfunding platform and now have a large variety of investors and institutional funding lines which provides us with a wider variety of loans and more firepower to help our brokers and clients.” SoMo stands for ‘Social Money Limited’ – the company’s legal name and ethical touchstone. “We connect people to help them improve their finances by borrowing and lending,” says Alexander. “At the heart of this is a focus on flexible and adaptable secured loans. We’ve built up our reputation as a trusted, reliable specialist finance provider and

for us it’s about working together with our partners and customers to ensure the best outcome for everyone involved.” The rebrand has also given SoMo an opportunity to create a new website which is both educational and relationship-centric – a reflection of the way in which peerto-peer lending has changed over the past eight years. And over the past 10 months, the Covid-19 pandemic has introduced a new raft of changes to the specialist lending sector. “As a society, we’re looking at the world through a new lens and we’re seeking better technology to help us do everything, including borrowing and investing our money,” he says. “Investors are more open than ever to non-traditional routes to finance and how we manage our money and we are seeking businesses that put our needs first and treat us as humans. “SoMo embodies all of these things and the new brand puts these values front and centre.” In fact, Alexander foresees “significant opportunities to grow” within the current economic climate, as lenders and borrowers start to move away from traditional stock market options and search for better rates and flexible lending options. “Our extensive due diligence processes minimise risk and ensure we only take on affordable and suitable loans with good security,” he says. “It’s about showing customers that there’s another way of lending out there that’s safe and secure, and has that personal touch as well. “The future is limitless in my eyes,” he adds. “I’m excited for what’s to come.”

PROFILE

The risk hunter

Neil Faulkner, chief executive and head of research at 4th Way, tells Marc Shoffman what goes into analysing a P2P lender

2P LENDING HAS become a multibillion-pound industry and as the sector has grown, so too has the need for independent analysis. At the forefront of industry commentary is 4th Way. It was set up in 2014 by Neil Faulkner who was previously a spokesperson for stock analysis website Motley Fool. The former financial journalist and stock analyst has adapted the Motley Fool’s style to P2P. He has built a team of researchers that provide regular Plus Ratings to assess the risk and returns on offer from a platform as well as summaries of the main players in the UK’s P2P lending space to help investors choose where to put their money. He explains what goes into analysing a P2P lender. Mark Shoffman: How do you assess a P2P lending platform? Neil Faulkner: It was obvious when it started that P2P lending was a good idea. It was the first new good idea in investing I had seen in 20 years. Our full initial due diligence process takes two to four weeks, it is very intensive. It is an incredibly detailed process. We look at more than 100 different data points and there are lots of email questions and face-to-

face meetings. Our main focus is risk. We look at how good a platform is at underwriting, how good is its book of loans, will borrowers repay and what are the chances of recovery. A large chunk of the information we collect is from a survey we send to platforms and the rest is looking at the experience of the people behind a platform, how the loans are secured and a brief summary of their results. Platforms are also asked to provide their loanbooks regularly, usually once a month or every two months to keep track of what is going on. This makes it harder to hide important problems that may be impacting the business. We are looking constantly at what would happen to lenders if there was a banking crisis and have developed our own stress testing models. There is also a consideration of returns on offer and the platform risk such as how much could be recovered in a wind-down. A lot of investors are keen to get their money back but money lending isn’t designed to always enable that. P2P lending works well most of the time but investors have to understand that you can either have stable returns or liquidity, you can’t have a high guarantee of both.

“ It was obvious when it started that P2P lending was a good idea”

MS: Zopa recently lost its 4th Way Plus ratings, have other platforms lost their scores? NF: This is the first time Zopa has lost its ratings. It used to provide updated data regularly, but it's just been too patchy for the past 12 months. It's not that it doesn't provide enough data, just that it doesn't provide it regularly enough. It makes it a bit easier to hide problems if you don't provide data routinely. I absolutely don't expect that Zopa is hiding problems, and it's probably harder for Zopa to do so than other platforms, but the rating rules have to be applied fairly and equally across all platforms. RateSetter is no longer rated as it is moving away from P2P lending.

PROFILE

Funding Circle lost its ratings in mid-2018, when it stopped providing data to 4th Way and the public to show its performance. Platforms are more than happy to provide regular data. Regular submissions are needed to assess loanbooks and spot anomalies. When there is a new platform or if a lender wants more coverage, we expect to see their loanbook. MS: Have you managed to save investors from P2P lending platform failures? NF: Generally, when platforms become less transparent, our rule is not to invest. We had hardly any contact with the platforms that have fallen from grace as they weren’t transparent. That should have been enough of a sign for investors as we weren’t covering these platforms. If they aren’t providing information you can’t say how good they are. MS: Why is analysis of the P2P sector needed? NF: We get a few comments from people who wish they had found us earlier. Focusing on the lenders we cover on 4th Way would have saved a lot of disappointed investors with FundingSecure, Lendy and Collateral. Choosing a P2P lender is easier than choosing a stock but there is still a lot to think about. You have to do your own due diligence. Analysts are important as we get a level of access no-one else does. It is also important to understand what you are doing though. For example, you could take an external analyst’s view and invest, but then if there is a recession you have to understand

