Peer2Peer Finance News September 2019 by Alternative Credit Investor

Regulation update

Special report on data and transparency

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ISSUE 36 | SEPTEMBER 2019

P2P sector poised to fill SME funding gap as recession looms • Brexit woes and global trade war raise threat of downturn • Alternative lenders “well placed” to capitalise on opportunities • But weaker players could fall by wayside PEER-TO-PEER business lenders are poised to fill the funding gap if high street banks pull back from the credit market in the next recession. The industry benefitted from the so-called credit crunch at the time of the 2008 financial crisis, lending money to businesses when the banks withdrew. This spearheaded a period of substantial growth for the P2P sector. With mounting concerns of an imminent recession due to Brexit uncertainty and global trade wars, P2P platforms say they are well positioned to step in again this time around. “A recession is coming, it is just a question of when,” said John Mould, chief executive of P2P business lender ThinCats.

“In a recession, many lenders stop lending or pull back on lending. However, there are many great companies that will still need funding! The country needs good companies to be funded to help drive the economy out of recession. “So for those lenders that can keep their heads there is great opportunity to lend well through a recession whilst others have stopped. This means that the platforms have to have good relationships with their funders to allow them to keep

going and take advantage of this opportunity. “A slowdown will challenge all lenders but is a great opportunity for the brave and well-run lenders.” Graham Toy, chief executive of the National Association of Commercial Finance Brokers, noted that credit conditions were starting to get a little tighter and said the trade body’s broker members “are having to work harder” to place business as a result. “I think that the more lenders we’ve got in the

alternative and challenger space, the better for smaller firms,” he added. “That can only help in a recession.” A historic reluctance of banks to lend to smaller businesses in a downturn had created liquidity challenges for many smaller firms, particularly those operating in tightmargin sectors such as retail, according to Mike Cherry, national chairman of trade body the Federation of Small Businesses. He said only one in >> 4 seven small

EDITOR’S LETTER

Published by Royal Crescent Publishing

WeWork, 2 Eastbourne Terrace, Paddington, London, W2 6LG info@royalcrescentpublishing.co.uk EDITORIAL Suzie Neuwirth Editor-in-Chief suzie@p2pfinancenews.co.uk +44 (0) 7966 180299 Kathryn Gaw Contributing Editor kathryn@p2pfinancenews.co.uk Marc Shoffman Senior Reporter marc@p2pfinancenews.co.uk Andrew Saunders Features Writer Hannah Smith Features Writer PRODUCTION Tim Parker Art Director COMMERCIAL Alamgir Ahmed Director of Sales and Marketing alamgir@p2pfinancenews.co.uk Tehmeena Khan Sales and Marketing Manager tehmeena@p2pfinancenews.co.uk SUBSCRIPTIONS AND DISTRIBUTION info@p2pfinancenews.co.uk Find our website at www.p2pfinancenews.co.uk Printed by 4-Print Limited ©No part of this publication may be reproduced without written permission from the publishers. Peer2Peer Finance News has been prepared solely for informational purposes, and is not a solicitation of an offer to buy or sell any peer-to-peer finance product, or any other security, product, service or investment. This publication does not purport to contain all relevant information which you may need to take into account before making a decision on any finance or investment matter. The opinions expressed in this publication do not constitute investment advice and independent advice should be sought where appropriate. Neither the information in this publication, nor any opinion contained in this publication constitutes a solicitation or offer to provide any investment advice or service.

t has been three years since we launched Peer2Peer Finance News. The growth of the industry has been tremendous over that period and it’s been a real pleasure to grow alongside it. We are now the go-to publication for peer-to-peer lending news. We regularly break exclusives and report on news that our industry and investor audience can’t find elsewhere. I really enjoy how much engagement we have with our readers and encourage all of you to continue emailing us with any feedback, news leads or queries. But good quality journalism requires investment, which is why we’ve made the decision to move to a subscription model at this stage in our journey. This will enable us to: • Become more dependent on our readers rather than our advertisers • Invest in expanding the editorial team, meaning more in-depth investigations, campaigns and exclusives • Produce a larger quantity of editorial content, both print and online • Roll out our events series at a faster pace I really hope that our readers will get on board with this as it will help us to make a better-quality publication for you. The exact date of the move to a subscription model is yet to be confirmed (depending on back-end technology development) but I am anticipating that it will be in place on the website by 1 October. We will, of course, keep you informed as soon as we have further details. In the meantime, if you wish to give me any feedback, please email me personally at suzie@p2pfinancenews.co.uk. SUZIE NEUWIRTH EDITOR-IN-CHIEF

