Peer2Peer Finance News November 2021 by Alternative Credit Investor

Initiative Ireland’s chief executive Padraig W. Rushe on the housing crisis >> 22 and P2P

>> 10

ATTRACTING THE SQUARE MILE

What institutions want

THE PENSION DILEMMA

>> 16

Why isn’t P2P a larger part of the SIPP market?

ISSUE 62 | NOVEMBER 2021

Fintech floats “just getting started” as Zopa Bank prepares to go public

THE FINTECH sector is poised for a flurry of initial public offerings (IPOs), with firms such as Zopa Bank preparing to float. Last month, Zopa Bank – a challenger spun out of the world’s oldest peer-topeer lender – confirmed a $300m (£220m) pre-IPO funding round to boost its balance sheet and help it meet capital requirements. It is expected to launch its IPO next year. P2P lending platforms Assetz Capital and Shojin Property Partners have also signalled ambitions to float in the coming years. Myles Milston, chief

executive of Globacap, which helps private companies raise funds, has forecasted additional fintech IPOs. “Fintech is starting to reach a maturity point where we’re getting some big companies now like

up to

Zopa and Wise; I think we’re at that point in the cycle,” Milston said. “Fintech 10 years ago was a relatively new concept but it has evolved massively over the past 10 years. Since the 2007 recession, the sector has

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really bloomed and I expect we will see more firms move towards becoming public.” Ekaterina Chmatova, senior manager, capital markets at PwC, said that fintech IPOs are “just getting started” >> 4

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EDITOR’S LETTER

Published by Royal Crescent Publishing

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

he Financial Conduct Authority launched its InvestSmart campaign last month to help consumers make “better informed investment decisions”, as it looks to halve the number of people putting money into ‘high-risk’ investments including peer-to-peer lending. It is promoting its InvestSmart campaign with the help of Olympic BMX gold champion Charlotte Worthington. This got me thinking – what would high-risk investments be if they were an Olympic sport? Cryptocurrency – High jump You’ll need to leap head first and hope for the best. If everything goes well you’ll fly high, but if not you’ll be heading for a crash landing. Forex – Canoe slalom You’ll be navigating through choppy, fluctuating waters and it’s difficult to have success unless you’re highly skilled. Mini-bonds – Golf If you’re lucky you’ll hit a hole in one, but if you haven’t checked out the course (or provider) correctly you may end up out of bounds (or out of money). Peer-to-peer lending – Alpine skiing As long as you’re aware of the risks and prepare properly, you can hopefully enjoy a smooth (investment) ride while staying chilled!

SUZIE NEUWIRTH EDITOR-IN-CHIEF

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

NEWS

cont. from page 1 and predicted more stock market floats from the sector. “I think that fintech IPOs globally are just getting started, we have already seen a number of high-profile transactions in the third quarter such as Wise’s direct listing in London and Robinhood’s IPO in the US,” said Chmatova. “And as the global fintech market continues to grow at a pace, we will see a number of issuers coming to the public market for funding or liquidity. “However, innovation could be the ethos of the fintech IPO wave as these disruptors would look to access the public markets on their own terms, be it direct listings, focus on

retail participation, or other changes to a classic IPO structure – and the options for funding are wider than ever. “With that said, the P2P sector is challenging and in the midst of increased scrutiny and regulatory change which may dampen the sentiment towards IPOs for this particular segment.” Investment expert Adrian Lowcock said that IPOs raise the profile of companies but warned that they also draw additional scrutiny and focus. He said other fintech and P2P lending platforms should wait and see how Zopa is received by the market before undertaking an IPO. “The UK has been a mixed bag for IPOs

recently and especially in the technology space with Alphawave, Deliveroo and most recently THG suffering as listed companies,” he said. “Technology-led companies in particular seem to find it difficult. Add in the issues that have surrounded P2P lending in recent years and an IPO for Zopa faces some challenges to get investors on board. However, the recent capital raise gives the company resources and time, while the commitment to focus on a sustainable and profitable business model will help somewhat. “Other fintech, P2P and alternative lenders might well wait to see how Zopa is received by the market, learn what they got right, or wrong, before going

down the same route. “There is a lot of risk being amongst the first to IPO so waiting to see how one or two are received in this climate might be an advantage.” Funding Circle became the first UK P2P lending platform to float in 2018 and has had a bumpy ride since its £300m IPO. Its shares began trading at 440p but slumped to 334p on their first morning and continued to fall since then, going as low as 44.2p last year. However, Funding Circle has recently shown signs of recovery, with its share price up around 126 per cent over the past year to 165p as of 21 October, although this is still far lower than its market debut.

Just two P2P platforms accredited for recovery loan scheme JUST two peer-topeer lenders have been authorised to offer the recovery loan scheme (RLS). Funding Circle and Assetz Capital are the only two P2P platforms accredited to offer funding under the governmentbacked scheme, out of 74 approved firms. In contrast, the coronavirus business interruption scheme – which preceded the RLS – included

more P2P platforms such as Folk2Folk and LendingCrowd. After a slow start, RLS accreditation began

picking up pace towards the beginning of the fourth quarter of the year. The scheme is designed to help UK businesses

navigate the post-Covid economic landscape by providing up to £10m via term loans, overdraft facilities, invoice financing or asset financing. It was due to close on 31 December 2021, but the Treasury has recently announced an extension to take the scheme into 2022. The RLS provides lenders with a government-backed guarantee of 80 per cent of the value of each loan, in the event that the borrower cannot repay.

NEWS

P2P Covid loan borrowers protected from interest rate hikes BORROWERS who have accessed Covid emergency loans during the pandemic through peer-to-peer lenders may be protected from interest rate rises. The Bank of England’s monetary policy committee is rumoured to be planning an interest rate rise to help stem rising inflation. This would hit borrowers on any loan with a variable or tracker product that follows the Bank of England’s base rate. British Business Bank data shows that 17 per cent of accredited lenders under the coronavirus business interruption loan scheme (CBILS) offered variable rates. Another 32 per cent offered a mix and 51 per

cent offered only fixed rate deals. The British Business Bank said there was no equivalent data for the successor recovery loan scheme (RLS), which does not have an interestfree period. CBILS launched in April 2020, providing small- and medium-sized businesses with loans of up to £5m. The government guaranteed 80 per cent of the finance to the lender and paid interest and any fees for the first 12 months.

