Peer2Peer Finance News May 2021 by Alternative Credit Investor

>> 10

INNOVATION DURING COVID

There’s plenty going on behind the scenes

SHIFTING SANDS

>> 18

The changing P2P consumer lending market

Plend bosses on launching a P2P firm during the pandemic >> 16

ISSUE 56 | MAY 2021

Working group established to address the ISA manager responsibility gap EXCLUSIVE A WORKING group has been established to improve HMRC’s ISA manager register, in response to the Gloster report’s call for better engagement between regulatory bodies. Peer2Peer Finance News understands that the new director-led steering group, which is made up of HMRC, Treasury and Financial Conduct Authority (FCA) representatives, will aim to improve intelligence sharing between HMRC and the City watchdog. This has already resulted in new intelligence being shared and acted on. HMRC’s ISA manager list has been updated, with more than 30 companies removed from the register and new information added to make it easier for investors to understand. Dame Elizabeth Gloster

led an independent review into the supervision of mini-bond provider London Capital & Finance (LCF) prior to its collapse, which was published late last year. The report highlighted a number of regulatory failings which may have contributed to the LCF crisis, including a lack of engagement between the FCA and regulated entities. Recommendation 10 from Dame Elizabeth Gloster’s report specifically stated that “HM Treasury should consider addressing the lacuna in the allocation of ISA-related responsibilities between the FCA and HMRC”.

While the FCA does not have direct responsibility for overseeing ISA regulations, firms must be FCA-authorised to be eligible for ISA manager permissions. In March, Peer2Peer Finance News reported some anomalies among the Innovative Finance ISA (IFISA) managers on the HMRC list. Several platforms were still listed as having IFISA permissions, even though they had exited the space, and more than a dozen companies continued to have IFISA permissions despite the fact that their business was no longer a going concern. By 19 April, there were

82 companies listed as having IFISA permissions, down from 91 companies at the end of March. The working group appears to have removed IFISA permissions from 11 companies: Access Commercial Finance, Crowdinvesting B.V, Formax Credit, Gallium PE Depositary, Go 2 Business Loans, Haich and Associates, KapSecure Asset Management, London and Eastern Property, NKK Finance (trading as Flender), Transcendent Real Estate and UK Bond Network. Two new IFISA permissions were issued, to Assetz Exchange and >> 4 Kapwealth.

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 UK’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 £1.95 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

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.

ame Elizabeth Gloster’s review into the regulation of collapsed mini-bond provider London Capital & Finance (LCF) was published late last year and I’m pleased to see that its findings are continuing to have a positive impact on the alternative finance sector. Our exclusive front page story reveals that a working group made up of HMRC, Treasury and Financial Conduct Authority (FCA) representatives has been established to address the ISA manager responsibility gap, in direct response to Gloster’s recommendation. Loyal readers of Peer2Peer Finance News will know that this is an issue we have been investigating for a while, as it is fully in the interests of P2P platforms and investors to have access to an up-todate ISA manager list. While the FCA does not regulate ISA permissions per se, as any P2P platform will know, you need to be FCA-authorised before you can gain ISA manager status from HMRC. Considering the size of the overall ISA market and the familiarity that consumers have with the tax wrapper, it is of great importance that intelligence is shared between these bodies to maintain the credibility of the industry. Speaking of LCF, another of our news stories quotes a lawyer representing the firm’s bondholders, who says that the Treasury’s compensation is likely to be a one-time event. This may be disappointing news for P2P investors in collapsed platforms such as Lendy and FundingSecure. Hopefully enhanced regulation and actions taken from the Gloster report's findings will help mitigate the risk of similar scandals in the future.

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 HMRC has also added a note to some of its listings to indicate where a company has gone into administration. However, Lendy and FundingSecure are both still listed as having full IFISA permissions, even though these companies have been shuttered for more than a year. Peer2Peer Finance News understands that Lendy never actually launched its IFISA product, and never had any ISA funds under management. Peer-to-peer lending platforms have welcomed the update, saying that an accurate and updated list of IFISA managers will help to build trust and weed out any misinformation that could reflect badly on the P2P sector.

“If you provide a register it should be as up to date as possible to prevent any misleading communication,” said Filip Karadaghi, chief executive of LandlordInvest. “Most of the recommendations [from the Gloster report] now seem so obviously sensible, you wonder why the FCA never did many of these things before; they’re generally positive and sensible developments," added Thomas Donegan, regulatory partner at Shearman & Sterling, the law firm which represents LCF investors. “There ought to be an 'ISA manager status' application process for FCA-authorised firms. Regulated firms making even minor changes to

their business models in other ways are asked to produce thick reems of documents and forms for the FCA, which are subject to extensive review and approval processes. But for ISA manager status, at least for firms already approved by the FCA like LCF, they just filled in a short form, sent it to HMRC and became ISA regulated.” A spokesperson from the UK Crowdfunding Association (UKCFA) said that the organisation had questioned HMRC on the ISA manager list being out of date. “The Gloster report highlighted a lacuna between the FCA, Treasury and HMRC on the registration of ISAs

and the register of ISA managers,” the UKCFA spokesperson said. “They have had to take on board a closer inspection of whether that register is up to date. There were ISA managers no longer offering ISAs or had a change of permissions and that was no longer reflected on the register, there was a lack of focus making sure that was up to date and accurate. “That was something the UKCFA raised to HMRC – us and a number of others queried some of the names on the register. “I think the process and monitoring of who was an ISA manager needed to be improved and hopefully now following the Gloster review it will be.”