Have you signed up to our e-newsletters yet? You can receive P2P news straight to your inbox five days a week, or sign up for our once-a-week version that comes out on Wednesdays. Go to www.p2pfinancenews.co.uk for more information.

NEWS

cont. from page 1 businesses are applying for external finance, mostly from banks, while just six per cent approached a P2P lender last quarter. “It’s key that – recession or not – small firms are aware of all external finance options and their different benefits,” he added. “Underuse of external finance translates into unrealised potential, weak growth and stagnant productivity levels.” A recession could bring opportunities for P2P investors as well as borrowers, according to

Assetz Capital founder Stuart Law. “The next cycle will bring a new opportunity for investors to really understand what this sector can bring,” he said. “In any kind of recession we will see Bank of England interest rates collapse and investors will pour into the sector like they did previously. “Investors will be attracted by the P2P lending interest rates and borrowers will be let down by the banks again.” While a recession could pose opportunities for the best and brightest

P2P platforms, weaker companies could struggle, industry stakeholders warned. Sophie Pearce, managing director of MoneyThing, said that alternative lenders are “generally well placed to capitalise on the opportunities that there are during adverse conditions” but noted that this would be the first time that most of them would experience a downturn. “Generally in a recession late payments and default rates increase and we have not yet seen how the

alternative lending market will cope under these conditions,” she added. “There is always a dead period in a downturn as nobody wants to catch a falling knife,” said Assetz Capital’s Law. “It could wipe out platforms if their volumes drop substantially. Some platforms may struggle to raise equity, we have already seen evidence of that. “The time to have built your P2P business to a sustainable scale has been and gone. Now isn’t the time to be short on capital.”

Foreign firms eyeing P2P market entry REGULATORY consultancy Bovill has reported a steady stream of interest from new entrants to the peer-to-peer lending market, particularly from overseas firms. Frank Brown, managing consultant at Bovill, told Peer2Peer Finance News that while there had been an undeniable slowdown from previous years, he was still “definitely” seeing interest from new P2P firms seeking regulatory authorisation. Brown attributed the slowdown to the fact that P2P is a more mature market, meaning there

was “less of a gold rush” for new players. “There is definitely still interest in the sector, in particular from foreign

firms,” he said. “I think they’re recognising the fact that while there are questions around Brexit, the UK

is still a good market with a strong regulatory framework to operate in.” Brown said it should not come as a surprise that P2P remains an attractive sector, but noted that it is “incredibly important” for any new entrants to ascertain what their niche would be in order to gain a foothold in the market. “I think the market is fluid in terms of investors’ options and I think it still remains unsaturated in terms of the number of investors,” he said. “I don’t think P2P is on every investor’s radar yet.”

NEWS

Industry blasts “inefficient” IFISA transfer-out process

THE TRANSFER process for peer-to-peer investors wanting to move funds out of Innovative Finance ISAs (IFISAs) to other ISA wrappers has been labelled as “frustrating” and “inefficient” by industry insiders. Peer2Peer Finance News has previously reported that some building societies and smaller banks do not allow IFISA transfers to cash ISAs, but it has now emerged that there are also issues transferring IFISA holdings to stocks and shares ISAs. In contrast, the process of transferring money between cash and stocks and shares ISAs has been automated by most providers. It is facilitated by providers signing up to Bacs for cash transfers and an exchange run by the Tax Incentivised Tax Association (Tisa) called TEX for stocks and shares providers. IFISA providers can sign up to these but there is no automatic category in either system. Michal Brzozowski, head of operations for Goji – which helps P2P lending platforms with IFISA administration – says this means they either have to list as cash ISA providers, which creates confusion, or the fund platform