Accredited lenders were approved by the British Business Bank and set their own rates up to a maximum of 14.99 per cent. But many borrowers may now be coming to the end of the first interestfree year and anyone on a variable CBILS product, or one from its RLS successor, could suddenly see their repayments rise if interest rates are hiked. However, Peer2Peer Finance News analysis has shown that a

number of accredited P2P lenders offered government-backed loans with fixed rates. Funding Circle, the first P2P firm accredited to CBILS and one of the largest lenders under the scheme, had fixed rates ranging from 1.8 per cent to 7.4 per cent. Its RLS rates range from 8.6 per cent and 12.1 per cent and are fixed. Assetz Capital also offered fixed rates on its CBILS and RLS loans. It did not reveal its CBILS rates but its RLS rates start at 6.99 per cent per annum for development finance loans and 5.99 per cent for commercial mortgages. LendingCrowd offered fixed-rate CBILS loans starting at 5.6 per cent.

What will be in the new FCA chair’s P2P inbox? THE FINANCIAL Conduct Authority (FCA) is on the hunt for a new chair after Charles Randell announced his departure a year early, and peer-topeer lending platform bosses have already identified the issues awaiting his successor. Randell was appointed chair of the FCA in 2018 and will step down in spring 2022. During his tenure, Randell oversaw the authorisation of a number

of P2P lending platforms and the introduction of stricter regulations for the sector. The City watchdog also faced criticism for how it handled the regulation of collapsed P2P lending platforms such as Collateral and Lendy. Randell’s successor will join as the FCA rolls out its new strategy to enhance consumer protections, particularly for what it views as highrisk investments including P2P lending.

Industry trade body the UK Crowdfunding Association (UKCFA) has highlighted several P2Prelated issues that should be high up in the new chair’s inbox. “We would urge the new chair to consider whether the approach to high-risk investments differentiates sufficiently between regulated and unregulated products, so that new rules do not provide further impetus for an exodus of companies to markets

beyond the perimeter,” a spokesperson for the UKCFA told Peer2Peer Finance News. “The challenge for the regulator will be the level to which it hopes that regulation can second guess both the market and consumer needs as we move towards a macro financial context in which the Bank of England is seeking to tighten its policy to meet the challenge of inflation post-pandemic.”

JOINT VENTURE

Six questions that every P2P investor should be asking

HE MOST SUCCESSFUL investors tend to be the most informed, and this is particularly true when it comes to peer-to-peer lending, as it is a relatively new investment product with a wide variety of choices available between products and providers. Filip Karadaghi (pictured), cofounder and chief executive of P2P lending platform LandlordInvest, has a background in finance and his long-standing experience in the P2P industry has highlighted the importance of investor research and due diligence. He shares the six essential questions that every P2P investor should be asking before making any investments. This is mainly related to platforms that offer property-backed loans but can in some instances be applied to platforms that offer loans to businesses or individuals as well. 1. Do the platform’s offered rates correspond to the risk? Karadaghi believe that the rates being offered by the platform should correspond to the risk. This is something that LandlordInvest has been doing since day one, says Karadaghi. A first charge loan should have a much lower risk than a second charge loan and the offered rate should therefore also reflect the difference in risk between these two products. Another consideration is that it is important to look at the spread that the platform charges (i.e. the difference between what the borrower pays for their loan and how much investors receive from it) and ensure that it is consistent across product ranges and risk.

Indeed, it is a regulatory requirement for platforms to set out the cost of credit for a borrower and a loan, and investors should carefully check it and ensure that it is fair, reasonable and reflects the risk of the loan. 2. What is the platform’s default rate? Some property platforms have historically maintained default rates of between 30 to 40 per cent, which is very high for property-backed lending. The industry standard is around two per cent, while LandlordInvest has averaged around three per cent, by comparison. All platforms are now required to disclose their default rates in an annual Outcomes Statement. High default rates suggest that the platform may be lending to less creditworthy borrowers. If that is the case, rates offered to investors should reflect the increased risk, as it is likely that borrowers pay a higher rate than market rate as well. 3. What are the incentives to invest? Be careful when choosing to invest in a platform due to generous cashback or referral schemes. These incentives play a significant role in changing conditions and behaviours. To quote Benjamin Franklin: “If you would persuade, appeal to interest and not reason”. Economists would refer to this as a moral hazard. 4. What is the LTV and valuations? Some platforms engage in a practice where the loan-to-value (LTV) is close to, or over 100 per cent. No mainstream or respected alternative

platform or lender would engage in such practice for obvious reasons and investors should be careful of platforms offering such high leverage. Platforms should also disclose a detailed valuation report along with the platform’s valuation instructions so that investors can see on what basis the valuation was carried out. Valuations should always be carried out by top tier valuers (to the extent that it is possible) to ensure as realistic valuations as possible. 5. Who is on the platform’s management team? An experienced management team is vital for the success of a lending platform. However, experience alone is no guarantee of success, and taking the time to review shareholder composition is also key. “Look at both the management team and the shareholders,” says Karadaghi. “Shareholders are important as they can put pressure on the management team to pursue short-term goals over long-term goals which may lead to the platform engaging in reckless lending practices.” 6. Can you ask questions? The capacity to ask questions is a key part of any due diligence process. Platforms should offer investors the possibility to ask questions directly when assessing a loan and also after the loan completes. Keeping the Q&A section public also ensures that all other investors in that loan can benefit from the information disclosed in the Q&A section.

