Peer2Peer Finance News July 2020 by Alternative Credit Investor

DISCLOSURE DEBATE

Industry split on how to interpret new rules

USING YOUR ASSETS

>> 20

Collateral is being put to the test by Covid-19

Bell & Company’s Terry Bell on the outlook for P2P defaults >>

ISSUE 46 | JULY 2020

P2P sector gears up for consolidation with banks THE PEER-TO-PEER lending industry is readying itself for a new era of bank partnerships and acquisitions, as the sector evolves and consolidates amid the Covid-19 crisis. Last month, it emerged that Metro Bank is in talks to acquire RateSetter, with the challenger bank showing a particular interest in the ‘big three’ P2P platform’s consumer loanbook. Goodbody analyst John Cronin said there was “compelling industrial logic” for the acquisition, as it provides a lending platform that Metro Bank can leverage to further boost its average asset yield

– which is essential in a profitability context. “While there may be a fixation on RateSetter’s current numbers in the post-news analysis (including what its loan losses might look like), this avenue for potential growth is

the important point in our view,” he added. “RateSetter is a leading player in the P2P industry and reports much lower average defaults than peers.” Industry stakeholders have since told Peer2Peer

Finance News that they envisage more bank involvement in the P2P sector, whether that be acquisitions or partnerships. Mike Bristow, chief executive of CrowdProperty, expects to see consolidation because banks have access to capital at a very low cost and P2P lending platforms can be exceptionally efficient originators of lending opportunities. “Put those two together and there’s a strong synergy between them,” he said. “In theory it makes sense. I think firstly we’ll see a load of platform failures and then see who >> 4 the good guys

New IFISAs come on to the market A NUMBER of Innovative Finance ISAs (IFISA) are being launched over the summer months, providing peer-to-peer investors with plenty of choice on where to utilise their tax-free allowance. P2P property lender Invest & Fund unveiled the full launch of its

IFISA last month, offering investors target returns of 7.5 per cent from residential property developments. Meanwhile, another P2P property lender, FutureBricks, is planning to unveil its own IFISA by the end of the month. The platform is wait-

ing on permissions from HMRC and already has 100 of its investors on a waiting list to use the IFISA. Additionally, P2P education finance provider Lendwise has promised an IFISA by the end of this year, which it said would expand its investor reach and appeal.

The flurry of new IFISA launches offsets some of the product closures in the market. Platforms such as Growth Street, ThinCats and Landbay have shifted from retail to institutional funding, meaning they can no longer offer an IFISA. As of 19 June, RateSetter >> 4 was not taking

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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WeWork, 2 Eastbourne Terrace, Paddington, London, W2 6LG info@royalcrescentpublishing.co.uk EDITORIAL Suzie Neuwirth Editor-in-Chief suzie@p2pfinancenews.co.uk +44 (0) 7966 180299 Kathryn Gaw Contributing Editor kathryn@p2pfinancenews.co.uk Marc Shoffman Senior Reporter marc@p2pfinancenews.co.uk 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.

ne of the most interesting things about the peer-to-peer lending industry is its constant evolution. Institutional funding lines, digital banks, stock market floats…there’s always been something to write about as the industry grows. One of the biggest stories of the past month was news that Metro Bank is in talks to acquire RateSetter. Banks and P2P platforms – traditionally positioned as rivals – now joining forces? The possibilities are fascinating. There are clear benefits for both parties, as banks could diversify their loanbooks and P2P platforms would have the benefit of a bank behind them, easing their capital requirements. However, the next question is what this would mean for the retail investor, who was the original backer of P2P. As this month’s news pages show, the industry may be changing but there is still a place for everyday investors. A number of upcoming Innovative Finance ISA launches show that there are still platforms targeting retail money, while some industry figures argue that diversification of funding sources (to include both institutional and retail) is the best way to shore up your platform. Rather than banks versus P2P platforms, or institutions versus retail investors, surely all parties could work together to propel the sector into its next stage? If you have any views on the participation of banks and institutions in the P2P industry, feel free to share them by emailing me directly at suzie@p2pfinancenews.co.uk.

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. top of page 1 are. I think any financial services consolidation at a meaningful scale will happen in good times, not just in the bad.” David Bradley-Ward, chief executive of Ablrate, said that it would be a logical step for challenger banks to partner with or acquire P2P lending platforms to gain access to different customers and better technology. “Banks have the opportunity to buy technology allowing them to lend better,” he said. Other industry executives have said that interest from banks in partnering with or acquiring P2P lending platforms is an endorsement of the fact the

sector provides a service not offered elsewhere. “The fact a traditional lender is looking to acquire a lender like that, shows what they can’t do,” said Rishi Zaveri, co-founder and chief executive of Lendwise. “Any interest in the sector is positive.” Acquisitions could be a natural progression for banks and P2P. There has been an increasing amount of institutional involvement in the P2P industry in recent years, as platforms use larger funding lines to scale up. However, Stuart Law, chief executive of Assetz Capital, emphasised the difference between part-

nerships and acquisitions as the P2P firm already counts European banks as institutional investors. “European banks see P2P investment as a good opportunity already,” said Law. “We intend to remain independent and can deliver the benefits of returns to banks, pension funds and retail investors directly.” Frank Wessely, partner at advisory firm Quantuma, last month predicted that banks would start to eye P2P firms as potential acquisition targets. “It eases the capital requirements on the platform if they’ve got a substantial high street bank behind them,” he said.