receiving the money will ask for the transfer to be done manually by post using a paper form and wet signature. “It is a point of frustration,” Brzozowski said. “It may make investors reconsider investing in an IFISA in the future given the resistance when they want to transfer out.” Furthermore, some fund platforms say they are open to transfers but only mention cash and stocks and shares on their website, with no reference to IFISAs. Fund platforms Hargreaves Lansdown and Fidelity said there has been little demand for IFISA transfers and they would need to be completed manually. Similarly, AJ Bell said IFISA transfer applications would have to come by post and customers would have to verify that they un-

derstand they are investing in a different asset. However, Interactive Investor said it could deal with IFISA transfers online. David Bradley-Ward, chief executive of P2P lender Ablrate, described the IFISA transfer system as a “relatively simple process to set up, but not efficient.” “It all comes back to the liquidity of the platform,” he said. “If you are in a loan and can't get out then the likelihood is you will not be able to efficiently manage your IFISA in line with your tolerance to risk in a timely manner. “Add this to the latency that is within the legacy systems and procedures and you have a problem for customers that does need solving.” Neil Faulkner, of P2P ratings and research firm

4th Way, said the whole ISA transfer system needs reform. “The entire process for transferring ISAs is outdated and slow by modern standards, regardless of the type of ISA in question,” he said. “Fees charged to transfer out from stocks and shares ISAs into other sorts of ISAs compound this. “There is no technological platform that connects ISA providers, which means that providers offering stocks and shares ISAs will not immediately know how to process applications to or from IFISA providers. “The whole system could use an overhaul to bring it into the modern age, because it surely puts some people off from transferring to or from other ISAs, even when it is in their best interests.”

SPONSORED CONTENT

Lands of opportunity

Frazer Fearnhead, founder and chief executive of The House Crowd, explains the benefits of property development finance for retail investors

INCE THE CRASH IN 2008, banks have been restricted in what they can lend to developers and this has created opportunities for retail investors, by providing finance to smalland medium-sized enterprise developers via peer-to-peer property lending platforms. Investors can now pool resources and lend small amounts to credible developers with a proven track record. Platforms offer a range of opportunities to provide senior debt, junior debt and mezzanine finance. The risks and returns increase according to which part of the ‘capital stack’ you are financing. Senior debt tranches of up to 60 per cent Loan to Gross Development Value (LTGDV) will usually pay six to eight per cent per annum, junior debt will typically pay 10 per cent and mezzanine lenders, who take the biggest risk on the project exiting successfully, can achieve 13 per cent per annum or more. Lending against a property development has two huge advantages over investing on an equity basis. Firstly, your interest is protected by a legal charge and, secondly, you get paid out first. So, should the properties not sell for the forecast prices, the developer and his equity investors are in a first loss position, followed by mezzanine finance lenders and so on. Therefore, you can lend up to a LTGDV that you feel comfortable with and earn a

commensurate reward. The basic property development formula is quite simple. The developer buys or gets an option on land, acquires planning permission, hires a contractor to build and then sells. However, in reality developing is very complicated and fraught with burdensome regulations, as well as unexpected delays caused by planning departments, utility companies, newts, bats and the weather to name just a few. Furthermore, there is never any guarantee of how quickly the developer will be able to sell the houses to repay you. The good news is that whilst nothing is certain, you can mitigate

your risk by carefully selecting which development to invest in. Here are the key points to look for: • To avoid long delays, invest only when full planning permission is in place. • Ensure a professional feasibility study has been done and there is a profit margin of 20 per cent on gross development value to allow for a drop in the market. • Diversify. Don’t just invest at the highest rate which carries the most risk. • Ensure the developer has a strong track record for developments of that type and size and knows the market well. • Ensure the chosen contractor has a healthy balance sheet and is hired on a fixed price design and build contract so they carry the risk of any overspend or delays (subject to things beyond their control). • Consider how attractive the development is – the houses must sell for you to get your money back. • Make sure there is an experienced new build sales and marketing team in place and that there are a high number of comparable new build sales in the area. Alternatively, if you like an easier life, on a platform like ours, you can select an auto-invest product or Innovative Finance ISA, according to your appetite for risk. We will then diversify your money over several developments and pay you regular interest.