NEWS

Hybrid working can pose compliance risks PEER-TO-PEER lenders have been urged to assess if their risk management systems are up to scratch amid the shift towards hybrid working. The Financial Conduct Authority (FCA) issued an alert to all regulated firms last month to be aware of the risks presented by home working, which has increased due to the pandemic. The City watchdog said it should be informed using a principle 11 notice if there has been a substantial change in the way a firm operates. Dena Chadderton, partner at compliance consultancy Adempi Associates, said fintech and P2P lending firms have an advantage compared with other financial businesses as their product is already online but they still need

to assess the staff risks. “If I was a P2P lender, I would worry about aspects such as complaints handling, how you are monitoring conduct and your vulnerable customer policies,” she told Peer2Peer Finance News. “Are you monitoring the outcomes on both sides? “Culture is a difficult one to manage remotely. How do you make sure people at home are kept included, you may not know for a while that you have poor outcomes like demotivated staff?

“There are also responsibilities under the data protection act, how are you stopping people saving private information onto computers or making sure family members don’t see it?” She said it can be hard for firms to know if a principle 11 notification is needed and Adempi is holding a roundtable for clients this month to highlight how to approach this. “We don’t know many firms, if any, who are fully back to the office, does that mean every regulated firm should make a principle 11 notification?” Chadderton said. “Firms need to update their risk assessment, consider if their working model has a significant impact on their risk profile and then decide

if a notification is necessary.” She added that the FCA does not always make binary rules, although firms would certainly find that easier. “If there is a significant change such as moving your head office to your private residence then there are notification requirements,” she added. “The onus is on the firm to make the decision and inform the FCA. “Our general rule is, if in doubt make a notification, if you don’t and the FCA decides you should have done then the consequences will in all likelihood be more severe. “In extreme circumstances, if the FCA spots a breach and says you should have notified it of a change then there could be a fine.”

SIPP holders face additional charge for P2P investments SELF-INVESTED personal pension (SIPP) holders are being charged more to invest their SIPP money into peer-to-peer lending platforms, as it is classed as a non-standard asset that requires more due diligence. John Dowding, technical director at Morgan Lloyd, told

Peer2Peer Finance News the SIPP administrator has an additional charge for its clients that invest in P2P. He said this is to cover the “additional admin and due diligence” that is required and that the “regulatory capital and risk increases pro rata to the size of the investment

hence the tiered charge”. Dowding said Morgan Lloyd offers a free SIPP where all investments are on its own platform or a low-cost SIPP where other platforms and standard assets can be held, which is charged between £150 to £350 per annum. However, Dowding said the SIPP administrator’s

typical charge for P2P investments, which is classed as a non-standard asset, is 0.35 per cent on the first £500,000 and 0.25 per cent on anything above £500,000, subject to a minimum of £1,350 per annum. Read more about SIPPs and P2P in our feature on page 16.

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JOINT VENTURE

JustUs reveals its global expansion plans despite challenges of Brexit

USTUS is set to bring its peerto-peer lending platform to the US and Europe within the next year, after Brexit forced the company to rethink its plans for global domination. Lee Birkett (pictured), founder and chief executive of JustUs, says that the company – which also trades under the Moneybrain brand, and issued the BiPS assetbacked crypto-currency – is in the process of finalising its US launch after seeing huge demand for its products. However, it has not been an easy journey. “Since Covid, the world has opened up and we have seen demand for JustUs and BiPS as a currency from multiple jurisdictions,” says Birkett. “But because of Brexit, there isn't actually a trade deal done with Europe and the US yet. So it's very difficult to do cross trade activities. “We're literally out on our own. So for the last year and a half because of Brexit, we have had to divert resources from investing in the UK to basically accommodate our global expansion. We've had to invest in other countries.” JustUs has opted to establish its European base in Estonia. From there, the lender can access all 27 countries of the EU. Crowdfunding is currently unregulated in Europe, but this is set to change when new legislation is introduced next year. This means that while JustUs may start as a non-regulated European P2P platform next year, it will still have to go through a transitional cycle to full regulation.

“But the beauty of Europe is it's harmonized across the 27 states,” Birkett explains. “So if you get one licence in a jurisdiction, then we can trade with all 27 countries. Unfortunately, in the UK now, we can only trade with the UK as a UK entity.” In the US, it is a little more complicated. JustUs recently announced that it has been selected by Visa to join their fintech fasttrack scheme, which means that the company should be ready to roll out its Moneybrain app in the US market next year. Under US law, to act as a lending platform, the company has to be licenced in each individual state, but Birkett has

already made inroads by registering for inter-state anti-money laundering checks and winning the support and investment of Visa. Along with its UK partner Railsbank, JustUs intends to raise money in the US following its registration with the Securities and Exchange Commission, by selling shares in the US for the organisation. “We've been welcomed with open arms in the US,” Birkett says. “The regulations are positively engaged. We're quite advanced obviously in the UK now with our P2P legislation, and it's the gold standard that a lot of other countries are now looking at. And so we've been welcomed with open arms. “From little old northwest of England, we’re going to be trading internationally, probably as early as 2022.” This means that within a year, JustUs could go from a UK-only P2P lending platform to a global fintech force with a regulated presence in the UK, US and Europe – and Birkett is not ruling out an Australia/Pacific expansion in the years ahead. “That may also evolve next year,” he says. “But we're literally focusing on the two biggest markets for us at the moment, which would be Europe and the US.” Despite the setbacks of Brexit, JustUs has managed to identify a global demand for its products, and Birkett is determined to meet this demand and bring both crypto-trading and P2P lending to the masses – no matter where they may be.

INSTITUTIONAL INVESTMENT

Show me the money!

