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HCG Funds
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Chris Laverty
Partner, Head of Financial Services Restructuring and Insolvency T +44 (0)20 7865 2302 E chris.m.laverty@uk.gt.com
Andrew Charters
Partner T +44 (0)20 7865 2321 E andrew.charters@uk.gt.com
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Resilience is the key to Covid survival
Operational resilience has never been more important for the peer-to-peer lending sector, says Chris Laverty, partner and head of financial services restructuring and insolvency at Grant Thornton
PEER-TO-PEER LENDING operational functions that should be platforms must focus on tested for their resilience. their operational resilience “Platforms need to consider the in order to effectively serve both people within the business, and borrowers and investors and thereby their ability to work remotely and secure their long-term future, continue to do their jobs normally,” Chris Laverty, partner and head of she says, adding that they should financial services restructuring and ensure that their usual funding insolvency at Grant Thornton, has channels are able to withstand the warned. pressures of the pandemic.
The Covid-19 pandemic has Laverty also highlights the created a “massive test” for importance of checking in withfinancial services firms, Laverty third party contractors that are believes. However, there are a few important to the platform, to review things that P2P lending platforms their corporate resilience. can do to ensure that they survive P2P platform because borrower “We've heard of cases where the disruption of the coronavirus performance might be impacted, third-party contractors have let pandemic. and it might go on to affect your platforms and other lenders down
“It's essential to shore up the secondary market,” says Laverty. because they didn't have sufficient health and sustainability of the “A lot of P2P platforms run a capability for their own staff to do platform,” says Laverty. “This is a vibrant, robust secondary market remote working,” she adds. time when you should be actively where their investors are trading IT is another crucial area that testing the resilience of your loans. And if you're not able to cannot afford to be overlooked, business, identifying trigger points provide up-to-date information while cyber risk should be a priority and putting robust governance on the borrower, then you’re not for any business which relies on procedures in place for when only looking at current issues that remote working and IT solutions. tolerances are breached. To do this affect your business, but ultimately Platforms may be tempted you have to look at each and every longer-tail issues on borrower to think that they have already important driver of your business.” performance, existing borrower completed their resilience planning
The primary concern for all P2P profile or borrower acquisition that before the pandemic, as it was a key platforms should be the investor, might affect the future sustainability focus for the Financial Conduct she adds. Those platforms which of the platform. Authority in 2019. However, have chosen to increase their “My focus would therefore Laverty cautions against that. lending have a duty of care to their be on the borrower value to the “Resilience planning needs to be investors to ensure that they will investor,” she adds. “But I would an ongoing process, especially given be able to recover borrowed funds. suggest that operationally most that so much has changed in the Laverty suggests that investor people are aware that their focus markets as well as the way we all dissatisfaction could result in many should be on keeping their current work,” she says. lenders leaving the platform, which borrowers and performance levels “In the short term, it's all about could create a liquidity squeeze that to a point where investors are sustainability and ensuring that can have long-term consequences. staying with the platform.” your operational and financial
“That's a key concern for a Laverty goes on to list other resilience remains intact.”
The next evolution
Consolidation, public listings or platform collapses – what does the ‘new phase’ of P2P lending involve? Michael Lloyd investigates…
THE PEER-TO-PEER
lending sector has undergone many changes since the launch of Zopa in 2005.
Against a background of low interest rates, higher demand for credit solutions and ongoing economic uncertainty, the P2P sector is entering a new phase of its evolution – one which will almost certainly involve consolidation.
The pandemic and subsequent economic downturn has already taken a toll on P2P platforms, with concerns ranging from higher defaults, to fewer new investors, to the challenge of working remotely for a prolonged period of time.
As a result, some platforms have opted to wind down, scale back, or pause new lending. And of course, this has led to new rumours around consolidation. But that is not the only change set to impact the P2P sector in 2021 and beyond.
“We’re about to go into a new phase for P2P lending,” says Daniel Rajkumar, managing director of Rebuildingsociety.
“Since the Financial Conduct Authority (FCA)’s postimplementation review, we have a better, new regulatory standard for P2P.
“And if capital is allocated appropriately with the right risk analysis, and platforms are carefully
operating with the phases of the economic cycle, P2P has a really good opportunity to support the economic recovery and could become one of the best performing asset classes of this decade.”
With the coronavirus crisis going on for longer than expected and sector instability as some platforms pause their lending, it is a precarious time for the industry. And loss-making P2P lenders without good portfolio management and controls could very easily end up in difficulty.
“There has been a substantial reduction in the number of platforms and there will continue to be a steady trickle of collapses, but not in great numbers,” says Stuart Law, chief executive of Assetz Capital.
“We can see the market seems to be holding and it looks like the sector has a future.”
Despite this, the P2P lending sector has so far been resilient, with many platforms still generating market-beating returns to investors and some even flourishing while traditional lenders have tightened their criteria.
The consensus is that the better platforms will survive the test of Covid-19, but it will ultimately lead to consolidation and an improved reputation for the sector.
“I think there will absolutely be more consolidation in the marketplace,” says Atuksha Poonwassie, managing director of Simple Crowdfunding.
“P2P is, and will continue to become, more of a recognised finance tool. I think the future of P2P lending is massive and even more so because of a poorer 2020.”