“It makes them a more stable, safer bet. It gives them ready-made access to prospects and loan originations being fed through.” However, he noted that banks could be more wary to embark on the acquisition path due to the current uncertain economic climate. “It depends on how the P2P marketplace resumes after Covid-19,” he added. “All you need is one deal to go ahead successfully and the P2P industry will see that they have something of potential interest to the banking sector. It’s all an unknown at the moment but it could be the start of a small trend.”

of the IFISA. “ISA account opening, inflows and transfers have been consistent throughout 2020, however that has not been the

ISA season 'peak' that we saw in previous years, almost certainly due to uncertainty during the lockdown,” Genn said. “Goji has inbound queries from platforms considering offering an ISA or looking to improve efficiency and scale from partnering with a specialist provider on an almost daily basis.” Median ISA balances are typically between £10,000 to £20,000 per platform and the maximum ISA balance is over £300,000 for some platforms, he added.

cont. from bottom of page 1 on new investors as part of its approach to the coronavirus pandemic, while Funding Circle temporarily closed to new retail money while it focuses on providing finance under the coronavirus business interruption loan scheme. Lending Works, which launched one of the first IFISAs, closed to new customers in April and was due to reopen this month. Other major lenders such as Zopa are still open to new IFISA subscriptions and Assetz Capital is due to reopen to new investor

money this month. David Genn, chief executive of IFISA technology provider Goji, said that the product “remains an important wrapper for investors looking to ensure their P2P investments are tax-efficient” and “gives them the opportunity to consider using ISA balances built over the years to diversify into P2P”. However, he highlighted that the wrapper offers no further protection to investors so they need to do the same level of due diligence as for investments outside

NEWS

PrimeStox axes plans to partner with P2P lender FOOD producer funding platform PrimeStox has abandoned plans to partner with a peer-topeer lender and is now focusing on getting its current loans repaid, its founder has revealed. The platform, founded by mining and metals analyst Joseph Cherrez and horticulturist Jenny Louw, allows retail investors to support food producers by funding production of their goods and sharing in the profits once they are sold. Cherrez told Peer2Peer Finance News last year that a food wholesaler or P2P platform may be a good partner for PrimeStox as it seeks to grow.

But he said his focus has now shifted and a partnership may not be appropriate. He said PrimeStox investors backed £1.1m of loans between 2017 and 2018 but it made only

two loans last year due to a lack of good-quality opportunities. It now has only one loan outstanding with a default rate across the whole loanbook of 6.5 per cent but annual returns of 15 per cent. “Unlike most players in the sector who have high fixed costs and domineering shareholders seeking growth at all costs, PrimeStox did not have to push itself too hard and make tens of millions of pounds of loans a month,” he said. “Instead it could take time and choose quality credit with counterparties who we knew and trusted. We believe this has been the key differentiator

and why investors have remained supportive. "If we restart lending in 2020 it will be under our own steam and to take advantage of a potential market opportunity which we see in front of us. “We will not make any hasty or inappropriate partnerships to prop ourselves up when we have proven that our model works and we can stand alone.” He insisted there is still a market for his product as producers are in need of funding due to the market disruption from Covid-19 and there is strong demand for food deliveries amid the pandemic.

Retail investors still have a place in P2P RETAIL investors still have a future in peer-topeer lending but certain products will be more suitable than others, industry experts have suggested. Over the past year, some P2P lending platforms including Growth Street, Landbay and ThinCats have opted to shut their doors to retail investors in favour of institutional lenders. But Mark Turner, managing director, regulatory consulting at business advisory Duff & Phelps, said there is still a

place for retail investors in the P2P sector. “It’s not surprising certain firms are pulling out [of the retail investment market],” he said. “Some products are less suitable for retail investors, like those that are inherently more complicated and risky. And some have a different liquidity profile, with money being locked in for longer. “Products for retail investors need to be easy to understand and messaged clearly in terms of what they’re getting into and

what the risks are. “There’s a future for retail investors in P2P, but not every product will be suitable for them. “As P2P lending has become a vehicle for investment of institutional funds, some firms will move away from the original P2P model, whereas some with products suitable for retail investors that still work, will stick to the original model. “There are still retail investors who want to invest money in the sector.”

Mike Bristow, chief executive of CrowdProperty, said the platform has performed well during Covid-19, partly because of having diverse funding lines from both retail and institutional investors. “Retail investors have still been happy to invest throughout the crisis on our platform,” he said. “The better platforms will grow their institutional lending and not necessarily shut their retail side. Retail is core to our strategy.”

NEWS

Only two P2P lenders accredited under CBILS in three months

RY ST

BACK

Peer2Peer Finance News launched its ‘back our industry’ campaign IND in May, urging the government to recognise the vital role P2P platforms can play in supporting the economy. Lee Birkett, founder of P2P lender JustUs, said there is a requirement for lenders to take a first loss on loans before the government, which he is unwilling to do. “A first loss is a lot of risk for the private sector to take,” he said. “We will look at an alternative solution if we can’t get approved.” However, Chris Hancock, chief executive of Crowd2Fund, and Stuart Law, founder of U

ONLY two peer-to-peer lenders have been accredited under the coroUR navirus business O interruption loan scheme (CBILS) in the first three months of its operation, with some platforms citing the ‘skin in the game’ requirement as a hurdle for the P2P industry. At the time of going to press, Funding Circle and Assetz Capital were the only P2P lenders accredited by the British Business Bank (BBB) to deliver the governmentbacked emergency loan scheme, out of 94 accredited lenders in total. Other P2P lenders such as Crowd2Fund and Folk2Folk are still awaiting BBB approval.

Assetz Capital, were comfortable with taking a first loss on loans. “[Assetz] can’t comment on the exact first loss requirement percentage as I’m sure that is relatively private between each lender and BBB,” said Law. “This seems very sensible to help ensure quality of lending and it certainly applies to us.” Peer2Peer Finance News understands that the BBB has disputed the idea that it mandates a first loss requirement although it has told platforms they need skin in the game. It is thought that it is down to platforms’ interpretation of the guidance and that some have decided to see this as a first loss requirement. A BBB spokesperson

highlighted the guidance for accredited lenders. “If you have a business model that does not fit the CBILS standard legal agreement, your application will be considered using a risk and judgement-based approach which will appraise (among other matters) whether your business model fulfils the underpinning principle of CBILS (the risk sharing and alignment of interests between the UK government and the delivery partner, which requires the originator to have a financial interest in the performance of the portfolio through the investment of its own funds) and your ability to deploy,” the guidance said.