What are institutional investors looking for in the peer-to-peer lending sector? Michael Lloyd reports

T IS NO SECRET THAT institutional investment has been growing in the peerto-peer lending sector. But postCovid, institutions are armed with financial firepower and alternative lenders are in their sights. Earlier this year, CrowdProperty announced a £300m institutional funding line from an unnamed “major investment manager” to support its P2P property loans. Meanwhile, Fasanara Capital has previously invested in UK P2P platforms including FundOurselves, and Varengold Bank has pumped funds into

EstateGuru and Assetz Capital. Furthermore, Starling Bank has revealed that the vast majority of its coronavirus business interruption loan scheme (CBILS) funding has gone to small firms via its Funding Circle partnership. Alison Harwood, head of the London branch of Varengold Bank, says the funder is actively growing its investment portfolio of wholesale loans to non-bank

lenders, both across the P2P sector and to balance sheet originators. “We are currently seeing more non-bank lenders launch under a balance sheet lending model, rather than under a P2P model,” she says. “Consequently, early-stage P2P investment opportunities are lesser in volume. They have some disadvantages to a balance sheet model, such as due diligence and understanding compliance risk

“ The landscape for institutional funding more broadly is quite positive”

INSTITUTIONAL INVESTMENT

associated with P2P regulation. This does not however preclude them from investment for us.” John Cronin, an analyst at Goodbody, says there seems to be a greater level of confidence in the P2P sector specifically. “The landscape for institutional funding more broadly is quite positive,” he says. “Since the depth of the Covid crisis it is certainly picking up and institutions are showing a greater level of interest in P2P specifically.” So what are these institutions actually looking for? Platforms typically report that institutions are keen to examine their team, their experience and their procedures. They also want to see a strong track record of lending growth and a quality-focused credit engine, as well as clear plans on how the P2P lender will use the funds allocated. “Team, experience and track record are the key elements for the

I know a lot of platforms make noise about “ raising funds, but it’s not that difficult. There’s a lot of money out there if you have the ability to meet the criteria

initial review,” says David Jelly, chief executive at Property Bridges. “After an initial review, six months of thorough due diligence will follow in which every document, process and system will be scrutinised.” Harwood says Varengold carries out a comprehensive due diligence process covering all aspects of the platform’s business and operations, alongside in-depth financial analysis. “We work principally with earlystage originators, looking to identify platforms with good ideas in need of institutional financing to help support their early years portfolio growth,” she says.

”

“We want to see a product offering with credible growth prospects, coupled with robust operations able to scale alongside that growth.” Harwood goes on to say that provided loans are priced properly according to risk, Varengold is agnostic as to loan type. “We do not however support lending which does not fulfil our sustainability criteria, such as payday lending,” she adds. As well as thorough due diligence, institutions have their own terms that platforms need to consider and these may deter some from accepting their money.

INSTITUTIONAL INVESTMENT

Neil Faulkner, managing director at P2P ratings and research firm 4thWay, says that institutions typically have very specific requirements in terms of the types of loans they are willing to lend in. “For example, they might want to lend in one type of property loan to a maximum loan-to-value of 70 per cent,” he says. “They also want to see that they will be able to deploy enough capital. Aside from that, they look for what any good analyst looks for: the right people, processes and past record, as well as the appropriate legal and regulatory structures.” Faulkner goes on to say that some institutions also only lend through platforms that have a 4thWay PLUS Rating and some have other wishes or requirements, such as needing to lend through a securitisation or wanting to be the initial underwriter of loans. Filip Karadaghi, co-founder and chief executive of LandlordInvest, says it is “very simple” to find institutional capital, but the problem is the terms that must be agreed on. He says every funding provider has very different terms, banks have certain costs associated with

due diligence and legal costs, monitoring costs and various other things and if a platform has not delivered all of the institution’s funds, they can face a penalty fee on what they have not deployed. “Once you engage with the providers, it’s down to you to decide which is best to reflect funding arrangements; everyone has different costs and fees,” Karadaghi says. “I know a lot of platforms make noise about raising funds, but it’s not that difficult. There’s a lot of money out there if you have the

“ The restrictions

institutions put on you removes the DNA of P2P

”

ability to meet the criteria. “It depends on the fees you have to pay and if they are reasonable, we have no rush to jump into expensive funding lines. Institutional funding is very easy to maintain, and we will do it on terms we think are suitable for us. “Many that receive funding offers

do not have the same experience and background and will jump at them much more quickly and are prepared to discount the high cost to get that funding.” There are broadly two types of institutional funding lines, committed and uncommitted facilities. A committed facility means the institution will pick a certain subject loan criteria and take all the loans automatically, simply purchasing them from the platform without checking them on a loan-by-loan basis, whereas an uncommitted credit line is where the funder reviews and checks every loan. Uncommitted offers are easier to attract when a platform has a lack of a track record. Peer2Peer Finance News understands that one platform even went so far as to decline a committed offer in April of this year. This demonstrates that there is capital available, but it may come with a few strings attached. Some other platforms have chosen never to take on institutional capital for various reasons. Crowdstacker says that it aims to connect retail investors – and only retail investors – to businesses, while JustUs chief

INSTITUTIONAL INVESTMENT

executive Lee Birkett says that it refuses to give institutions better deals than retail investors. Birkett says that he has spoken to institutions but refuses to give “special deals to institutions that goes against the whole ethical methodology of P2P”.

having done so already. He says they just need to pass an institution's due diligence and demonstrate that they can bring enough quality borrowers in to make it worth the institution's while. “Platforms have managed to get institutional funding even while

“ All institutional investors will require platforms to have the necessary operational and regulatory systems in place as well as the personnel capacity to originate and manage a loanbook

“We give the same deal for someone putting in £100 as someone investing a million, whereas institutions want a special deal,” he says. “That’s how they operate. The restrictions institutions put on you removes the DNA of P2P. It’s not something we’d choose to do. Some institutions want preferential terms and want the platforms to take a balance sheet risk – most want you to take the first loss.” There is a common belief that platforms need to be of a certain size in order to attract institutional capital, however others dispute this as a misconception. “It’s the wrong assumption, it’s not true,” says LandlordInvest’s Karadaghi. “For a bridging lender that’s very small and starting out to get funding, that’s how they get it. There’s a misconception you have to be bigger, but anyone can go and get a funding line from day one without a loanbook established.” 4thWay’s Faulkner agrees and says that it is not especially difficult for platforms to attract institutional money with many

”

lending in the low tens of millions per year, so it is certainly open to smaller platforms,” Faulkner says. “There are a lot of smaller institutions too.” However, Property Bridge’s Jelly highlights that while it is possible for smaller platforms to attract institutional capital, it is more difficult to do so at that size. “We'd consider ourselves relatively small and we have managed to attract institutional investment, so it is possible, but it's not easy,” he says.