Government scales up fintech support THE UK government has unveiled a number of new support measures for the UK’s fintech industry, signalling its commitment to the sector in the postpandemic economy. Speaking at UK Fintech Week in April, Chancellor Rishi Sunak announced a new Financial Conduct Authority (FCA) ‘scale box’, a Centre for Finance, Innovation and Technology and a taskforce into a digital

centralised currency. The FCA ‘scale box’ will create a “one-stop shop for growth stage firms”, in an effort to improve the long-term prospects for fintech firms. These new measures were initially outlined in the Kalifa Review, which was published in February. During UK Fintech Week, the review’s author Ron Kalifa said that “we don’t have a problem with

regard to start-ups in the UK, we have a problem with scale-ups.” He welcomed the new government efforts, but said that more could be done to ensure the success of UK fintech. He called for the government to create a digital finance package that designs a new framework for fintech, and to use institutional capital to create a fintech growth fund worth £1bn.

“We have a huge opportunity to make a transformational change for the UK,” Kalifa added. “It’s going to be about financial inclusion, innovation, and that’s what the fintech sector represents.” According to data from Innovate Finance, investment into the UK’s fintech sector hit a record £2.5bn in the first quarter of 2021 – a rise of 331 per cent year-on-year.

NEWS

LCF redress may be only time the Treasury steps in for investors THE TREASURY’S compensation for London Capital & Finance (LCF) bondholders is likely to be a unique event, experts say. It emerged last month that the Treasury will pay out approximately £120m to around 8,800 investors who lost money when the mini-bond provider collapsed in 2019. A lawyer representing LCF bondholders in their battle for compensation from the Financial Services Compensation Scheme (FSCS) said the Treasury will likely never again step in to repay investors in a collapsed firm. Thomas Donegan, a regulatory partner at Shearman & Sterling, said that LCF was an exceptional case, as it was a Financial Conduct

Authority (FCA) regulated firm issuing very unusual bond instruments, holding just £50,000 of capital against a £200m book of exposures. As far as he is aware, the FSCS has never previously refused to compensate ISA investors in a failed FCAregulated firm. “LCF had an FCA licence as a broker and adviser, but purported to avoid FCA-regulation of its business as a deposit-

taker or dealer by issuing bonds which to all intents and purposes were pretty standard looking products, except for a quirky and unusual non-transfer provision,” said Donegan. “The non-transfer provision which supposedly supported LCF's regulatory structure has now been found in a judicial review case to be void and unenforceable. “Finally, LCF is not a case of investment loss

and reduced returns – the public's money has simply all disappeared under the FCA's nose. All this goes to the unique nature of LCF as a situation. “Several of the other recent financial scandals involve unregulated firms, or regulated firms out of scope of the FSCS such as payment services firms, which the government will unlikely want to bail out. And failures of authorised firms are expected to be covered by the FSCS. So, I do not see this sort of thing happening very often.” More than 11,000 LCF investors were left with £237m in losses when the mini-bond provider entered into administration in January 2019.

Non-bank lenders awaiting access to CBILS successor scheme THE GOVERNMENT’S new emergency loan scheme has already come under fire for its slow accreditation of alternative lenders. The recovery loan scheme (RLS) launched on 6 April, replacing the coronavirus business interruption loan scheme (CBILS), bounce back loan scheme (BBLS) and coronavirus large business interruption loan scheme (CLBILS), which all ended on 31 March.

It was thought that alternative lenders were part of the preliminary conversations for the RLS, after its preceding schemes attracted ire for slow accreditation of non-bank lenders. However, there appears to be a similar issue this time around. High street banks have already been accredited for the RLS while many alternative lenders have not, such as Funding Circle and Assetz Capital which were both

accredited for CBILS. Simon Cureton, chief executive of business finance aggregator platform Funding Options, has questioned why there has been yet another delay in accreditation for alternative lenders. “Conversations between the government and the community are taking place which suggest there are a significant number of alternative finance lenders bottlenecked within the accreditation

pipeline,” he said. “This should not have been an issue, given the RLS was announced at the start of the year and the same lenders still awaiting accreditation have been working with the British Business Bank for months facilitating loans via CBILS.” A British Business Bank spokesperson said all CBILS lenders were invited to apply and a full list would be regularly updated online.

JOINT VENTURE

Invest & Fund prepares for growth spurt After weathering the Covid-19 pandemic, Invest & Fund is ready to ramp up its growth plans, says the company’s chairman Robert Burgess

ROWTH IS ON THE horizon for Invest & Fund, after the peer-topeer property lending platform weathered the Covid-19 crisis with an impeccable lending record. As well as supporting its borrower community, Invest & Fund has remained open to lenders throughout the past year, and has continued to pay out interest rates of between 6.5 and 7.5 per cent to its investors. “We didn't close our doors,” says Invest & Fund’s chairman Robert Burgess. “Indeed we were one of the few platforms to have a fully functioning secondary market throughout. “We have come out of the pandemic with a totally clean credit book, no losses of capital, no losses of yield, and no distressed cases. And we've worked with many property developers that have actually completed sites and gone on to make sales.” 18 months ago – just before the start of the pandemic – Invest & Fund started to lay the foundations for its future growth. Over the next 12 months, the platform plans to further upgrade its technology and scale up its capacity. A series of new hires will soon be announced, particularly within the business development team and the senior team. Burgess says that the expertise and experience of Invest & Fund’s staff has been essential over the past year. During the pandemic, the platform’s credit team has worked