Rebuildingsociety launches an app for investors PEER-TO-PEER business lending platform Rebuildingsociety has launched a smartphone app for its investors, Peer2Peer Finance News can reveal. The free app is available from both Android and iOS app stores. It allows both existing and new investors, once they complete an appropriateness test that is available on the app, to manage their portfolio, access funds, withdraw

money, purchase new loans and sell loans on the secondary market. The app features a repayment calendar to show investors what income they are going to receive and when, and a chart where investors can see a breakdown of how much cash they have, how much they’ve invested and how their loans are performing. “This is the first version of the app and we’re really pleased with it,” said Daniel Rajkumar, founder

and managing director of Rebuildingsociety. “It’s simple to use and presents an easy way for existing customers to manage their portfolio. It doesn’t do a whole lot more than the website does, it’s just a different way of controlling your investments. We hope it means people feel they have more control over managing their money. “We’ve had good investor feedback with many liking the

repayment calendar and the ability to review their portfolios on the app. A lot will use it as the main way of managing their investments in future.” Rajkumar said Rebuildingsociety is working on an open banking integration to reconcile transactions in real time, which he said would work well with the app, as well as developing an interface where investors and borrowers can communicate with each other.

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Exiting the Covid-19 haze: An opportunity for growth? Sarah Balsom, senior manager at Quantuma, explains how peer-to-peer lending platforms can make the most of the crisis

S THE UK CONTINUES to take tentative steps towards exiting full lockdown conditions, many businesses are starting to turn their attention to planning for life as commerce starts to return to a semblance of normality – albeit what ‘normal’ will look like is yet to be determined. Whether your lending platform has been left relatively unscathed from the impact of Covid-19, or you are still working towards a recovery, it is our view that as the UK exits full lockdown the peer-topeer lending sector will see market growth opportunities. Discussions with businesses we are advising has revealed that after Covid-19, there is likely to be a significant dash for cash from corporates as the UK government withdraws the extensive support measures that have so far provided an effective buffer against the impact of the pandemic. The anticipated volume of borrowers seeking funding lines will inevitably drive up the price of credit offered by the traditional lenders which may, in turn, lead many borrowers to consider alternative lending sources such as P2P platforms. As the government’s Covid-19 support initiatives are eventually withdrawn, significant numbers of businesses are likely to be left with varying degrees of additional debt burden, that will need to be serviced and ultimately repaid. For those businesses facing this reality, operating in sectors which

are likely to experience a rapid return of customer demand, there will be immediate and significant need for working capital and general funding. The period after Covid-19 therefore, presents a potential opportunity for those P2P platforms that are both well capitalised and robust, to grow market share. So how might P2P platforms approach this growth opportunity should it materialise as we predict? Whilst there will be a natural exuberance to initially prioritise top line growth platforms, our recommendation is that platforms take preparatory steps now to ensure that they have appropriate operational capacity and systems to digest increased borrower volumes. Key factors to consider in advance of growing the borrower base • Is there sufficient operational capacity/bandwidth within the platform to cope with the influx of enquiries? • Do you have a robust risk management function in place? • Have you considered the impact of higher volumes on the credit approval process? • How do you maintain credit management discipline during this time? • Do you need additional layers of enquiry and review in the underwriting process? In order for P2P lending platforms to capitalise on the

potential growth opportunities discussed in this article, the robustness of the onboarding and credit underwriting process will be critical components to achieving this. This will entail some P2P lending platforms having to review and update their underwriting processes to ensure that they have increased due diligence capabilities to prevent the onboarding of poor quality lends, given the expected volume of new borrower enquiries. Quantuma’s financial advisory team has significant experience in providing support to traditional and alternative lenders, including the P2P sector, when it comes to appraising new and existing borrowers, where required. For further information, you can contact me via: Email: sarah.balsom@quantuma.com Direct dial: +44 (0)161 694 9144 Mobile phone: +44 (0)777 470 0934

NEWS

Remote working revolution sparks change in property demands DEMAND for home offices has increased since lockdown began, in the first hint of how the UK property investment market may change after the pandemic. According to research from estate agents Benham and Reeves, in London alone demand for homes with an office has risen from eight per cent to 28 per cent since March 2020. This demand is higher in London’s more peripheral boroughs, suggesting that homebuyers are less concerned about their commuting distance when remote working is an option. Alternative property lender Wellesley has similarly noticed a spike in requests for new

property developments which contain a home office, in anticipation of a long-term change in working habits. “The belief amongst property professionals is that workers will spend at least part of their week working at home in the short term and a change as fundamental as this is likely to change working patterns over the long

term as well,” said Simon Betty, head of credit at Wellesley Finance. “Homes are often not well suited for home working and so new builds will look to find space to cater for home workers with dedicated office space or at least areas where home workers can shut themselves away. Totally open plan buildings may become less

attractive to purchasers.” Betty has also noticed that domestic internet connectivity has increasingly become a priority for property buyers, as they realise the need to have a fast and reliable connection for home working. As remote working becomes more popular, demand for commercial property could also change. “An interesting question is how much office space will become redundant and whether this will be an opportunity for live/work space in town centres,” added Betty. “Live/work space has been around for some time but it has never taken off and become a mainstream offering. Maybe its time has come.”

Investors call for arrest of Lendy directors as new allegations come to light LENDY investors are calling for the arrest of former directors Liam Brooke and Tim Gordon, after the administrator revealed they had siphoned investors’ funds into offshore companies. On 19 June 2020, administrator RSM released a 35-page report detailing the state of the collapsed peer-topeer lender’s loanbook and the result of their

investigations. It was revealed that £6.8m was paid to entities registered in the Marshall Islands, with RSM stating that “that these payments were ultimately for the benefit of Liam Brooke and Tim Gordon.” Members of the Lendy Action Group (LAG) have suggested that these offshore payments were funded by investor deposits, and therefore amounted to fraud.

They have called for the former directors to be arrested and held accountable for their role in the platform’s collapse. Brooke and Gordon had their assets frozen last month and RSM said that it had commenced proceedings against the former directors and two companies associated with them. RSM also said that it was contemplating additional

legal actions, relating to a third-party guarantee against a loan as well as negligence on the part of a professional adviser. More than 10,000 retail investors were left out of pocket when Lendy went into administration in May 2019. At the time Lendy’s loanbook was worth approximately £152m. To date, just under £17m has been recovered.