“All institutional investors will require platforms to have the necessary operational and regulatory systems in place as well as the personnel capacity to originate and manage a loanbook. This can be a resource challenge for some of the smaller platforms.” Institutions are taking notice of P2P lending platforms, approaching them with offers and pumping more and more money into the sector. Many platforms take this route to scale up, and some have even left the retail space to focus solely on institutional backing. However, there is no such thing as free money, and while there may be a glut of institutional money in the P2P space right now, it often comes with a few conditions. It is worth highlighting the detailed due diligence that institutions undertake, the experience and track record and management of the platforms they analyse closely, as well as the terms and conditions that they impose. If platforms are after institutional funds, they do not just need to attract it, they need to negotiate for it and only accept suitable offers.

JOINT VENTURE

Kuflink maintains its losses at zero

UFLINK IS ONE OF THE few peer-to-peer property lending platforms which has managed to keep its investor’s losses at zero, while offering returns of more than seven per cent to investors. By following an incredibly detailed credit checking process, and by taking action at the earliest possible stage, the platform is able to ensure that not a single investor has lost money since the company was founded in 2016. According to Nattalie Weeks (pictured), head of loan management at Kuflink, it all comes down to attention to detail and respect for the platform’s borrowers and investors. “We are putting these loans out to our investors, and we need to be as sure as we can be that we understand the risk,” she says. “We have to explain that risk so that our investors can make a choice based on the information they have. If we think it's a slightly higher risk, we will explain that to the investors, and obviously the reward to them will be higher. And then it's their choice. But we always endeavour to understand fully our borrowers, their reasons and the exit plan. Once we know that, we can explain it to our investors so that everybody is clear and they understand what this loan is.” The Financial Conduct Authority defines a default as a loan that remains outstanding 180 days after the due date. Weeks says she would never wait that long. “We call default as soon as a loan is in default,” she says. “So if you're one day past the date you are due

to pay us, you are in default with us, and we will start having those conversations with our borrowers to see why they missed their payment or they haven't exited.” Weeks’ aim is always to ensure that the borrower can achieve a realistic exit. For instance, if a borrower applies for a six-month term with an exit on a refinance, Kuflink will push back “because most tier one or tier two lenders are not going to lend unless you've actually owned that property for six months,” she explains. “So they probably need at least nine months

to achieve an exit.” If the borrower won’t accept a longer term, then the loan will not be approved. “We're not a company that sets people up to fail,” Weeks says. “If they've given us an exit plan and we can see a good reason why they may not be able to achieve that exit, we need to help them to get to where they need to be.” This is one of the ways that Kuflink sets itself apart from its competitors. Its role does not simply involve lending money – it also manages its borrower relationships. Kuflink’s underwriting and loan management teams are constantly performing due diligence on the platform’s borrowers – even after the loan has been distributed. “We always make contact as soon as the loan is written,” Weeks explains. “Then we make contact regularly throughout the term to see if they're still on plan to achieve the exit. “We very heavily relationship manage our loans because we want these people to achieve the exit. It’s in nobody's interest to end up in a place where we have to recover.” After five years of lending, this process has become very streamlined, but it relies on the experience of its underwriters and their attention to detail. “We try to be as open and honest with our customers as possible,” Weeks says. “I've always said if you underwrite properly, you collect more successfully because everybody understands what they're getting into and our customers are clear on what we require from them.”

SIPPS

The pension question

Diversity from the stock market, inflation-busting returns and a variety of products on offer… with all these benefits, why haven’t peer-to-peer investments become a mainstay of the self-invested personal pensions market? Michael Lloyd investigates

OR SEVERAL YEARS, peer-to-peer lending platforms have been trying to tap into the lucrative self-invested personal pension (SIPP) market. But despite offering inflationbeating returns in a tax-free wrapper, progress has been rather lacklustre to date. A SIPP is a personal pension tax wrapper which people can pay into

and use to manage their investments flexibly in a tax-free environment. They can contribute up to 100 per cent of their annual earnings, with tax relief applying on contributions of up to £40,000 per year, with no capital gains or income tax. The concept was first introduced in 1989, but P2P platforms were only allowed access to the scheme in 2016. A number of platforms now

accept P2P investments through SIPPs, including CrowdProperty, Proplend, Money&Co and Ablrate to name a few. However, five years after P2P SIPPs were first introduced, the concept of P2P pension investing has not really gained traction. This is partly due to the many challenges that P2P firms currently face in the SIPP market.

SIPPS

John Dowding, technical director at SIPP administrator Morgan Lloyd, says that he has seen falling demand for P2P investments through a SIPP. He believes that demand has dropped this year due to

involved,” says David Bradley-Ward, chief executive of Ablrate. “I’m sure there is quite a lot of SIPP money around. We have quite a lot on the platform but it’s not an easy thing to do. Not many SIPP providers would allow SIPP

“ There was a flurry of people getting involved

in SIPPs, but I think the IFA market and SIPP providers are just not getting involved “uncertainty over the economy and concerns that businesses may default on lending, coupled with the coverage of the likes of Lendy”. “In our experience interest peaked around 2018/2019 but has diminished quite considerably since this time,” he says. Lack of demand may be one reason for P2P platforms’ limited progress into SIPP money, but is only part of the problem. Residential property investments cannot be held within a SIPP, which means that some P2P property lending platforms are automatically excluded. Furthermore, the ‘connected parties’ rule means that SIPP investors cannot lend to a ‘connected person’ like a spouse or close relative, which is difficult to guarantee when putting money into a P2P platform that auto-diversifies investments. And then there are sectoral challenges, such as the fact that P2P lending is labelled as a nonstandard asset and relatively few independent financial advisers (IFAs) recommend P2P to their pension-planning clients. “There was a flurry of people getting involved in SIPPs, but I think the IFA market and SIPP providers are just not getting