very closely with borrowers to make sure that they were supported. The company’s ability to survive the Covid downturn proves the maturity of the P2P sector, Burgess says. Now, Invest & Fund is well placed for strong and sustained growth over the coming months. “We have great credibility with developers,” says Burgess. “They know how we behave during challenging periods. And because of our proven credit credentials, we can now take advantage of the opportunities that always come out of these periods. We're unencumbered and in a good place to do that.” The pandemic has “shaken out the P2P market” says Burgess. This has led some players to leave the P2P space, while others have raised

their profile and credibility during a trying time. “P2P is starting to come onto people's radar as a very credible alternative,” says Burgess. “The pandemic has increased the sector’s profile. In times of high pressure, there is always the chance to stand out.” Invest & Fund is certainly ready to stand out. It has a highly specialised credit analysis division, which is “people based, knowledge based, and experience based”, says Burgess. But investments in new technology are expected to streamline the company’s back office processes in the year ahead. Over the next six to nine months, Invest & Fund will introduce a whole programme of automation in those areas where there doesn't need to be human action. The platform is also exploring new partnerships and seeking to expand its investor base to include both institutional and retail investors. However, Burgess is quick to add that Invest & Fund will always cater to retail investors. “We're in a great place and we are continuing to grow rapidly,” he adds. “We know there is huge demand, but we are also helping investors understand the quality of the asset class for their business models, because it's stable, highly secure, and comes with very low volatility. “For us, it very much feels as though all the moons have aligned. We are ready for safe, rapid growth.”

NEWS

Charlotte Crosswell says fintech has proven the future is led by tech OUTGOING Innovate Finance chief executive Charlotte Crosswell has said fintechs have shown the future is technology led, after the sector adapted well to Covid. Crosswell (pictured), who stepped down from the helm of the fintech trade association on 1 May to be replaced by Janine Hirt, said it was remarkable how quickly the fintech sector assessed the situation Covid presented, regrouped and began to push ahead once again. Speaking at UK Fintech Week last month,

Crosswell highlighted how fintech innovations are embedding themselves into other sectors, for example, with big data and artificial intelligence, and will continue to do so in other parts of people’s lives. Crosswell added that the UK financial services sector must continue to innovate and fintech must continue its journey to being truly tech led. “We often say that fintech was born from the global financial crisis of 2008,” she said. “The Covid crisis has had a similar jolting impact, setting the

stage for how the future of financial services can rapidly evolve and innovate, leverage best in class technology and dataled products and services. “I simply cannot give enough credit to everyone for their resilience, resourcefulness and

the speed at which they reacted to the challenge. “The world of financial innovation never ceases to amaze me, fintech was born from one crisis and has proved itself in another. It has become a leading light in the UK’s technology story, something we can be proud of, and we must grasp that opportunity to challenge ourselves as we look to economic recovery. “Our future post Covid is clearly technology led and fintech is showing us that future. I personally cannot wait until that chapter.”

Fintech jobs market shows signs of Covid recovery THE FINTECH jobs market has “gone bananas” as lockdown restrictions have been eased, a recruitment expert has claimed . Many fintech firms, including peer-to-peer lenders, put hiring plans on hold last year due to the coronavirus pandemic. But Tracy Fletcher, managing director of recruitment firm Campbell & Fletcher, said renewed economic confidence thanks to the vaccine rollout has prompted businesses and bosses to start hiring again. “March to Christmas last year was so quiet but

now it has gone bananas,” she told Peer2Peer Finance News. “It has been helped by a more relaxed attitude towards working outside the office. “Clients are becoming more flexible in their approach to talent and that gives us a wider candidate pool. “A lot of the recruitment freeze for P2P lenders was because businesses were accessing emergency lending but now the more normal routes to finance have reopened. “The world feels like it’s getting back to normal and that is

facilitating movement in the jobs market.” It comes as the Office for National Statistics estimates there were almost 16 per cent more vacancies in March 2021 compared with a month before across all job sectors. The data, based on listing on jobs website Adzuna, shows weekly vacancies in the financial sector were at 83 per cent of pre-pandemic levels. Henry Morse, associate director at recruitment consultants Robert Half UK, said the firm has seen a bounce back in business confidence. “This has been

mirrored on the candidate side, with more than half of all workers expecting a salary bump by the end of this year as well as a bonus, with freezes in both off the table,” he said. “For those looking to break into the fintech sector, don’t let a lack of industry-specific experience put you off making the transition. “Anyone who has the ability to programme, analyse and interpret complex datasets or has a track record of digitally-focused delivery is likely to be warmly welcomed into the industry.”

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

The hunt for yield has already begun Stuart Law, chief executive of Assetz Capital, explains that an economic boom is coming and where you put your money will matter