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Hot property

Carl Davies, chief operating officer at The House Crowd, explains why affordable residential property development will be the “hot pick” in property investment after the pandemic

NTIL RECENTLY, two sectors (office and retail) have formed a large proportion of the property investment portfolios of funds, family offices and sovereign wealth funds. However, some of the biggest changes to our daily lives since the Covid-19 outbreak have been how we work and how we shop. The Office for National Statistics published a summary which found that less than 30 per cent of the working population had experienced working from home prior to the pandemic. However, since lockdown restrictions, 60 per cent of the UK’s adult population is now working from home. This is a huge shift in working practices. Many would agree that the transition has been surprisingly easy and could spell the beginning of a shift in how businesses operate. Barclays’ chief executive Jes Staley recently commented that “the notion of putting 7,000 people in a building could be a thing of the past”. Some experts have predicted that demand for office space could fall by as much as 20 per cent. These changes will have massive implications for commercial landlords. Landsec – the UK’s largest commercial property developer and investor – has reported that just 65 per cent of its rent due on 25 March was paid by 31 March, compared

with 96 per cent for the equivalent period last year. With offices typically making up between eight per cent and 15 per cent of a company’s budget, it is logical to assume that many employers will now be looking at ways of reducing these overheads at a time when cutting costs will be of paramount importance to the survival of UK businesses. Perhaps the sector which has seen the most change is retail. According to Barclaycard data, which records nearly half of all UK debit and credit transactions, consumer spending fell by 36.6 per cent in April compared to the same month in 2019. This marks the biggest drop since records began in 1995. Conversely, online sales excluding grocery items grew by a massive 57 per cent which is impressive given that the average annual growth rate is 8.5 per cent. So, with Covid-19 and the change in working practices and shopping

habits, where can professional and institutional investors now look for a reliable and lucrative return whilst protecting their capital? The demand in the market now is around solving the UK’s housing shortage. We are some way off delivering the government’s target of 330,000 new homes per year. Small- and medium-sized enterprise developers play a vital role in delivering around 100,000 of these but ironically, even in normal markets they do not find funding easy to come by. With the current crisis, many commentators have predicted a liquidity squeeze similar to 2008. Developers will have to look to alternative funders such as The House Crowd to support them. They put together innovative schemes to build affordable homes which can support the higher interest rates that the alternative finance sector charges. The key to reducing risk and improving the chance of timely redemption of loans of this type is choosing the right locations (around economically active geographies) and sticking to economic fundamentals on pricing points. As a result, we may find that this sector starts to attract more institutional funds seeking out the returns that savvy peer-to-peer investors have been enjoying for several years now.

PROFILE

Rising risks

Terry Bell, chair of debt advisory firm Bell & Company, talks to Marc Shoffman about the outlook for defaults in the peer-to-peer lending sector

HE CORONAVIRUS pandemic has raised concerns of a rise in loan arrears and defaults as businesses and consumers struggle to repay their debts due to lost income. The peer-to-peer lending sector is not immune to these risks and platforms have been putting plans in place to support borrowers, through forbearance or by signposting struggling borrowers to government support. Debt advisers such as Bell & Company have been seeing an increasing number of cases even before the coronavirus outbreak hit and its chair Terry Bell explains why the P2P lending sector could be particularly vulnerable. Marc Shoffman: What does Bell & Company do? Terry Bell: The Bell & Company team is made up of legal professionals, accountants, finance specialists and insolvency experts. We are debt strategists. Our role is to develop a strategy for borrowers specific to the client’s issues. Every case is different. We will work with firms in bankruptcy right up to those with multi-million-pound debts. We are Financial Conduct Authority regulated. By trade I am an accountant, which is an important function to understand a company’s finances. Then we need legal input. We try to avoid litigation if we can,

the world is a bit too litigious but sometimes it is necessary. We have had cases that have taken eight years to resolve. MS: What is the difference between insolvency practitioners and debt strategist? TB: We are not insolvency practitioners. There is an important distinction as they are appointed by the court when looking at liquidations or individual voluntary arrangements. It is a formal statute led process and they can be pretty rigid in their approach. Our role is to look at every facet of the company and see how we can help. MS: What work do you do in the P2P sector? TB: P2P has come in slowly on stream. We were seeing more cases coming onto the radar even before the coronavirus outbreak. P2P lenders did an excellent

job filing the gap for small- and medium-sized enterprises (SMEs) when banks hid during the financial crisis. But as it has evolved, problems have started to come out and that has been exacerbated by Covid-19. MS: How do you get paid? TB: We always give independent insolvency advice. We typically work on retainer and success fee and never take a case we wouldn’t have a chance on. The bulk of the fee is in how much success we get. MS: What trends are you seeing in P2P loan insolvencies? TB: The economy wasn’t that great even before the outbreak. The world was awash with cash and low interest rates but the outbreak has shown many businesses never really recovered from the 2008 crash and even steady professions are getting hit. Very few seem to have had cash put away to tide them over.

PROFILE

P2P has certain criteria. That is fine when everything is going swimmingly. There has been a strong reliance on personal guarantees. The model is starting to struggle as you need the cash inflow from investors. There are remedies, they need to rewrite their books with the government. A lot of these loans are a maximum of five years long and a meaty amount, while in comparison a bank would give you longer to repay such as 10 or 15 years. This creates a lot of risk in a P2P platform’s loanbook. The government should help turn P2P loans into coronavirus business interruption scheme loans or bounce back loans. If you have a loanbook that worked in a certain economy that is ok but this is a totally different situation and the government should help underwrite some of these. P2P lenders need to take a view on this as going through the legal process of recovering bad loans doesn’t always get them their money back. MS: Are there common mistakes being made in P2P loan due diligence? TB: The due diligence wasn’t as strong as it should be in a lot of the earlier cases. Platforms had the ability to shovel the money out the door and it was more that they were brokers rather than lenders. That will come back to bite them. A lot of lenders need to revisit their due diligence, which is a huge task especially if there is a massive reliance on personal guarantees. A lot haven’t geared up for these cases and just rely on chasing the debt. MS: How are P2P platforms treating borrowers? TB: At the moment, a lot of P2P