NEWS

Funding Circle nears one-year anniversary of London float FUNDING Circle is coming up to its one-year anniversary as a publiclylisted company, after an eventful 12 months which has seen its share price plummet to less than a third of its offer price. The peer-to-peer business lender began conditional dealings on the London Stock Exchange on September 28 before being officially admitted to the bourse on 3 October. It launched with an offer price of 440p per share, giving the firm a valuation of £1.5bn. However, its market capitalisation as of 19 August has since dropped to £407m, with its shares now trading at 119p. While some commentators have been quick to attribute the decline to issues with Funding Circle or the wider P2P industry, others have pointed out the challenging macroeconomic environment and typically shaky starts for many

newly listed companies. Analysts have said that share price performance in the first year of listing can be a “mixed bag.” “You only have to look at this year where wellknown US companies such as Uber and Lyft took part in highly anticipated and much watched initial public offerings (IPOs),” Tom Rosser, investment research analyst at The Share Centre, said. “Share prices have struggled since, with both companies down over 26 per cent. “Contrastingly, plantbased protein producer Beyond Meat who listed

at the end of last year has seen its share price soar 476.8 per cent. “It seems those companies where large institutions are involved to bring the stock to market tend to suffer post-IPO as the offer price is often rather lofty.” Funding Circle posted a 29 per cent rise in firsthalf revenues last month but downgraded its fullyear revenue guidance from 40 per cent to 20 per cent ahead of the update. It has tightened its lending criteria to move away from riskier loans, a move which was endorsed by ratings agency DBRS, and recently announced a

fourth securitisation deal – its first in the US. “On the face of it Funding Circle is a fundamentally sound company offering a very valuable P2P lending service which plugs the funding cap for many small businesses,” Rosser added. However, the analyst also noted that the firm is not forecast to make a profit until 2021, which puts its initial market price into question. But Jonathan Minter, of analysis firm Intelligent Partnership, says Funding Circle’s stock market performance is less relevant to P2P investors. “For those investing through Funding Circle, the fact the platform is pro-actively tightening its lending criteria ought to be seen as reassuring news,” he said. “Also reassuring is the fact that its projected bad debt range and annualised return range remained stable.”

…while Peer2Peer Finance News celebrates third birthday IT HAS been three years since Peer2Peer Finance News officially launched, hitting inboxes and desks as the UK’s first dedicated peer-to-peer lending publication. Filling a gap in the market for targeted coverage

of this fast-growing and dynamic sector, the magazine has grown rapidly to become the must-read title for industry and investors alike. A successful Regulation Breakfast Briefing in London at the end of June

marked the launch of the magazine’s events division, with more dates soon to be announced. “A huge thank you to all of our readers, advertisers and of course, the P2PFN team, for making the magazine into what it

is today,” said P2PFN founder and editor-inchief Suzie Neuwirth. “It doesn’t stop there – we have plenty of things planned for the rest of this year and beyond to make the magazine better than ever!”

For even more peer-to-peer finance news, go to our website at www.p2pfinancenews.co.uk. With real-time news and exclusive insights, www.p2pfinancenews.co.uk is your indispensable portal into the world of peer-to-peer lending. Go online to sign up to our e-newsletters, for a comprehensive digest of the latest peer-to-peer finance news sent straight to your inbox. You can choose our weekday e-newsletter, which comes out by 7am Monday to Friday, or sign up for our once-a-week version that is sent out at noon on Wednesdays. www.linkedin.com/company/peer2peerfinancenews/ @p2pfinancenews