”

investing into P2P loans because it’s a non-standard asset. “It’s a niche marketplace as far as that’s concerned and with increasing trajectory of what the Financial Conduct Authority (FCA) says you can invest in, I would imagine they wouldn’t be too keen on pension money going into P2P loans in future.” On top of this, Dowding says Morgan Lloyd has an additional charge for SIPP clients that invest in P2P to cover the extra admin and due diligence that is required. He says the SIPP administrator

offers a free SIPP where all investments are on its own platform or a low-cost SIPP where other platforms and standard assets can be held, which is charged at between £150 to £350 per annum. Meanwhile, Dowding says the standard charge for P2P investments, which is classed as a non-standard asset, is 0.35 per cent on the first £500,000 and 0.25 per cent on anything above £500,000, subject to a minimum of £1,350 per annum. “This covers the additional admin and due diligence that is required for these types of arrangements,” he says. “The regulatory capital and risk increases pro rata to the size of the investment hence the tiered charge.” This effectively makes it more expensive to invest in a P2P SIPP, as it is only economically viable if a hefty investment of many thousands of pounds is being made. Nicola Horlick, chief executive at Money&Co, blames SIPP administrators for the slow uptake of P2P SIPPs. “The main problem is that the

SIPPS

client has to persuade the SIPP administrator that P2P loans are a suitable investment for their SIPP and many administrators see P2P lending as high risk and will not approve an investment,” she says. “This is the main reason why so few SIPPs have P2P loans.” However, Gareth James, head of policy at AJ Bell, suggests this hesitation around P2P is understandable given the possible consequences if something goes wrong and the low demand for SIPP investment into this sector. “Providers and SIPP customers face a risk of penal tax charges if the party they’re lending to holds a SIPP under the same registered pension scheme,” he says. “Larger SIPP firms have tens, or even hundreds, of thousands of customers making this a risk which is beyond the control of the provider, as they don’t have sight of the parties to the individual loan transactions. “This, combined with low customer demand, is the main reason larger SIPP operators haven’t been encouraged to make P2P lending available through their pensions.” Dowding agrees and is pessimistic for the future of the P2P SIPP market, saying take-up is “unlikely” to improve. “On current trends, it is likely that the P2P SIPP market will continue to contract,” he says. “The principal challenges are twofold. Firstly, to include sufficient controls to ensure that the

borrower and SIPP investor are not connected, secondly to ensure that the borrower is a genuine diverse commercial vehicle. Failure to observe these requirements could have significant tax consequences.” He goes on to say that SIPP providers have come under increasing scrutiny from the FCA around the investments that they accept and the level of due diligence

that is undertaken on them. “It is considered that the demise of Lendy for example, has seen a greater reluctance from both SIPP providers and SIPP investors to enter this market,” Dowding adds. However, some industry stakeholders predict that take-up will improve, whether through engagement and education with advisers and SIPP providers or

“ When SIPP providers better get to grips with P2P lending and as

platforms develop better ways to communicate with them, take-up might finally speed up

”

SIPPS

“ For P2P investments to become a

mainstay in SIPPs the industry would have to win over financial advisers and SIPP providers, and ultimately this will be driven by customer demand

through the simple fact that the P2P sector is building up a strong track record – something that IFAs should take note of. Neil Faulkner, managing director and head of research at 4thWay, says platforms have already been working on educating SIPP providers about the risk-reward profile of P2P lending platforms. He says they need to be able to show SIPP providers how they will concretely benefit in the form of rapidly attracting more SIPP customers, while also generating awareness and interest from their own investor base. “Take-up will improve slowly for

the foreseeable future,” he says. “When SIPP providers better get to grips with P2P lending and as platforms develop better ways to communicate with them, take-up might finally speed up.” Karteek Patel is co-founder and chief executive of Crowdstacker, which stopped offering the ability for investments to be held within a SIPP following low demand. He says there isn’t enough interest to drive the sector to work on educating and convincing financial advisers and SIPP providers of its benefits. “For P2P investments to become a mainstay in SIPPs the industry would have to win over financial advisers and SIPP providers, and ultimately this will be driven by customer demand,” he says. “This demand is not yet there, customers are much keener to use P2P investing as an overall add-on to their day-to-day investing, and those seeking tax advantages utilise their ISA allowance.” The limited progress of P2P lending tapping into the SIPP market can be shown through several challenges, from the ‘connected parties’ rule, SIPP administrators and IFAs being reticent about P2P lending and P2P itself being labelled as a nonstandard asset with SIPP holders charged more for these investments, not to mention the FCA’s direction of travel for the sector.

”

These challenges are stalling take-up despite the obvious benefits of diversified tax-free investments which can achieve inflation-beating returns. Yet despite the barriers, several platforms still accept investments through the tax wrapper and have received SIPP money with minimal marketing of the product. The P2P SIPP market may not have fully taken off to date, but platforms aren’t closing the door on SIPPs just yet. Peer2Peer Finance News understands that Kuflink is working on a SIPP product, while Property Bridges is looking into accepting SIPP investments and Lendwise chief executive Rishi Zaveri says it “makes sense to offer this in due course”. In addition, Relendex is preparing to enter the SIPPs market a year from now through its new associated company Farringdon Portfolio. The next generation of SIPPs couldn’t have arrived at a better time. Low interest rates and rising inflation have encouraged many investors to look at their pension portfolio with fresh eyes, and P2P lending platforms have a strong track record of delivering inflationbeating returns even during a global pandemic. While obstacles remain, the story of P2P SIPPs is far from over.

Be Prepared. Plan ahead and mitigate risk. BTG Advisory can help. Tackling government backed loan fraud is going to be an enormous challenge for lenders, with the difficult task of identifying legitimate loan defaults from deliberate fraudulent activity. It will be key to implement prudent debt recovery and restructuring strategies to sensitively address this issue.

If you would like to discuss how we can help or have an informal discussion, please contact:

BTG Advisory can assist. We have the expertise and knowledge to work closely with lenders to review loan portfolios, devise strategies and advise on solutions to manage the risk of fraud and improve recoveries.