why it may be better to keep your money in rather than panicking and withdrawing your funds. MS: Have Financial Conduct Authority (FCA) regulations made it easier to assess P2P lenders? NF: There has been a minimal impact from the new regulations in terms of transparency. The appropriateness tests force investors to read what they are doing before they sign up but the regulations don’t focus on working out if P2P is a good investment. That’s not the job of the FCA. It

industry since 2005. All these platforms could present data showing it’s a stable way to make money and demonstrate a track record to the FCA and investors. MS: What are the biggest challenges for the sector? NF: It depends on the platform. It will be very individual. Some will struggle with revenue or bad debts for a bit. For the most part it will continue to tick along reasonably. There does needs to be more education about risk reward balance.

“ I think closures will happen and there are likely to be acquisitions rather than mergers”

just has to make sure the product is clear.

MS: Why do you think the regulator and the mainstream press see P2P lending as so risky? NF: There is a level of caution in the press that is totally understandable. It is the job of the press to be sceptical. P2P lending is reasonably new so if everything works then it is business as usual but as soon as one platform collapses the FCA will face questions about why it wasn’t on top of it. As the years go by people will look at the returns and more will believe the sector is big enough to have a respectable track record. The industry could do a lot more to promote the benefits though. They do a lot of marketing for themselves but could do more to say look at the results of this

I think closures will happen and there are likely to be acquisitions rather than mergers.

MS: What are 4th Way’s plans for the future? NF: We know millions of pounds can enter or leave a platform based on a research report by 4th Way. The core way we have made money has been through affiliate commissions for platforms that want extra coverage. Our next step is to launch a subscription service for investors. Information should stay free in the vast majority of cases. People tend to want shorter summaries and reviews but there are those who want greater detail. The subscription service will publish a lot of the due diligence we do such as the background notes and transcripts of meetings. 4th Way also provides credit modelling for platforms and we will continue to do that.

IFISA

What’s next for the IFISA? Covid-19 has stalled the rapid growth of the IFISA. Is there life for the tax wrapper after the pandemic? Michael Lloyd investigates…

020 SHOULD HAVE BEEN a blockbuster year for the Innovative Finance ISA (IFISA). Since the tax wrapper was launched four years ago, it has steadily grown in popularity. According to figures from HMRC, £36m was invested via 5,000 IFISA accounts in the 2016/17 financial year, followed by a huge jump to £277m invested through 49,000 accounts during the 2017/18 tax year.

Then, over the 2018/19 tax year, IFISA investments reached a peak of £328m via 38,000 accounts. And 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. But then – just when the IFISA was reaching substantial levels – the pandemic hit. Thanks to almost a year of economic instability, national

lockdowns and job losses, investors can no longer afford to invest so much and are becoming more cautious. Many are opting for lowinterest paying cash accounts in this uncertain climate, while others are gravitating towards ‘safe havens’ such as gold. Understandably, some investors opted to withdraw their funds in the face of an economic recession, and peer-to-peer lending platforms witnessed a spike of withdrawal

IFISA

“ Investors will realise which platforms are

stable and continued to function during the pandemic and I would expect ISA inflows to start increasing again activity in the early days of the pandemic. March and April have always been the busiest months for ISA deposits, but for IFISA providers, 2020’s ISA season was characterised by delays in withdrawals, pauses in taking new investments, higher risks of defaults and lower predicted returns. In addition, this year’s ISA season was the first to take place after stricter investor marketing rules were introduced. Under the Financial Conduct Authority’s regulations, introduced in December 2019, P2P lending platforms can only communicate ‘direct-offer financial promotions’ to high-net-worth or sophisticated investors, those receiving regulated financial advice or restricted investors. It is no surprise then, that across the board, the majority of platforms have reported that IFISA inflows have fallen this year. Proplend chief executive Brian Bartaby says that the propertybacked platform’s IFISA inflows for the current tax year have been running at around 20 per cent below 2019 levels. Peer2Peer Finance News understands that one platform has seen underwhelming demand for its recently-launched IFISA while another platform has paused the launch of its IFISA indefinitely. Filip Karadaghi, co-founder and chief executive of LandlordInvest, sums up the recent trends. “It’s typical risk-adverse