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NEWS

Navigating the world of Appointed Representatives THE FINANCIAL Conduct Authority’s (FCA’s) authorisation process is notoriously slow, with platforms waiting up to two years to get their full permissions. So it is no surprise that some market entrants have opted to become an Appointed Representative (AR) instead. By becoming an AR, a firm operates under the regulatory umbrella of an authorised company, which is known as the principal. For example, Huddle Capital is an AR operating under Rebuildingsociety’s permissions. Growth Street started out as an AR under Resolution Compliance’s licence, before winning full authorisation in March 2018. This has become a popular option for new platforms seeking a quick route to market. As an AR of Rebuildingsociety, Huddle Capital was able to gain authorisation to trade within just eight weeks. By comparison, Rebuildingsociety had to wait 28 months before it gained regulatory approval. Becoming an AR can also mean that a new platform can benefit from the experience and processes of the principal; even sharing software and other back-end processes. “Becoming an AR means that you don’t

need to reinvent the wheel when it comes to the policies and processes needed to run a regulated business, as the principal will provide these or give significant guidance on their development,” said Kylie-Jo Greef, compliance manager at Rebuildingsociety. “Our ARs are able to learn from us and get up and running quicker.” But while the benefits are clear for the AR platform, onboarding an AR represents a substantial risk for the principal. According to the FCA’s rules, the principal is responsible for reporting on the AR’s activities in its own FCA submissions, and this includes strict adherence to client money protection and contemporary

compliance. With a host of new regulations on the horizon for the P2P market, this could lead to an increase in the bureaucratic burden for principal platforms. “A principal will be fully responsible for the acts and omissions of its AR as if they were the acts and omissions of the principal themselves,” confirmed Marc Piano, an associate at the law firm Fox Williams. “Consequently, the principal is required to undertake certain pre-appointment checks on the proposed representative, as well as ensuring that it is duly licensed for the proposed regulated activities the representative wishes to undertake. “As a principal will always be responsible for the acts and omissions of

an AR, an AR arrangement can be time consuming and costly for the principal to arrange, enter into and monitor, as well as increasing exposure and potential liability for the principal during the course of the arrangement.” The FCA’s own guidelines on the liability of the principal are “by no means exhaustive”, said Greef, underlining the importance of creating extremely detailed contracts ahead of the onboarding process. Many principals also include a caveat in these contracts which makes it clear that the AR is entering into a shortterm agreement only. “In our experience, AR agreements are not usually intended to be a long-term arrangement, and the representative is unlikely to have much bargaining power during negotiations,” added Piano. “Many businesses that choose to go down the AR route do so as an interim measure, with the goal of eventually being directly authorised.” To protect the principal, Fox Williams always insists that there is at least one approved person at the AR who is already on the FCA register. For more on P2P regulation, read our feature on page 12.

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JOINT VENTURE

The recovery position

Nick Horton, client services director, Steve Smith, operations director and Chris Jenkins, client services and technology manager, introduce Wrights Recoveries

ECOVERY FIRMS AND finance providers go hand in hand. But it isn’t easy to find a truly innovative and efficient recoveries agent – one with a long track record and driven by cuttingedge technology. Over the past 15 years, Wrights Recoveries has returned more than 60,000 assets to its clients and it has carved out a niche in the recoveries sector by offering completely bespoke solutions to each and every one of its customers – from bigname banks to smaller lenders. “We treat all our clients in exactly the same way,” says Nick Horton, Wrights Recoveries’ client services director. “We don’t just offer an off-the-shelf product. We engage with our clients, find out what they want, and then we build a bespoke package around what they need.” Wrights Recoveries is not only a car repossession firm – it also covers numerous commercial contracts which see the firm recovering HGVs, PCVs and highvalue plant machinery. “Being a national company, we can truly offer our clients a greater opportunity to recover their assets regardless of post code or location,” says Steve Smith, operations director. “We succeed by having all of our agents employed solely by us, as our research has found that when you hire somebody as self-employed, there is a chance that you won’t have control over their work. They could also represent numerous clients and

customers which could in turn create a conflict. “Our agents undergo a comprehensive training package to ensure that they are fully qualified as not only do they represent Wrights, but just as importantly, they also represent our clients.” Wrights realises the importance of regulatory technology within the financial services and motor finance sector, focusing its efforts on technology that provides an all-in-one solution for the financial market. This provides a unique and innovative “cradle to grave” solution for the asset finance sector using technological advancements to pro-actively manage client assets, spreading risk and mitigating end of cycle losses. The RADR Asset Management platform is what underpins this marketleading success. Wrights Recoveries provides bespoke fintech solutions not currently available anywhere else in the industry, and in recent years it has created an innovative