lenders are going straight for litigation if you don’t adhere with what they want to do. Sometimes their position isn’t correct. I am not a lover of the legal profession but when they get a grip on the cases the agenda changes, up go the fees and away we go. Each lender is different. The FCA has asked all loan providers to provide payment holidays but suddenly if you can’t repay some will want a charge on your house. This may end up costing a P2P lender more as if a borrower goes bankrupt a bankruptcy trustee could unravel a transaction such as stopping the P2P lender taking a security on a house so all creditors instead have an equal share. That takes more management time and resources. What platforms need is a period of reflection. We are telling clients to make sure their financials are up to speed. There has to be a dialogue. P2P lenders and borrowers need to get their affairs in order. It needs to be a human interaction, not just tearing straight to litigation, MS: How can P2P borrowers deal with lenders chasing loans? TB: As a businessperson you should check the validity of your business in a new environment. If you think it is valid going forward, then work out what you can and can’t do. A lot don’t know where they are in terms of finances. We had one borrower with six P2P loans secured by a personal guarantee, they had legal demands flying in, and their home life wasn’t great. They were really struggling and feared bankruptcy but sometimes that is the best option as it turns several problems into one.

There is only one trustee to negotiate with compared with a swathe of proceedings from P2P lenders. Most are very aggressive and they will get worse as they try to protect their position. We will also try to work on debt repayment plans and ask for any leeway. Borrowers need to work out what they have got financially, what is at risk and how they are going to deal with it. You have to work out what is the right price for your financial survival. MS: Are P2P lenders mis-selling loans? TB: There was an element of mis-selling in a minority of cases. Unfortunately, standards drop when it is such a frothy market and some borrowers abuse that. It is not just the platform’s fault as borrowers aren’t always what they are cracked up to be. Some P2P lenders were too quick to do personal guarantees in the early days that end up not being worth as much as initially thought. Many tried to get money out as fast as they could so were a soft touch in the beginnings of this sector. There are always arguments that clients shouldn’t have borrowed and also that platforms should not have lent. The new FCA regulations have improved things. There is more stringent lending going on. However, a lot of the early problems are only coming through now though due to when the early loans were first taken and are now maturing. Furthermore, the Covid-19 backdrop brings everything into play and creates more risks.

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JOINT VENTURE

Changing the car leasing market Buy2Let Cars’ founder and chief executive Reginald Larry-Cole, and operations director Scott Martin, explain why they are committed to the idea of compassionate capitalism

IGHT YEARS AGO, when Reginald Larry-Cole founded Buy2Let Cars, he had one clear aim – to make car leasing more accessible to the people who need it most. This meant targeting key workers with bad credit and making it possible for them to lease a brand-new car at an affordable monthly rate. Today – amidst a global pandemic where key workers are more important than ever – the platform has never been busier. “We started in 2012 and we based the business around serving key workers,” says Reginald LarryCole, founder and chief executive of Buy2Let Cars. “They can’t work from home and they need reliable transportation to get them from A to B. That’s what we do and that’s what we’ve always done.” “We’ve never had as many car applications as we have now,” adds Scott Martin, Buy2Let Cars’ operations director. “It’s been all hands on deck.” The pandemic has underlined the importance of Buy2Let Cars’ model, and its ability to handle a sudden influx of requests. “Operationally, things aren’t going to change,” says Martin. “We run a tight ship anyway – we’re very streamlined. We’re not about excess.” Martin and Larry-Cole have a combined total of 50 years’ experience in the car finance

sector. They established Buy2Let Cars after being struck by the inequality which allows wealthy people to gain access to lower interest rates on their loans, while the average worker can be charged as much as 50 per cent on a loan for a car that they need in order to get to work. “It’s sad,” says Larry-Cole. “Not everyone who has bad credit is ruined. They might have a poor credit rating due to a divorce, or circumstances beyond their control. That’s where we came from.” Larry-Cole has first-hand experience of wealth inequality. He grew up in an affluent household in the Northern Province of Sierra Leone, but when the political climate changed, his family lost everything. He moved to the UK and worked hard to build up his own fortune, until the 2008 financial crash once again left him with nothing. In 2010 he

met Martin, and soon afterwards, Buy2Let Cars was created. “I have always hated injustice wherever I find it,” he says. “I don’t think the guy who needs credit should be charged 50 per cent in interest, while a guy like me who has good credit is charged next to nothing.” This was the ethos behind Larry-Cole’s book ‘Compassionate Capitalism’, and it is an ethos which still drives the business today. “We service the credit market, but we do it in a way that our customers are giving us five star reviews on Trustpilot, in an industry where they are used to getting ripped off,” says Larry-Cole. “Our margins aren’t high, but we focus on fantastic products and pay a premium to our funders, we look after our staff well, our lessees get a premium product with a premium service, and our funders get a great return. “It’s win/win.”

DATA AND TRANSPARENCY

Full disclosure The regulator has introduced tougher transparency requirements for the peerto-peer lending sector, but stakeholders are split on how to interpret the new rules. Michael Lloyd investigates

VER SINCE TOUGHER rules for transparency were introduced in December 2019, platforms have been seeking clarity on how to interpret the new regulations â&#x20AC;&#x201C; to the point where some have questioned if they are even effective. The idea behind the new rules is to allow investors to make informed decisions by displaying a certain amount of loanbook data, such as default rates, on

their websites to give investors the opportunity to do their own due diligence on the portfolio. The now-defunct Peer-to-Peer Finance Association (P2PFA) demanded that all of its members provide loanbook data, but these new Financial Conduct Authority (FCA) regulations require even more from the sector. Following the publication of an extensive consultation paper, the FCA introduced prescriptive

disclosure rules for all platforms, in the hope that retail investors will better understand the service the platform is providing, while also being able to compare different platforms in terms of both service offering and performance. Platforms now also have to publish detailed disclosures of the role of the platform, including how they undertake due diligence, characterise risk and price an agreement; and what will happen