T: 020 7516 1513 E: gshankland@btgadvisory.com

Sorca McGeown T: 020 7516 1526 E: smcgeown@btgadvisory.com Gary Shankland

Offices across the UK. www.btgadvisory.com BTG Advisory LLP, a limited liability partnership, registered in England No: OC319336. Registered office: 340 Deansgate, Manchester, M3 4LY.

PROMOTED CONTENT

Clawing back BBLS fraud

ENDERS HAVE AN enormous challenge ahead to parse out legitimate loan defaults from a spiralling number of instances of fraud among the taxpayer-backed coronavirus loan schemes. Fraud risk was identified as high in the design of the schemes, particularly under the bounce back loan scheme (BBLS), with the speed of access to funds prioritised over due diligence. For example, under BBLS, credit and affordability checks were omitted, and borrowers were allowed to self-certify loan application documents. This scheme design ensured far greater demand than anticipated by the Treasury, with £47.4bn of loans across 1.6 million facilities approved under BBLS, according to data from the British Business Bank. The government does not have definitive data on how much loan demand resulted from opportunistic company directors capitalising on the availability of finance with no credit and affordability checks. However, much of the suspected fraud is concentrated among ‘micro’ borrowers, defined as companies with a turnover of less than £632,000 per annum and 10 employees or fewer. Accredited lenders are responsible for fraud management and are required to conduct stringent counter-fraud due diligence, supported by post-scheme implementation coordination between fraud prevention services, fraud bureaux, HMRC and lenders. One alarming indicator of potential fraud has been the huge spike in the number of companies that applied to be struck off the

Companies House register in the first quarter of 2021. According to Companies House data, strike-offs increased by 25 per cent year-onyear to 34,191 in the first three months of 2021. It raised alarm bells that unscrupulous company directors were registering a new company to secure a governmentbacked loan, supported by fraudulent documentation. However, lenders do have specific powers to support loan recoveries from insolvent borrowers. For example, lenders can object to borrowers’ voluntary strike-off applications by filing a simple form with the Registrar of Companies, where an insolvency event occurs, and can exercise a “right of offset” over any credit balances held by insolvent borrowers (which provides authority to directly take money from a borrowers’ bank account). In voluntary liquidations, lenders can use their voting power to ensure an insolvency practitioner of their choice is appointed to carry out an investigation into the conduct of the borrower and its directors in the lead-up to insolvency. In cases of suspected fraud, lenders can apply through the courts to issue a winding up petition; this is typically reserved as a last resort after a borrower has repeatedly failed to repay debts and has ceased communication. To support fraudulent debt clawbacks, the

government granted new powers to the Insolvency Service in May to investigate directors of dissolved companies and identify companies that have remained dormant since receiving a coronavirus loan. The government provided a 100 per cent guarantee to BBLS lenders, but this does not remove the lenders’ duty to take reasonable steps to recover money from defaulting borrowers. Accredited lenders are expected to exhaust recovery options before turning to the Treasury for compensation on defaulted loans. How easy the recovery process will be depends on how the loan proceeds were deployed, how they interact with existing balance sheet loans and whether borrowers undertook a corporate restructuring after receiving loan payments. To its credit, the government moved quickly to support UK businesses that suffered cash flow difficulties after national lockdown measures were introduced. The government’s rapid response protected viable businesses and saved jobs, but the expeditious roll-out has ensured a messy loan recovery cleanup process that may take years. If you would like to speak to one of our team about your Covid loans and discuss your options, please contact Sorca McGeown at smcgeown@btgadvisory.com or Gary Shankland at gshankland@ btgadvisory.com.

PROFILE

Taking initiative

Initiative Ireland’s chief executive Padraig W. Rushe talks to Marc Shoffman about the Irish peer-to-peer lending market, solving the housing crisis and the platform’s overseas growth plans…

HE HOUSING SUPPLY shortage gets plenty of press in the UK but it is an issue faced by our neighbours in Ireland as well. Irish peer-to-peer property lending platform Initiative Ireland is looking to fill the gap and help investors meet not just demand for homes, but to ensure supply goes to buyers who genuinely need somewhere to live. Its model, focusing on sustainable private, social and affordable housing schemes, has attracted backing from major financial institutions including Goldman Sachs. Chief executive Padraig W. Rushe – who has held senior risk and commercial management positions at Ulster Bank, GE Money and Bank of Ireland – explains how his platform can help solve the country’s housing crisis. Marc Shoffman (MS): What gap in the market is Initiative Ireland filling? Padraig W. Rushe (PR): We finance the delivery of social and affordable housing by funding developers and housing associations. There was a 48 per cent shortfall in supply last year versus annual new housing requirements. After a decade of undersupply, the reality is we need supply to more than double to address the housing crisis and compounded shortfall from the past 10 years. We're aiming to support a 16 per

cent increase in supply over the next three years. MS: Do borrowers in Ireland know there is an alternative to banks? PR: We've been working with developers since 2015, building a network of repeat customers. However, we've always been a boutique finance partner. This year, we secured backing from institutional partners and banks, which give us capacity to lend €900m (£760m) over the next three years. The challenge for us now is ensuring that every developer nationwide understands that there is not only an alternative to the banks, but that Initiative Ireland may be a far more suitable partner.