technology solution to improve its service offering even further. The web-based platform VT Validate simplifies and speeds up the voluntary termination (VT) process in the car financing sector. “Our research suggests that VT ranges from £2,500 to £4,500 in losses to lenders,” says Chris Jenkins, Wrights’ client services and technology manager. “So we designed a product that would help mitigate these losses, while being fair to the customer and compliant with the Financial Conduct Authority. “VT Validate puts the ownership of the VT process on the customer. This means that before the customer surrenders their car, we can tell them exactly how much they are going to owe, what their liability is, and what arrears they owe.” Wrights’ results indicate that the overall process usually takes in excess of 35 days, whereas VT Validate delivers over 75 per cent of VTs that are completed within seven days. It has onboarded six mainstream lenders to date and serviced more than 1,000 VT applications since launch. The groundbreaking technology has been recognised for its originality and innovation, being shortlisted for the 2019 Credit & Collections Technology Awards for Customer Engagement. By continuing to hone its offering and respond to customer feedback, Wrights is set to bring fintech-level innovation to the UK recoveries sector.

REGULATION UPDATE

Temperature check

It’s been five years since the Financial Conduct Authority took over regulation of the peer-to-peer lending sector. With new rules coming into effect this December, is the industry happy with the watchdog’s efforts so far? Kathryn Gaw reports

T HAS BEEN FIVE YEARS since the Financial Conduct Authority (FCA) took over the regulation of the peer-to-peer lending sector, but in some ways it feels like it is just getting started. Following lengthy authorisation processes and the culmination of a post-implementation review of the sector, the regulator is making its presence felt. P2P lenders are bracing themselves for a number of regulatory changes later this year. The first relates to the implementation of the FCA’s final rules on the sector and the second is the Senior Managers and Certification Regime (SMCR), which will apply to all FCAauthorised firms. The City watchdog is applying stricter rules on a number of areas

including wind-down plans and investor protections. On the same day – 9 December – SMCR will also come into effect, requiring each lender to adopt a culture of accountability at every level. “It’s set to be a busy autumn,” says Gillian Roche-Saunders, a partner at regulation consultancy BWB Compliance. “Getting ready for just one of these regulations involves a fair amount of work for all concerned.” Most P2P platforms are now in the final stages of preparing for the new regulations, but the process has led to a bit of soul searching about the relationship between the FCA and the alternative lending sector, and how it might change in the future. In off-record conversations, several platforms told Peer2Peer

Finance News that they were concerned about the FCA’s lack of knowledge about the P2P sector – at least in the early years. “I think the FCA started out with a certain understanding of what the concept of P2P was,” says John Gillespie, a veteran of RateSetter and chief executive of newlylaunched P2P platform Square Deal Finance. “But I don’t think they fully understood how different the platforms actually were. When they actually started to engage with the different platforms they found that they had slightly different models and they didn't necessarily map to their idea of how they should be working.” This is a view echoed across the P2P landscape. In the early days, the FCA gave platforms the distinct impression that it was struggling

REGULATION UPDATE

to define P2P lending – the pace of change in the sector meant that no sooner had one platform model been unpacked, a totally new type of platform had been created. Today, P2P platforms can touch on everything from consumer lending, to business financing, to remortgaging, cryptocurrency trading and asset-backed loans. The FCA has more than 3,700 members of staff, but the vast majority of these employees focus on the big hitters of the UK finance market – asset managers, day traders and high street banks. The minority who work with the P2P sector have had to learn about this brand new industry from the ground up, while also keeping up with the latest innovations. What’s more, regulation of the P2P industry came at a time when the FCA was also just beginning to regulate credit brokers – at one point there were approximately 50,000 new firms and individuals waiting to get onto the FCA register. As a result, P2P regulation was slow to take off. “The FCA was stretched, given their new responsibilities and perhaps caught short by a fastmoving new industry,” says Andrew Holgate, Assetz Capital co-founder and chief executive at fintech consultancy Equitivo. “That seems