N ECONOMIC BOOM is coming, but investors may have to look beyond the banks if they want to benefit from it, says Stuart Law, chief executive of Assetz Capital. Over the past year, an immense amount of money has been injected into the global economy, and particularly into the UK. According to several analyses, many households have been able to save money during the pandemic, and by the summer there could be as much as £250bn of personal savings in cash in bank accounts. But keeping this money in cash savings may not be a fruitful option. “Inflation is likely to be on the up as soon as this year,” predicts Law. “But for various reasons, we do not believe base rates are going to budge very much at all. I would be surprised if we have base rates at two per cent in three years’ time even with sustained inflation well above target.” Rising inflation and low bank rates means that savers and investors will struggle to get a positive return on money which is being held in bank accounts, even while living through an economic boom. So where do these people go in their hunt for yield to counter the negative effects of inflation? “We are reaching quite a crescendo over the next two or three years where there will be an even stronger hunt for yield,

because inflation can be very dangerous,” Law says. “So I think we're going to see a very strong push towards investments and away from savings. “According to recent Aegon research, a huge 42 per cent of consumers would move out of bank savings accounts and into investments if faced with negative interest rates, to find a way of earning more money.” As a result, Law expects to see a pronounced shift from savings to investments in the coming months and years, and peer-to-peer lending is perfectly positioned to take advantage of this trend. “P2P has now been through a

cycle,” he says. “People want to see that. They want to know what it does to your defaults, to your losses and to your interest rates. And whilst investors have had a bit of a reduction in interest rates, that can also help more money to flow into the provision fund which may help to avoid losses.” What’s more, by investing in Assetz Capital, investors can play a key role in the rebirth of the UK economy and society, by supporting British businesses, housebuilders and also much needed care and supported living facilities. “We're not a bank, and we're not becoming a bank,” says Law. “We are able to support smalland medium-sized enterprises (SMEs) with a more flexible product than a bank might be able to offer, with a more personal approach and with real people on the ground. Our market is really dealing with the SMEs who have some security available and who just need to get some help in structuring the right loans. “People are going to be attracted to this as a proven asset class with the leading platforms,” Law adds. “We had a recession, and we've had some winners and losers. And I think the winners in any industry will benefit tremendously from the next cycle. “We would expect P2P lending to be a good home for people looking to put a bit of money into an investment producing a healthy interest rate.”

INNOVATION

Behind the curtains Platforms have used Covid to go backstage and innovate for compliance purposes. Michael Lloyd reports

EER-TO-PEER LENDING platforms are known for their innovation, but it’s still surprising how many new and varied developments are underway in the sector during the pandemic. When Covid closed theatres and postponed gigs, entertainers did not quit, but continued writing, practicing and rehearsing virtually to hone their skills. It seems the P2P lending sector is no different. Some product launches may have been delayed, but the innovation work backstage

continued as platforms used the crisis as a chance to look internally at how to improve. Products have still been launched, such as Proplend’s AutoLend 2 and Kuflink’s beta app, and some changes are being introduced for the sole purpose of meeting regulatory requirements. As well as taking stock to improve, platforms are perhaps being forced to innovate sooner than they would have due to a range of new compliance requirements and a changing economy, which is

increasingly going digital. This has led to a drive to make processes smoother and faster for borrowers, as well as looking further afield to the big flashing lights that are blockchain and cryptoassets. One P2P lending platform chief executive told Peer2Peer Finance News that it has been working on making it easier to onboard new customers, saying that it costs the same to onboard lenders investing £100m as those investing £100. “That can’t be right,” the platform owner says.

INNOVATION

“It’s very cumbersome at the moment. Regulatory proportionality has gone out of the window. There should be a risk-based approach to savings and investments.” To follow Financial Conduct Authority (FCA) regulation, by December 2019 platforms introduced appropriateness tests to quiz potential investors about their knowledge of P2P before investing. These are already in place on platforms’ websites, but whenever work is carried out, they need to be carefully maintained. Folk2Folk is investing in a new technology platform and will integrate its appropriateness test into the application process, embedding it as a seamless step as part of its new end-to-end technology. When onboarding new customers, platforms must also

comply with know your customer (KYC) and anti-money laundering (AML) regulations. Automation can aid these processes, either through platforms implementing this themselves, or outsourcing to a compliance software provider. Blend Network partnered with tech firm NorthRow last year to create a secure, compliant and fast client onboarding process to verify both the platform’s lenders and borrowers. Meanwhile, FutureBricks has automated the majority of its KYC and AML processes itself. These checks have become even more vital during the pandemic, with fraud ever prevalent during the crisis. For example, in February, a specialist police unit funded by the banking and finance industry announced it

had prevented almost £20m of fraud and arrested more than 100 suspected criminals in 2020, including several involved in Covid-19 scams. “Innovation on the technology front is a driving force at FutureBricks,” says Arya Taware, founder and managing director of the platform. “The company has automated a large part of its KYC and AML processes, with the technology and database access enabling the company to vet all its lenders instantly, and as part of this, highlight any particular red flags that would require further inspection.” Taware goes on to say FutureBricks is currently developing automated monthly reports that will offer an “at a glance” snapshot of an account

“ Blockchain and

crypto aren’t making waves, they’re making a tsunami

”

INNOVATION

for the client and an automated report creation system based on user base information to produce more detailed regulatory reports and construct more insightful management information on demand. “This level of efficiency will ensure we remain aligned with FCA requirements and are able to relocate our teams’ efforts towards further developing our service,” Taware adds. Money&Co has also conducted some recent innovation, driven by regulatory considerations. The platform has automated its client money reconciliation process, which means that it can be confident that everything balances daily, and it can provide daily reconciliations with ease should someone from the FCA want to see them. Similarly, software provider Katipult, which provides the technology for Irish P2P platform Property Bridges, including its new auto-invest feature, helps platforms with any audits including those from the FCA. As well as making the investor experience as slick and frictionless as possible, the firm has rolled out a full loan servicing capability to manage repayments. Its tech allows platforms to easily search and find data on their investors and

the end of the day if a client gets an audit, from the regulator or an internal audit, they have the information at their fingertips. They can pull up all transitions at a click of a button, with everything accessed easily on a cloud-based