DATA AND TRANSPARENCY

in the event of the platform failing and ongoing disclosure regarding individual agreements. The rules also mandate for detailed publication of the expected and actual default rate of all P2P agreements the firm has facilitated by risk category, to be shown as an outcomes statement published annually. Stuart Law, chief executive of Assetz Capital, has openly criticised the rules, claiming that they require platforms to publish data in a way which may not be easy for the average retail investor to understand. “There are simpler ways of explaining these things,” he says. “We’d like to be simpler, but we have to follow the rules. “Much of what we publish is regulatory and that is a problem because it’s not easy to understand but we can’t do anything about it. We do our best, but our hands are tied.” However, other stakeholders point out that the FCA has to strike a balance between allowing firms to be flexible and to ensure they publish their data in the right way. Mark Turner, managing director,

regulatory consulting at business advisory firm Duff & Phelps, says the regulator will not mandate exactly what needs to be published in detail, as the requirements will differ for each type of firm. Furthermore, the City watchdog is aware that more detailed instructions may not be welcomed

“ Disclosure does

not protect against investment loss or defaults

”

by the wider lending sector. “The FCA could give more guidance perhaps, but the onus is on firms to think about their database and provide enough data to make informed decisions,” Turner says. He adds that firms need to publish data which is honest about the potential risks of the platform, and contains information on losses, which enables investors to make informed decisions. If they do not do this, and it leads to

customer harm, the City regulator can take legal action against both the firm and its senior managers individually, under the Senior Managers and Certification Regime. “Where there’s customer harm through losses and investors can say they didn’t know what they were investing in, platforms can expect a level of complaints and the regulator to get involved, asking senior managers difficult questions,” Turner says. Platforms agree that they need to ensure investors can make these informed decisions, but no one seems to be able to agree on what this might actually look like in practice. Investors can misread data, which can lead them to believe that a certain investment is safer than it actually is, or vice versa. “Investors new to lending can often jump to incorrect conclusions,” says Assetz Capital’s Law. Overloading people with unnecessarily detailed data can give rise to these misunderstandings, therefore it is vital that platforms publish clear, digestible and relevant information in order to help

DATA AND TRANSPARENCY

investors make investment decisions and assess their performance. What’s more, different types of investors require different levels of transparency. For instance, retail investors may be happy with the headline figures on a platform’s loanbook, while sophisticated investors may want more granular detail. This makes it difficult to present P2P data in a standardised way. It should also be noted that disclosure alone is not enough to protect investors, although it should give them more insight into the platform’s processes. “The sector as a whole welcomed the changes and we saw little push back on implementation,” says Dena Chadderton, partner at compliance consultants Adempi Associates. “We believe the rules are sufficient. There are however two points to consider here – firstly that disclosure rules do not guarantee the completeness or quality of the due diligence or risk assessment undertaken by the platform and secondly disclosure does not protect against investment loss or defaults.” And then there is the question of whether platforms should be the ones to take charge of their own data publication – or if this should be done by an independent third party instead. Brismo collects data in a standardised way from platforms, verifies this as a third party and creates metrics that illustrate performance. “This allows investors to quickly appraise performance both within the lending space, and in the context of other asset classes,” says Rupert Taylor, the company’s founder and chief executive. A third-party transparency monitor would lead to performance

“

We’d like to be simpler, but we have to follow the rules

”

and risk being reported on a truly comparable basis – but only if the entire P2P sector got behind it. This is not currently the case. Transparency monitors would also require more detail from the regulator on what data is actually required, and how it is presented in a way which can be understood by every different type of investor. “My concern is that the platforms

not showing their data transparently don’t do it because it probably doesn’t show very good things,” says Mike Bristow, chief executive of CrowdProperty. “If there was a common and detailed data transparency requirement across the sector then lenders would be able to compare data better.” At the moment levels of transparency vary across different platforms. Some opt to publish enormously detailed reams of data, while others need a little improvement. As fintechs, P2P lending platforms are well-placed to take advantage

DATA AND TRANSPARENCY

“ The FCA could give

more guidance perhaps but the onus is on firms to think about their database and provide enough data to make informed decisions

”

of the latest technology to deliver data in an honest way – and there is certainly no shortage of dataprocessing software on the market. If this data is updated frequently and presented in a clear and concise manner, it could make a huge difference to investor confidence and understanding. “Firms should always be thinking of what they can do to help investors make informed decisions,” says Turner. “Data isn’t just numbers but information and that’s at the heart of decision making.” Amid the uncertain economic environment created by Covid-19,

the need for transparency is greater than ever. Platforms have had to be open with investors about any problems they are encountering, from having to introduce payment holidays for borrowers, to adding lender fees for investors, or by pausing lending altogether. Investors simply want more updates during volatile periods, and this is when strong data management can truly demonstrate its value. “I think the importance of data transparency has certainly increased,” says Turner. “If the P2P sector can demonstrate

it’s open and transparent with investors it can emerge from this crisis in a positive way.” Confusion remains around how to be transparent, what the transparency regulations mean and how effective these rules can be. However, what’s certain is that data transparency in this space has improved over time and will continue doing so. It will evolve as platforms grow and hire more experienced senior staff who are more used to collating and presenting data. And the quality will improve too, as investors become more confident in their understanding of the sector, and start demanding more from their platforms. However, just publishing more and more data isn’t the answer – platforms must provide betterquality relevant data, which is presented in a way that allows investors to make fully informed decisions. “Investors will seek transparency more and more, and will prefer to go to platforms that are more transparent about their performance and therefore everyone has to lift their standards,” says Bristow.

GOOD GOVERNANCE. TRANSPARENCY. TRUST. Some things can’t be bought, sold or traded. Duff & Phelps and Kroll help clients protect, restore and maximise these ideals and mitigate risk. As peer-to-peer platforms find themselves navigating a new reality, addressing issues from financial stress and regulatory compliance to valuations and fundraising, our multi-disciplinary team of experts can help you assess and manage the risks to your business and address your most complex challenges. Our services include: •

Regulatory advice including wind-down planning

•

Implementing sound governance and robust risk management processes

•

Liquidity and capital management planning

•

Assisting with borrower defaults and loan enforcement recoveries

•

Assessing collateral security including property valuations

Learn more at www.duffandphelps.co.uk.