”

behaviour,” he says. “Across the whole industry investors are converting to cash and some platforms suffered from liquidity issues.” This is clearly a worrying trend, but it must be viewed in perspective. Covid-19 is the reason IFISA inflows are down – it is not a reflection of the product itself or the reputation of the sector. Industry stakeholders believe that once the coronavirus vaccine has been distributed and the pandemic comes to an end, confidence will return, and investors will start searching once more for inflationbeating returns. “I think ISA money will increase by the end of the tax year,” predicts Karadaghi. “Investors will realise which

platforms are stable and continued to function during the pandemic and I would expect ISA inflows to start increasing again. I think it’ll pick up next tax year to last year’s level.” Although inflows are down overall, the P2P lending sector has witnessed some demand for the product via ISA transfers over the past year. This has mostly come in the form of transfers from stocks and shares ISAs, but there have been signs that the IFISA investment market is maturing, with more and more IFISA transfers coming from other IFISA providers. “We have seen people transferring in their IFISAs from other providers,” says David Turner, co-founder and chief executive of Invest & Fund. “This is due to a number of factors: a clean credit book, six per cent plus returns, exceptional credit rigour and a continual supply of first-class loans.” Other platforms have simply shifted their focus away from their IFISAs this year in order to focus on other forms of financial backing. Both Funding Circle and LendingCrowd have temporarily

IFISA

paused new retail lending while participating in the coronavirus business interruption loan scheme. And RateSetter, which was previously the largest IFISA provider, is expected to see a substantial drop in IFISA inflows since the platform closed its doors to new retail investment earlier this year following its acquisition by Metro Bank. Existing investors can still invest in the platform’s P2P loans using the IFISA wrapper. Elsewhere, many platforms including Assetz Capital,

out when they are over the age of 55. But IFISA investors can take their money out and put it back in during the same tax year if need be, all without losing the tax advantages. Stuart Law, chief executive of Assetz Capital, says this flexibility makes IFISAs the perfect investment during the uncertain economic climate. “People will see by March that businesses are recovering and will have confidence in an IFISA, knowing that if something goes wrong they can withdraw their funds easier,” he says.

“ I think the next ISA season will be good. People are continuing to find new homes for money with risk

CrowdProperty, Kuflink and JustUs have affirmed their commitment to the IFISA as an important part of their long-term strategy. This view could prove particularly prudent if the IFISA market shrinks, leaving existing IFISA investors searching for a new IFISA provider. “Those with IFISAs at platforms that are no longer conducting IFISA lending will move their accounts if their funds have been paid back,” says Atuksha Poonwassie, cofounder and managing director of Simple Crowdfunding. “People could just take the money out, but chances are they’ll transfer to another provider.” This is not the only way for platforms to improve IFISA inflows in the future. Some platforms have been exploring the idea of IFISAs for pension saving. Pension investors lose their tax advantages when withdrawing their money and can only take their funds

”

“I think the next ISA season will be good. People are continuing to find new homes for money with risk.” Law highlights another opportunity that some IFISA providers have been eyeing: IFISAs as a home for landlords’ investments. So-called amateur landlords have been exiting the buy-tolet investing space following tax changes such as the phasing out of mortgage tax relief over the past four years. From April 2020, landlords are no longer able to deduct any of their mortgage expenses from rental income to reduce their tax bill. Law says direct ownership of rental properties will continue to decline, with many landlords who may have used buy-to-let investments as a retirement plan being put off due to the higher tax rate. He suggests that investing in property via an IFISA could prove to

be an appealing alternative for them. “Some people coming out of buyto-let will enter the IFISA market,” Law says. “P2P lending structured in a way that competes with buy-to-let property is the future for buy-to-let investors.” Similarly, Invest & Fund’s Turner says that if capital gains tax (CGT) rates increase, IFISA inflows will soar.

IFISA

“ The government is

talking about increasing CGT rates and if that happens a lot of people will find alternative investments

”

This follows a report from the Office of Tax Simplification in November which said increasing the minimum CGT rate of 28 per cent to bring it closer to income tax rates could help raise up to £14bn to repair the government’s finances from spending during the pandemic. “The government is talking about increasing CGT rates and if that happens a lot of people will find alternative investments,” Turner says.

“Anything producing a yield will become more popular than it is now, particularly within tax wrappers like self-invested personal pensions and ISAs.” Many platforms do not plan excessive innovation to their IFISAs this year, with a couple of exceptions. JustUs is planning to offer P2P mortgages this year at a 2.5 per cent fixed interest rate for borrowers.

The platform’s founder Lee Birkett is planning for the product to be eligible for an IFISA, offering investors a one per cent return via the tax wrapper for investing in owner-occupied mortgages, which would help free mortgage prisoners – those unable to remortgage and trapped on their current deal. He says he is also calling for a one per cent government guarantee. “[Our IFISA comes] at a time when interest is at zero and looking like it will be negative in 2021,” Birkett says. “It allows investors to help other people and should be very welcome, particularly if backed by low-risk mortgages.” Before Covid-19, IFISA inflows were rising year-on-year. The coronavirus-induced economic crisis may have slowed this growth in 2020 but it will end when the vaccine is eventually rolled out and confidence returns. Until then, there is plenty to be positive about, as IFISAs provide a flexible investment option during this time, an alternative for buy-tolet investors and those hit by capital gains tax, and soon, a way to invest in owner-occupied mortgages. There are clear signs that the IFISA has just entered into an autopilot mode for 2020 before reemerging better than ever in 2021 and beyond.