“ Decentralised finance is already happening, that’s P2P lending in the crypto world”

transactions held on the cloudbased software. “That’s one of the big value things that gets overlooked by software purchases by groups,” says Brock Murray, head of global development at Katipult. “It doesn’t have the sizzle but at

system and standardised workflows are all built from an FCA viewpoint. “In terms of the methodology of verifying information disclaimers need to see, everything the regulator expects firms to do is inherent in the software, in terms of direct authorisation or working with

appointed representatives (ARs) you have software fully standardised.” To better supervise its ARs, P2P platform and principal Rebuildingsociety has analytics that feed into its risk register and key risk indicators giving live information. The platform is using some software for its risk register which integrates it with its project management system that prioritises tasks for different staff managers. “It lists different types of risks and who oversees the different risks and attributes who is responsible for what,” says Daniel Rajkumar, managing director of Rebuildingsociety. “It references different tasks and says who is responsible and is part

INNOVATION

another platform chief executive believes that everything that can be tokenised will be as blockchain solves the ‘trusted third-party’ problem. “Blockchain and crypto aren’t making waves, they’re making a tsunami,” says Lee Birkett, founder of JustUs and Moneybrain. “It’s the biggest economic revolution for 100 years if not more.” Katipult’s Murray says that cryptocurrency will allow for decentralised finance and cross-

code,” she says. “The advent of technology is yet within the realms of risk management, government involvement and regulatory frameworks.” Much of the technology that platforms use can be purchased off the shelf, but the next wave of innovation may well be in finding the ways to build trust and engagement within investors. Jatin Ondhia, founder and chief executive of Shojin Property

“ The advent of technology is yet within

the realms of risk management, government involvement and regulatory frameworks

of the work we’re doing to improve the risk management framework and AR oversight framework.” When speaking about innovation, buzzwords such as blockchain and cryptocurrency always seem to crop up. Platforms have been making inroads into these areas, from more consumers purchasing the cryptocurrency BiPs on JustUs’ sister platform Moneybrain; to the launch of Ablrate’s blockchainbased secondary market ASMX last year. And it seems that more and more P2P lenders are paying attention to this area. Money&Co is looking at using tokenisation for creating pools of assets that can be invested in by institutional investors, while

border investing with investors seeking yield in P2P and in cryptoassets. “Decentralised finance is already happening, that’s P2P lending in the crypto world,” he says. “You get investors from every country looking to get yield, the whole private debt markets can really learn from private finance.” FutureBricks' Taware says blockchain and crypto have potential benefits for property deals but the question rests on whether it can conquer mass adoption whilst still allowing for speedy transactions and meeting potential regulatory requirements. “It is interesting to consider the technology implications if these challenges were to be met: it could then explore the creation of digital identities in a property deal – that of investor and tenant, the adoption of smart contracts allowing traceability and automated property sales, and the ‘tokenisation of actions’ facilitating rentals with pre-defined

”

Partners, believes that platforms should collaborate to produce a centralised place where investors only have to sign in once to access many different platforms, likening it to people preferring to go to a shopping centre than one individual shop in order to access more options. “This is the direction the individual platforms have to take to bring alternative investments into the mainstream,” he says. “Collaboration will help to standardise the investment products making them easier to understand and therefore increase engagement with investors. This can only be done through collaboration.” P2P certainly did not stop innovating during the pandemic, and this innovation looks set to continue with the second act of the play likely to cover the endless potential benefits of blockchain and crypto. As the saying goes, the show must go on!

PROMOTED CONTENT

Ask about default policy

Platforms should be able to provide investors with a satisfactory default policy, as Kuflink’s chief executive Narinder Khattoare explains…

NE OF THE ISSUES that many peer-to-peer lenders don’t really like to discuss is what actions they will take if a borrower defaults on a loan. The Financial Conduct Authority’s (FCA’s) definition of a default loan is as follows: “A loan is in default when the borrower is past the contractual payment due date by more than 180 days (approximately six calendar months).” However, letting a loan reach that position is detrimental for the lender and particularly for the people who have invested in the loans. Some of the failures among now defunct P2P platforms happened because they took little or no action ahead of declaring a default. Inevitably, investors lost money. It is imperative to act swiftly in these scenarios in order to recover the money lent with minimal default and receiver fees and potential auction fees which eat into the equity of the loan. In some cases, it can wipe out everything. We allow a 30-day window on any loan that has not paid on the maturity date and is in danger of going into default. If the client does not pay towards the debt due or refinances the debt, we place that loan into recovery, so we can get our investor monies back as quickly as possible. In an ideal world, we would want to be out within three months, but that is not always the case as borrowers will look to delay matters by seeking a refinance (in

some cases too late) or finding a family member or friend to bail them out. In some cases, it is too late and borrowers can tend to blame us, the lender. In our case, we are in touch with borrowers 60 days, 30 days and in the days before the loan is due to be repaid, so they have ample time to take action. Therefore, it is surprising that many brokers who acted on the borrower’s behalf when the loan was originated cannot refinance out the debt from a short-term lender like us in plenty of time. It is vital for a lender to determine what the route out of a loan is when it falls due. It is our responsibility as a lender to manage money from investors actively from start to finish. Yes, some loans go bad and that is inevitable, but if the lenders like us have strong processes, underwriting

and collecting capabilities then we can usually nip potential problems in the bud by taking action at the first hint of trouble. This means there is space for those lenders in this market, but too many came in offering bigger rates of return but with flawed processes, and inexperienced individuals making key decisions which gave them and the industry a bad name. I have been saying this for years, but as the industry matures, lenders with poor processes will vanish due to their inadequate systems and lack of experience when underwriting and processing deals. My advice for any would-be investor is to ask questions of the platform you are thinking of supporting. How do they handle defaults? If they can’t explain their procedures to your satisfaction, take your money elsewhere.