The majority of platforms are
And Starling Bank chief executive Anne Boden revealed at the LendIt Fintech Europe 2020 virtual conference in October 2020 that the bank will “probably” acquire a
“I think the industry could become 10 times bigger over the next decade” optimistic about the future of the lending platform within the next sector and believe there will be year or two as it seeks to grow its more partnerships and acquisitions small- and medium-sized enterprise fuelling this consolidation. This loan originations. seems to be the case already with P2P platforms are attractive to Metro Bank acquiring P2P lending banks due to their proprietary platform RateSetter in September, technology and lending volumes. This for an initial consideration of has already resulted in a number of £2.5m, with up to £9.5m to be paid partnerships over recent years. out after the completion of the deal. Starling has a forward flow
arrangement with Zopa and a deal with Funding Circle to lend £300m through the coronavirus business interruption loan scheme (CBILS) to small firms through its platform.
“More platforms will be bought by banks,” predicts Neil Faulkner, managing director at P2P analysis firm 4th Way.
“P2P lending platforms will be attractive targets for banks and the entrepreneurs who set them up will all be considering sales to banks as a possible way to cash in.”
Faulkner adds that he does not expect to see formal mergers between equals, but the acquisition of loanbooks from platforms that have chosen to wind down.
“Some will see the opportunity that P2P lending offers and enter the market,” says Simple Crowdfunding’s Poonwassie.
“And once they do, it might make sense to work with an existing platform.”
However, Mike Bristow, chief executive of CrowdProperty, points out that mass consolidation has not happened yet.
“Everyone has talked about consolidation for years, but it has not really transpired,” he says.
“It will happen by weaker players not being able to continue so there will be fewer platforms.”
Covid-19 is certainly weeding out the weaker players in any sector, but the same can perhaps be said for regulation.
Towards the end of last year,
the City regulator introduced a raft of new measures including an appropriateness test, a cap on retail investments in P2P and stricter wind-down plans for platforms. Some industry stakeholders believe that the FCA will introduce even stricter regulations which will make it harder for smaller platforms to survive.
It has been suggested that the FCA will clamp down on P2P investment accounts that have been marketed as ‘easy access’ but prevented lenders from withdrawing their funds during the pandemic.
“P2P regulations are still in their infancy, and the regulator has learnt a great deal over the years as to what works and what does not work,” says Jonathan Segal, partner and head of alternative finance at law firm Fox Williams.
“I think we will see a tightening up of regulations in the short-term.”
Lee Birkett, founder of JustUs, believes there will be a potential increase in capital adequacy requirements for platforms.
“We basically do nine tenths of what a bank does and have a more robust financial model,” says Birkett. “Not much needs changing.”
However, Assetz Capital’s Stuart Law argues that this depth of regulation would not be introduced in the P2P sector as banks adhere to much more detailed, stricter rules.
“Banks are so dangerous that the
level of regulation they have is off the scale compared to other firms,” he says.
“They borrow 90 per cent of their capital so need incredibly detailed and controlling regulation to ensure they’re safe enough. P2P was set up to be a simpler structure and is nowhere near as risky.”
Stricter regulations have increased the costs of authorisation and compliance, so industry stakeholders believe there will be fewer new platforms entering the sector.
Furthermore, increased competition in most segments of the lending market mean that existing platforms are having to work hard to grow loan originations and attract new investors.
But as long as platforms continue to generate attractive returns, the consensus is that more money will flow into P2P.
Mike Carter, head of P2P platform lending at trade body the 36H Group, points out that the larger platforms such as Assetz Capital, Funding Circle and Zopa are always evolving their business models and attracting more institutional money, showing the strength of the sector.
“It’s an important strategic step in the development of the sector: having proven their ability to originate high quality customers, their diversification into institutional funding sources.”
Meanwhile, Stuart Law believes the P2P sector will follow the normal curve that most markets follow, which he describes as initial excitement followed by massive growth, which then slows when reality sets in before good ideas can lead to an expanding sector.
“I think the industry could become 10 times bigger over the next decade,” he says.
“If the sector continues to improve it could become very large in years to come. But if it continually delivers
“Everyone has talked about consolidation for years, but it has not really transpired” they can diversify their funding disappointment and failures it would sources and offer a wider range of likely struggle to grow and die away. products while retaining their P2P The future is in the hands of each platform and ethos at the heart of individual company in the sector. how they do business,” says Carter. “There has been a substantial
“A good example is Zopa’s recent reduction in the number of launch of its credit card, having platforms, which will continue to secured a bank licence. Attracting a degree and bigger platforms will institutional money to the sector continue to move in a direction of or obtaining a banking licence institutional capital. I think this will is a very strong validation of the result in a smaller, well-functioning quality of their P2P business market with quality firms that models and will result in stronger deliver a good service and return to businesses going forward.” investors throughout the cycle.”
Industry onlookers also believe In the meantime, the P2P sector that retail investors will play an is at the mercy of the economy, the important role in the future of regulator and the public’s appetite for P2P, via savvy platforms that investment and borrowing. understand the importance of One year from now, consolidation diverse funding sources. may have resulted in fewer platforms
“Following the Covid-19 crisis and a higher quality of products for we expect retail P2P to resume its borrowers and lenders, with more growth path as platforms restore institutional capital and a growing their lending,” says Carter. base of retail investors.
“So, we expect this type of funding Whatever the next phase of P2P to grow over time, but it will become lending might bring, platforms a smaller proportion of total funding are not going to stop innovating, by platforms as a consequence of evolving and growing.