JOINT VENTURE

Show your work

Duff & Phelps’ Mark Turner and Geoff Bouchier tell senior managers how to maintain regulatory oversight during a pandemic

OVID-19 HAS presented many challenges for senior managers in the peer-to-peer lending sector. Just months after the introduction of the Senior Managers and Certification Regime (SMCR), P2P managers are grappling with the reality of having to maintain oversight in an unfamiliar and unpredictable world. But according to Mark Turner (pictured right), managing director in Duff & Phelps' compliance and regulatory consulting practice in London, senior managers should focus on ensuring that their existing regulatory obligations are being met. This means taking “reasonable steps” at all times, even as they may have to make sudden and sweeping changes to their business model. “Issues such as, should we foreclose a loan? Should we gate the lenders’ investments for the protection of other investors? Those sorts of decisions need to be taken with due governance, consultation and importantly, a documented audit trail of decisions,” says Turner. “In a year’s time when we’re out on the other side of this crisis, the regulator will be asking questions like, why did you make this decision to foreclose the loan, to gate the fund or perhaps not to gate the fund? Because maybe early redemptions got all their

money back and the people at the end of the queue got 10p in the pound back. “The fact that there’s detriment doesn’t mean that the senior manager has done something wrong, but the senior manager is on the back foot at that point. What you want to be able to say is ‘we had this discussion at the appropriate committee—here are the minutes of that meeting, yes there were different views but we landed on this decision after looking at all the risks’.” A documented audit trail of Covid-19-era decisions is particularly important when work is not being carried out in a centralised office. With the majority of P2P employees now working remotely, there is a risk that some standard administrative processes might be overlooked. “You might forget why you made these decisions if you don’t write them down,” says Turner. “But it’s not that the decision itself might be wrong, it’s the path

towards the decision that matters to the regulator.” In the absence of water-cooler conversations and informal meetings, senior managers may choose to speak to a non-executive director or another board member for a second opinion, or they may seek external advice. “One thing that senior managers do need to do is be honest with themselves,” adds Turner. “If they can see that their business model is being challenged or is no longer viable because of the changes that are happening, then be honest and have those conversations with your board sooner rather than later.” These challenges may include stressed loanbooks, staffing issues or technology disruptions. Geoff Bouchier (pictured left), managing director in Duff & Phelps’ global restructuring advisory practice in London, adds that some firms may need to update their promotional materials to ensure that they are still fit for purpose, particularly if a valuation has changed since the start of the pandemic. If senior managers can prove to the regulator that they are taking a scrupulous approach to risk management and compliance— even in extraordinary circumstances—those platforms could come out of the pandemic stronger than before. As Turner predicts: “This could be a huge coming of age moment for the sector.”

ASSET-BACKED LENDING

Put to the test Asset-backed P2P lenders use collateral as a key method of mitigating risk, which has attracted investors in turn. As the pandemic leads to a downturn in the economy, the valuation of those assets will now be put to the test. Michael Lloyd reports

‘L

ENDING IS ONLY lending when you get the money back’ is a wellknown phrase in the world of peerto-peer lending. And in cases where borrowers cannot repay, taking security is the most common form of risk mitigation to recover funds. Therefore, it comes as no surprise that asset-backed

lending is incredibly popular among P2P investors and – according to those platforms that offer it – the most secure. Property is undoubtedly the most common asset which is valued, lent against and used as collateral, but there is a myriad of alternative assets used by alternative lenders across the UK. From fine art, to vintage cars, to private jets, yachts and green

energy stores – P2P investors have plenty to choose from when looking at asset-backed loans. Security gives investors confidence and on paper is an effective way to manage risk. But in reality, it only works if the lending and risk mitigation is conducted properly, in a way that allows money to be recovered. But the Covid-19 pandemic and

ASSET-BACKED LENDING

subsequent economic turbulence will test valuations and security to show which P2P lenders have been swimming naked. Platforms have to ensure there is sufficient margin between the market value of the asset and the

says Frank Wessely, partner at business advisory firm Quantuma. Sharon Davies, managing director, valuation services at Duff & Phelps, describes valuing assets as coming down to what someone would be willing to pay for the asset and the

“ Covid-19 has heightened the uncertainty and the risk profile of any investment is higher”

loan percentage to ensure if there’s a fall in the value there is still enough equity in it to repay. The idea is that the security should only be a fallback and should not detract from the lender’s quality of underwriting. Assets aside, every borrower needs to meet their platform’s criteria, and the loan and security documentation should be fit for purpose. “The income, liquidity and profitability of businesses and individuals would have been affected by Covid-19, so platforms still have to satisfy themselves that applicants have the ability to repay,”

price at which someone would be willing to sell it at. For equipment finance, she looks at how much the equipment costs and its uses, as well as any improvements that can be made. For patents or rights, Davies says that Duff & Phelps takes a forward-looking approach towards cashflows, but Covid-19 has made this particularly challenging as it is so difficult to predict what could happen. This means that it has become harder to assess these valuations in the same way. For a start, it is much more difficult for platforms

to visit sites and view these assets in person – a crucial step which can often make the difference between a loan approval and a refusal. It is also hard to predict what the market for a particular asset will look like in a matter of months or years. Already, the pandemic has driven down the value of properties, while assets such as construction equipment are lying dormant on newly-quiet building sites. “Covid-19 has heightened the uncertainty and the risk profile of any investment is higher,” Davies says. “So, the way you see that coming through in valuations is investors expect higher returns. “Some sectors will struggle. It depends on the flexibility of lenders and how they adapt to meet changing investor demands.” Asset-backed P2P lender Ablrate takes everything from removal crates to business jets as collateral and currently is busy with battery storage energy. The platform’s chief executive David Bradley-Ward says if an asset is depreciating, you need to take

ASSET-BACKED LENDING

that into account. For example, if you have an asset which is worth £500,000 today but will likely be worth £100,000 in four years’ time, this all needs to be factored in. “I bet there are plenty of distressed asset funds being formed right now,” Bradley-Ward says. Another asset-backed P2P lender, Crowdstacker, typically has large loan sizes and will consider property, renewable projects and equipment finance as security, with an independent valuer conducting the valuations. The platform’s principal security is a debenture of a company, but this may differ for specific loans. Crowdstacker has had a few borrowers requesting forbearance amid the pandemic, although chief executive Karteek Patel is hopeful that over time businesses will recover and start repaying investors. Meanwhile, ArchOver carries out a thorough analysis of the business, management, industry, collateral, financial performance and risks surrounding each potential borrower as part of its credit process and due diligence. On top of this, the P2P platform also monitors the asset to ensure it doesn’t lose its value. The collateral used for this type of lending is typically the trade debtors or accounts receivables owed to the borrower. Though it doesn’t take

service with a handful of borrowers. It has also requested a ‘Covid-19 statement’ from businesses, including how they have adapted to the pandemic, how trading has been and how it is expected to fare.