PROFILE

A pandemic-inspired platform James Pursaill, chief technology officer and Rob Pasco, chief operating officer at Plend tell Kathryn Gaw about the challenges of building a brand-new peerto-peer lending platform during a pandemic

HERE ARE A LOT OF reasons why it might be challenging to launch a new peer-to-peer lending platform, but add in a global pandemic and a slew of national lockdowns and it may seem like an impossible task. Yet that’s exactly what 33-year old James Pursaill and 27-year old Rob Pasco have done. During an unusually tough year, Pursaill and Pasco have built a grassroots P2P offering which uses open banking and a modern credit checking process to connect individuals seeking funding with investors seeking yield. Plend will officially launch later this year, targeting returns of 10-11 per cent. Chief technology officer Pursaill and chief operating officer Pasco explain how they built a new kind of P2P platform against all odds. Kathryn Gaw: Why did you decide to set up the platform? Rob Pasco: When I first came to the UK, I faced many of the same problems other ex-pats do, in which they don’t have a credit history. So because of this thin credit file, the ability to access affordable credit was very difficult. My first credit card was 50 per cent APR, even though I had a career in the City of London and a good salary. My career progressed, but my credit score never did. It was extremely difficult to access certain

Rob Pasco

parts of life without affordable credit. It’s very much a privilege in this country. I did some research and realised that the number of people in the same situation was quite significant. That’s where we decided to set up Plend and push towards a solution which doesn’t just provide affordable credit, but allows other people to back those people with affordable credit, so it’s a real social lending aspect. KG: How did you guys meet, and what led to your decision to go down the P2P lending route? RP: I started Plend last year. I was always looking at some kind of debt consolidation product, but what that would look like, I wasn’t quite sure.

James Pursaill

Jamie and I met through our girlfriends, and from that, we started talking about the injustice of credit scoring. As we talked to more people and built our network and looked for a solution, the social lending element became quite prominent and that’s where the P2P aspect came from, allowing retail investors to get involved. It was also a way in which we could brand ourselves as being an impact-led business, which is what we wanted to do. James Pursaill: I’ve always been really excited by tech that breaks new ground and has a positive impact at the same time. When we started talking about

PROFILE

changes in the investment scene, we realised that our friends who did have savings didn’t just want to put it into a savings account, they wanted a better rate of return, but they were also looking to make a difference with their investment. We started talking about how people have this misconception that businesses or projects are somehow less risky than people. If you get the credit scoring right, open banking has opened up a whole new tool kit to score affordability. We were really eager to prove that people are just as reliable, if not more reliable than businesses to lend to. We also realised that when people can actually see a face and a name and a reason behind the loan, there’s a much more tangible one-on-one connection with that.

to be quite nimble when we were building our credit scoring and taking into account the new reality of our economy post-Covid.

KG: What were the challenges of launching a company in a pandemic? RP: Networking has been difficult and that is probably connected to our funding journey. Even though P2P fundraising volumes were very large last year, there weren’t many deals done for first-time companies or first rounds in the UK.

JP: Sometimes you find you’re struggling against a negative perception around the P2P space. There have been some great successes in P2P but there have definitely been some high-profile failures and perhaps some poor management of those companies has given it a mixed reputation. We are trying very hard to show that we are using P2P in a different way and you can make a great success of P2P by treating both sides of your customers, lenders and borrowers, with respect and transparency.

JP: The pandemic has provided a real challenge in terms of interpreting what transaction data means. Certain assumptions that traditional lenders had before the pandemic have now been completely upended and a lot of the economic logic that was driving their decisions doesn’t hold true anymore. For example, traditional lenders would give a higher APR to teachers or nurses as they saw those as risky professions to lend to. But Covid has split that logic on its head. It’s changed a lot of the signals we get from transaction data. We had

KG: How difficult has it been to secure funding? RP: One of the difficulties for us is that our product has quite a high barrier to entry. It’s obviously very regulated, there are funding reserves or cash reserves needed to lend and as part of that, there are restrictions around some products on offer, especially in the short term. Trying to convince investors that a pre-revenue start-up is going to be successful was always going to be difficult, but there are definitely avenues for us, it just takes a little longer to find them because of Covid.

KG: What is Plend’s creditchecking process? JP: We very much champion open banking. The best results these days are coming from a verification of traditional bureau data and openbanking data. It’s essentially a two-stage process. We do a straight affordability check where we use both sets of data and make a call as to whether or not you

should be allowed to float the loan on the platform in the first place. Then there is a second part to our affordability scoring where we analyse your transaction history and build a risk profile for our investors to see. If you’re floated on the platform, you will have a score built up from a number of different indicators – your net disposable income very much being one of them, but not the only one. There are positive weightings around regular bills you are paying, positive behavioural traits and also potentially negative weighting as well, for instance we will flag high gambling spend activity as a potential risk. Then we score you and hand the risk-profile number to our investors so they can season their appetite for risk on the platform with the right rate of return. KG: What is Plend doing that’s different to other P2P firms? JP: We are leaning much harder into the open-banking data to build our affordability scoring and we are reflecting the fact that the economy has changed post-Covid. This is true P2P, the exposure of individual borrowing opportunities with a name and a photo and a story behind the loan, as well as the risk profile for our lenders to engage with. There’s no one else in the UK who’s doing that right now for personal unsecured lending. Because no one is exposing individuals directly to lenders, no one is building an individual investment risk scoring guide built from open-banking data. That particular score we are building is unique. No one else is exposing borrowers individually as an investment opportunity in the way we are.