MS: Why is there a lack of suitable property supply? PR: Access to flexible finance is key but the housing crisis in Ireland doesn't just stem from that. While supply has fallen drastically behind demand, planning approvals have had a similar shortfall. There have been some efforts over the last five years to fast-track the planning process for large scale developments but developments below 100 units have been left behind, without reform. Disruption to supply chains and rising costs are a factor. Delays in utility connections are creating bottlenecks but the number one issue is access to skilled labour. During the recession, Ireland saw an exodus of skilled construction

PROFILE

labour. There is a significant opportunity for construction firms in the Irish market. MS: Are first-time buyers’ property aspirations too high, do they try to purchase larger properties too early? Is there anything wrong with renting? PR: First-time buyers are subject to strict borrowing limits in Ireland. They can borrow up to 90 per cent loan-to-value but they also cannot borrow more than three times their household income. This means that the purchasing power of many households is capped below the cost of construction, locking them out of the market and forcing them to rent. With supply of new housing being low, so too is supply of rental properties, which has seen rents sky rocket along with rates of homelessness. That's why we're focused mainly on financing social and affordable housing, as a way to rebalance the scales of supply to meet the urgent social need. MS: How can P2P and alternative lenders help tackle the housing crisis? PR: We see P2P and alternative lenders as playing a key role in stabilising the market. It's important that they're governed and managed by teams who understand the market and have proven lending track records. In past cycles we've seen firms enter Ireland without understanding the market, doing more harm than good before leaving again. People often talk about the democratisation of finance, we believe in the responsible democratisation of finance and there is a big difference. MS: How will the Goldman Sachs

backing help your business? PR: Through our joint lending venture with Fairfield Real Estate and Goldman Sachs, we're able to lend up to €900m over the next three years. That is a game changer for us and for Ireland as a whole. MS: Are you seeking further institutional funding? PR: We are open to engaging with additional institutional funding partners who share our passion for sustainable finance. We are also speaking with institutional funders who are interested in backing our growth through direct investment in the company over the coming years. Long-term, our goal is to become a leading finance provider across Europe and we understand the important role our partners will play in enabling that success. MS: What are your thoughts on EU crowdfunding and P2P regulations? PR: Regulation is welcome to promote market access and establish minimum standards. It needs to go further to ensure the fitness and probity of platforms themselves, with regard to their management. The art of lending or investing is not about getting money out the door but getting it back again at the other end. MS: Is the P2P lending market competitive enough in Ireland? PR: Ireland is a relatively small market. What we need are sustainable and reliable lenders. It's not a matter of volume but a question of quality. MS: How has the platform performed during the pandemic? PR: We've worked through challenges faced by our developers.

As an impact investor community, our clients lend for returns and social impact. They have been extremely supportive and understanding of the extra flexibility our borrowers have needed. We still have a zero-loss rate and a zeroenforcement rate. It helps that we're ultimately funding social and affordable housing supply, which not only benefits from a first legal charge but demand which has not been impacted materially by the pandemic. MS: Have borrowers faced shortages of building supplies as a result of the pandemic and Brexit? PR: There have been delays in some supplies but largely our developers have worked around them. Brexit has seen delays in deliveries due to come through the UK and indirect impacts to nonUK suppliers. At the same time, developers have shown incredible resilience in overcoming challenges. MS: What is your focus for the future? PR: As an environmental, social and governance (ESG)-focused finance and investment specialist, Initiative Ireland is working to become a trust leader in the Irish finance market. Although we're a private company, we are building partnerships with global leaders and national bodies to address urgent social and financial needs through innovative ESG finance products. We definitely see scope to expand our offerings to address other underserved markets and social issues like climate change, housing and healthcare. It's something I'm personally passionate about and I know I'm not alone.

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

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

JOINT VENTURE

Savers will be forced to become investors as inflation starts to soar

ISING INFLATION AND low interest rates will soon force savers to become investors in order to maintain the value of their money, Assetz Capital’s chief executive Stuart Law (pictured) has warned. While cash savers may be used to historically low savings rates, Law says that rising inflation will make bank savings even less attractive to consumers, as the impact of inflation erodes the value of their money. The Financial Conduct Authority has just launched a campaign to encourage people to consider sensible investments much more than they do at present, but this change will not happen overnight. “The savers and retired people of the world have suffered because of it but everyone else is hooked on the low interest rates,” says Law. “For interest rates to rise dramatically it would break the world – it would literally break the world as it is so reliant on low rates now after decades of benign conditions.” The Bank of England has hinted at an upcoming increase to the base rate, but Law does not expect this increase to be too extreme. For a start, the economy could not afford a drastic rate hike. According to one estimate, a rate rise of just one per cent would cost £25bn per annum in additional interest payments on the national debt. “And who’s going to pay for that?” Law asks. “The chancellor has made it quite clear that it will be us, the taxpayers.” If the base rate goes up to five per cent, as used to be typical before the

Global Financial Crisis, everyone from business borrowers to mortgage holders would suffer. But Law doesn’t think that the base rate rise will go anywhere near that far. “Most are now thinking that it will go up to one per cent in the next year and at most two per cent at some time in the future perhaps,” he predicts. “Unless we get forced into it by some major black swan event people shouldn’t be worried about a massive increase in base rates at this stage, nor expect their savings rates to recover because banks are known to only pass on a small fraction of base rate increases.” Meanwhile, inflation is expected to soar to four per cent over the next few months, and Law believes that the cost of living will continue to rise at a similar pace in the years ahead, to the detriment of cash savers. “I don’t see inflation moving out of the three to five per cent zone for a long time – possibly a few years,”

he says. “Let’s be optimistic – let’s say we see three per cent inflation for the next five years. That means your money is worth around 97 per cent of what it was the previous year. “Within five years your money will be worth just around 85 per cent of what it’s worth today. You’re going to lose 15 per cent of your capital over the next five years at three per cent inflation. And that won’t be materially countered by bank savings rate increases. “People are going to be forced into investing their money to avoid this and to try to beat inflation.” For years, Assetz Capital and other P2P lenders have made the case that in terms of risk, P2P sits somewhere between cash savings and stocks and shares investments. Law points out that last year, the stock market collapsed by tens of percentage points and people accepted it as a norm. P2P lending from most established platforms has not seen that volatility, and platforms such as Assetz have been delivering inflation-beating rates for years, including 2020. “The income we produce is way above that in savings accounts,” says Law. “There’s more risk but probably not as much risk as shares on the stock market. “Investors need to start asking whether they want to have the volatility of the stock market, a lack of income from a bank account with huge security, or do they want to take a moderate level of risk and invest a sensible sum with a proven platform? P2P has a place in a balanced portfolio.”

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