“ I bet there are plenty of distressed asset funds being formed right now”

other assets into account, Archover always takes a first charge. During the pandemic, the platform has focused on the needs of current borrowers and has been funding its unsecured advance

“There is definitely a place for P2P platforms to exist alongside traditional asset-backed lending facilitators going forward,” says Charlotte Marsh, managing director of ArchOver.

The consensus among platforms is that Covid-19 will lead to a rise in defaults. However, if this happens, the asset-backed P2P sector can still prove its worth. For instance, defaults can be mitigated by a secondary market, where investors who are opposed to any loan extensions can sell the loan to other lenders, depending on liquidity. “We believe that initially there will be a default spike across the sector for the businesses that were already in a poor state, but generally, default rates should hold as long as businesses have access to the government schemes, and banks

ASSET-BACKED LENDING

and P2P lending platforms continue to supply working capital needs,” says ArchOver’s Marsh. More recoveries are likely to be needed, and platforms are confident in their recoveries processes. But recoveries should only ever be a last resort, and before reaching the recoveries stage, it is useful to work with the borrower, as this often addresses the underlining business issue surrounding possible default or poor performance. Ablrate is one such lender that layers security and has a robust, aggressive recoveries process. “If you have plenty of levers to pull you find people can be more

“ The market

will thrive for those platforms that can weather the current storm

”

cooperative,” says Bradley-Ward. “That could involve repossessing the asset or calling in a personal guarantee, for example. “I think that people will be able to look back on some investments they had and decide which

performed better and over a period of time I’d imagine assetbacked would have done better than unsecured.” Despite talk of defaults, during this uncertain time there are a range of opportunities that present themselves to platforms. In a marketplace like this, businesses which are asset rich look to turn their assets back to cash and lease them back, something which asset-backed P2P lenders can play a part in. Furthermore, businesses know that there are borrowing options outside of the main high street banks, and this will carry on driving demand to other lenders, including P2P. Asset-backed P2P lending has been growing in popularity over the past few years and Marsh forecasts this upwards trajectory to continue as investors look to seek reliable returns over a very volatile stock market or savings accounts with near-zero interest. “We believe that the market will thrive for those platforms that can weather the current storm,” she says. Covid-19 presents a big test for asset-backed P2P lending platforms – one which will sort the strong from the weak. However, within every cloud, a silver lining emerges. The consensus among platforms and stakeholders alike is that asset-backed P2P lending will prove itself during the crisis and continue growing. The platforms that have valued their collateral appropriately and undertaken robust risk management processes will weather the storm, which will in turn reassure investors and could help cement the P2P sector’s place in the mainstream investment space.

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JOINT VENTURE

A day in the life of Wellesley’s head of credit

Simon Betty, head of credit at Wellesley Finance, tells us how his average day has changed since the pandemic began

ONGER DAYS, LESS travelling, and fewer site visits – these are just a few of the changes that Simon Betty, head of credit at Wellesley Finance, has had to tackle since the pandemic lockdown was introduced in March. “Pre-pandemic I would normally be in the office at about half seven, and there was less structure around the day than there is now,” says Betty. “Because people were physically in the office and you could wander around and speak to people on an ad hoc basis – it made engagement that much easier.” Now, in order to achieve that same level of engagement, Betty must schedule video calls and regular check-ins with his team – often early in the morning and into the evening. “Keeping the team motivated while they are working on their own is essential,” he says. “I contact them every morning and then again later in the day, and part of that is to encourage them to log off because otherwise they will keep working long after office hours.” In pre-pandemic times, the first part of Betty’s day would be spent catching up with admin and housekeeping tasks, and then he would liaise with lenders and attend general internal and external meetings. “Post-pandemic, the working day has become elongated,” he says. “Firstly, because I don’t have to do the commute, and secondly because several challenges brought about by Covid-19 mean that increased oversight has been required over the loanbook. So, there’s been a lot more work involved.”

Wellesley already had robust procedures in place when it came to the management and monitoring of its loans, but now it is taking an even more meticulous approach. Every single loan is now monitored closely and Betty chairs loan review meetings every week to ensure that prompt decisions are made if necessary and issues are not allowed to slip. But one element of his job that can’t be performed remotely is site visits. Before lockdown, Betty would spend a lot of time travelling around the country to check on the progress of borrowers in the property development space. When the lockdown restrictions were at their tightest, these were not possible and it was necessary to rely on videos and photos, supplied by the borrowers themselves. “That was not ideal,” he says. “And to be fair the borrowers worked with us but it’s certainly not what I would normally want. Since the restrictions have been lifted some sites have started to reopen and we have started to visit again with so-

cial distancing measures, including not taking public transport. “But obviously construction has slowed down over the past few months with supply chain difficulties and fewer contractors on site. Furthermore, new sales progress came to a halt although I have been encouraged by new enquiry levels since estate agents re-opened. We are therefore currently heavily involved in speaking to borrowers about restructuring their loans where necessary and how we do that.” Wellesley has worked closely with their borrowers to ensure that investors are not unnecessarily affected by project delays and loan restructuring. This diligence is already paying off. In a recent chat with his team, Betty found that a lot of their loans were performing more positively than expected, and he recently signed off on a promising new loan request that should be approved soon. In fact, Betty believes that Wellesley will maintain some of its pandemic processes even after lockdown has ended. “For the foreseeable future, I can’t see us going too far from where we are now,” he says. “I think I’ll continue to be working more remotely – I won’t be in the office as much and I won’t be travelling as much by train or via the Underground.” Necessity is the mother of invention, and Wellesley’s experience suggests that the notion of a ‘typical’ day in property development lending could soon become a thing of the past.