CONSUMER FINANCE

Michael Lloyd explores the growth prospects of the peer-to-peer consumer lending market in an ever-changing world

HEN FACED WITH danger, the ostrich buries its head in the sand, avoiding its worries and hiding from threats. We are all guilty of acting like ostriches in times of chaos – and this has been particularly true over the past year. The Covid-19 crisis and subsequent lockdowns have forced many of us to hit the pause button, retreating into our bubbles until the threat of the virus has passed. And of course this has had a big impact on the consumer finance market. The market has subsequently shrunk, but this will not last forever

– consumers will emerge from lockdown and start to spend and borrow again in the growing and shifting consumer lending market. During Covid, the entire financial ecosystem went into hibernation. Nothing has been normal for well over a year. So what has been happening in the consumer finance market while our heads were in the sand? Many peer-to-peer platforms took the year as a chance to assess their market position, including P2P consumer lenders. RateSetter was acquired by Metro Bank, Lending Works was purchased by Intriva Capital and Zopa paused its new

Innovative Finance ISA account openings due to low demand for personal loans. There has been a drop in demand as consumers no longer needed loans for holidays, weddings or social gatherings, but instead used their time in lockdown to pay off their debts and save money. By February 2021, consumer borrowing had fallen by a record 9.9 per cent, as people hibernated indoors with their wallets. According to the Bank of England’s money and credit statistics, individuals made £1.2bn in net repayments of consumer credit in March of this year, down

CONSUMER FINANCE

from £1.8bn since March 2020. This represented the largest drop in borrower activity since records began in 1994. Within the consumer credit market, the weakness on the month reflected £900m in net repayments on credit cards with £300m in repayments of other forms of consumer credit.

Lending Works resumed new lending at the start of January 2021 with tightened creditworthiness and affordability criteria after pausing its new accounts and loans for the majority of 2020. At the end of October, the platform announced it was introducing a period of negative interest rates, so that it could pour

“ We have tightened our credit acceptance

criteria a bit in 2020 as a precaution since we’re unsure how the UK economy will perform once government support schemes end Despite this, P2P consumer lending platforms appear to have fared well. Elfin Market launched in 2019 to let investors fund lines of credit to individual borrowers with the same flexibility as a credit card but with lower interest rates. It introduced an app in March 2021 and now reports that the platform has been growing steadily. Chief executive Mansour Bouaziz says the platform granted all requests for payment holidays received prior to the furlough scheme, which led to a slight fall in lender returns at the time. But he adds the situation has since settled down and Elfin Market has been growing. “Our platform has been growing steadily, roughly 15 per cent growth per month in the number of borrowers and loanbook size over the past year,” he says. “We have tightened our credit acceptance criteria a bit in 2020 as a precaution since we’re unsure how the UK economy will perform once government support schemes end.”

”

more money into its provision fund to mitigate anticipated higher credit losses. On 29 January, the platform said that a period of negative interest rates was still required, but their severity will ease from February onwards. Now chief executive Nick Harding says that the platform is performing in line with what was expected at that time.

Neil Faulkner, managing director of 4th Way, says that early results from Lending Works, which provides substantial data to the P2P analysis firm, shows that the platform appears to be weathering this storm well. “Many investors have seen their overall returns drop, but still no lenders have made overall losses and 70 per cent are expected to make at least half of the target lending rate overall by the time the loans are fully repaid,” he says. “The other notable P2P consumer lending platform is Zopa, which provides data less regularly and hasn't done so since the pandemic started, but its public, aggregated statistics show that it still seems to be holding up, with overall returns for the majority of investors still positive.” The P2P consumer lending market has also had innovation on its side, with new technologies allowing platforms to react quickly and nimbly to any regulatory and macro-economic changes. Last month, in a letter to shareholders, Jamie Dimon,

CONSUMER FINANCE

chairman and chief executive of American investment bank JP Morgan, predicted that more banking products and other forms of lending will move into the nonbank space. He said this could be partly attributed to banks facing heavier rules and regulations than non-banks. The consumer credit market is shifting but it is expected to grow once more, after lockdown restrictions ease. And P2P platforms are here to make the most of it. “Consumer lending has shrunk since the onset of Covid-19 as surplus savings have accumulated, some consumers have used these to repay debt,” says John Cronin, an analyst for brokerage Goodbody. “However, I believe that the consumer lending market, including the P2P lending market, will see a return to growth following the reopening of the economy.” Growth isn’t just forecasted for dedicated consumer lending platforms in this space – there may also be an opportunity for investors in property and business lending to diversify into consumer lending. “Consumer lending has not been the focus of most P2P lending platforms and so I think that more competition and choice in this space would not do P2P investors any harm,” says Faulkner. “Different downturns impact different forms of lending more

than others and I think consumer lending platforms have a strong case for saying they think that the next downturn is likely to impact other types of loans more. “The appeal is to investors who like to diversify from various forms of business and property lending.” The consumer finance landscape has been forced to evolve as some companies have closed or switched

“ Many investors have seen their overall returns

drop, but still no lenders have made overall losses and 70 per cent are expected to make at least half of the target lending rate overall by the time the loans are fully repaid

”

focus, and consumers want different and easier means of obtaining finance. One such form is the buy-nowpay-later (BNPL) industry, which has been led by firms such as Klarna and Clearpay. According to Financial Conduct Authority (FCA) figures from February 2021, the use of BNPL products nearly quadrupled in 2020 and is now at £2.7bn, with five million people using these products since the beginning of the pandemic. Following recommendations from the Woolard Review into unsecured lending, the FCA will be given new powers to regulate unregulated BNPL firms. This leaves a gap in the market for P2P platforms to tap into the

CONSUMER FINANCE

borrower demographic that these firms target, with better rates and stronger support mechanisms. The Woolard Review called for more alternatives to high-cost credit

One such way platforms can tap into the market BNPL is leaving behind is via embedded finance, which involves integrating a financial service or technology with a traditionally non-financial service, product or technology. BNPL may be a form of embedded finance but there are other ways P2P consumer platforms can partner with mainstream brands. Zopa’s chief commercial officer Tim Waterman has previously said that he is “very excited” about the potential benefits of embedded finance for the lending industry. Speaking at LendIt Fintech Europe’s Lending Innovation Summit earlier this year, he said that embedded finance can give lenders the ability to tap into someone else’s brand for distribution. 4th Way’s Faulkner says there will be pros and cons for businesses and individuals using embedded finance. “In P2P consumer lending, the platforms have less to lose than the giant high-street banks and more potential upside,” he says. “Therefore, it's likely to turn out to be a positive in economic terms

“ The consumer lending market, including the

P2P lending market, will see a return to growth following the reopening of the economy

”

to make the credit market more sustainable and the report’s author Christopher Woolard backed P2P as an alternative funding source. When he unveiled the review in February, he told Peer2Peer Finance News there is “no reason P2P can’t be a source of funding into the prime market”.

for lenders as well as for platforms, where it could mean higher volumes and more diversification. “For individual P2P borrowers, the outcome is less certain. Borrowers might benefit from lower – or at least competitive – interest rates if the industry continues its more socially-minded

attitude, but they might also slide easily into borrowing more than they needed to.” Open banking offers another opportunity for platforms to take part in the shifting consumer credit finance market. Using the data-sharing initiative allows P2P lenders to mitigate against the risk of fraud due to the confirmation of payee. It also helps platforms to offer an improved customer experience with quicker lending decisions and reduced friction in their processes, and improve affordability checks via the visibility of borrowers’ latest transactions, rather than relying on older bank statements. More platforms are adopting open banking, with ArchOver and Rebuildingsociety among the latest to onboard the technology in the past. P2P consumer lender Leap Lending launched to market with its open banking capabilities in January 2020 and Kuflink is currently working on its own implementation. “I believe there are opportunities for better financial inclusion in the consumer credit space, due to new technologies like open banking,” says Elfin Market’s Bouaziz. The consumer credit market has undergone many developments over the past few years and was pulled to a halt with Covid. The market has shrunk but this only means that there is more space to grow, as consumers resume spending, and as the embedded finance and open banking trends become more mainstream. When the ostrich pulls its head out of the sand, it dusts itself off and races away at an astonishing 70 miles per hour. P2P consumer lending is ready to run.

PROMOTED CONTENT

Nibble – an ideal crowdlending platform to obtain high passive income

IBBLE IS AN EXCITING new fintech that aims to provide investors with access to a diversified portfolio of consumer loans, with target returns ranging from 9.7 per cent to 19 per cent. The platform enables customers to invest in loans that are issued by companies under the Joymoney brand, which operates in Russia and Spain. It only allows Joymoney companies to post loan opportunities on its platform, as it is highly familiar with Joymoney’s credit scoring process and the types of companies issuing loans. In February 2021, Nibble turned one year old. Despite the fact that Nibble is a young platform, it is a part of the IT Smart Finance holding company that has operated in the fintech market since 2014. The companies issuing loans that are posted on Nibble’s platform for further investment are also part of the holding company and have been operating since 2014. The fact that all of the operations are carried out within one holding company enables better control of processes, reduced risk and increased profitability for the customers. This means that if one entity faces financial difficulties, the IT Smart Finance holding company can step in. Joymoney, together with credit scoring service Scorista, has developed unique predictive models that analyse borrowers. Using this double scoring system empowers Nibble to offer investors

tailored strategies that avoid high levels of risk. “Nibble performed well in 2020,” said Maxim Pashchenko (pictured), founder of Nibble. “But frankly speaking, the time of our platform release was not the best. We made a lot of efforts to achieve these performance indicators: more than 1,500 users registered; more than 600 users invested in our platform; more than €50,000 (£43,297) euros in paid interest; and the total investment in the platform was almost €500,000.” Nibble has developed a new product, called Flexible Investment, to help investors diversify their portfolio. It involves three investment strategies with an annual interest rate ranging from 9.7 per cent to 19 per cent. Nibble makes it as transparent as possible for investors by describing all the risks

that an investor may face. At the end of each month, the risk committee analyses the issued loans, calibrates the scoring model and makes forecasts on interest rates for the next time periods. “Currently, we are undergoing the process of obtaining an antimoney laundering licence and an Estonian Financial Supervision Authority credit provider licence,” explained Pashchenko. “Although they are not required by law, we are obtaining them to make our customers feel as secure as possible when investing with Nibble. We believe that the company's open attitude towards the risk policy has fortified investors’ confidence in our platform.” The aim of Nibble is to become one of the top three investment platforms in Europe, with plans to increase its investment volumes and expand its product line in 2021.