“

The FCA has had an awful lot to learn in a short period of time

”

to be changing though.” The new regulations, which were unveiled in June, are the result of years of research and industry consultation on behalf of the FCA and they have been largely welcomed as necessary as the alternative lending sector enters its next stage of growth. “The FCA has faced scrutiny of its regulation of the P2P sector recently,” says Sam McCollum, legal director at TLT Solicitors. “However, the rules announced in PS19/14 show that the FCA is committed to regulating the industry in a way that strikes a difficult balance between seeking to prevent harm to investors, whilst not stifling growth, and this has been welcomed by many P2P providers.” The new rules require platforms to introduce appropriateness tests and restrict their marketing to sophisticated and high-networth investors, people receiving regulated investment advice, or

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those who certify that they will not invest more than 10 per cent of their portfolio in P2P. Other key points in the document included ramped-up disclosure requirements and more clarity around wind-down plans in the event that a platform goes under. However, there is still some way to go. For instance, the concept of a loan can be easily misrepresented in the current working of the rules. In P2P, loans can sometimes be called loan parts, or contracts, or investments. From the regulator’s point of view, they are treating the lender as a loan provider, but this may not always be true – the lending platform could be trading in loan parts, or acting as an aggregate or intermediary between borrowers and lenders. Regarding the collapse of P2P property platform Lendy, FCA chief Andrew Bailey wrote that the regulator was still trying to define what a ‘creditor’ is within the confines of that particular case. This is a continuation of an ongoing theme, whereby words get defined and redefined as the sector evolves. “At one point we tried to call our users savers but it's not a savings product,” says Gillespie. “Then it was lending, then it was investing, then it was lending again. So, even regardless of the regulator that's

REGULATION UPDATE

been an issue for a long time of description and classification in the way the person in the street would be able to understand something.” “I think the FCA has had an awful lot to learn in a short period of time,” says Christine Farnish, former chair of trade body the Peer-to-Finance Association and now Zopa’s P2P board chair. “When P2P regulation first came along in 2014 the FCA hadn't really dealt seriously with any sort of grand new type of business model before and so I think they found it quite challenging both from a resource and policy perspective.” This led to a laborious authorisation process which left some platforms waiting for more than two years to receive full regulatory approval. In response to criticism of lengthy approval processes, an FCA spokesperson said: “It is important that applications from firms wishing to be fully authorised are properly considered and that the firms meet rigorous standards. How long it takes to consider an application depends on a number of factors including the completeness of the application, the complexity of the business, and the firm’s demonstrated compliance with regulatory requirements. “We work closely with individual firms to ensure are authorised as quickly as possible, however it is important that we take time to make the right decision.” Farnish believes that the FCA has landed in a “fairly risk averse” place, in its efforts to oversimplify the increasingly diverse P2P market. “Of course the downside of that is that the lower risk platforms are now saddled with exactly the same regulatory regime as the high risk,” she adds. At its worst, regulation can create barriers to entry for new firms, while

“

I think FCA regulation still misses tighter controls over newer innovations

”

stifling innovation in larger, more established platforms, and a number of P2P operators are nervous about this new era of active yet risk-averse regulation. “There has to be a degree of capability and operational competence and sustainability to the business which means you need to be properly capitalised before you can launch,” says Gillespie. “You can't run on a shoestring, and that's probably a good thing

to be honest. But it does mean it is harder for new entrants to get into the industry.” It is unrealistic to expect to FCA to be all things to all people – its remit is to “prevent harm to investors, without stifling innovation in the P2P sector,” and this is a lofty ambition, even without the rapid pace of change. But the FCA is not alone in its desire to make P2P lending safer. While the regulator is frequently criticised by P2P insiders, this criticism is always constructive. Everyone seems to have a view on how the FCA can perform its role more effectively. “The FCA have got a tough job on their hands, not just in P2P but across the board,” says Holgate. “Generally they do a good job, but I think FCA regulation still

REGULATION UPDATE

misses tighter controls over newer innovations around provision funds and how they are funded and used.” “My worry is that the sector could be completely killed off by heavy handed regulation that isn’t truly risk based and doesn’t differentiate between different platforms,” adds Farnish. “The FCA

has to think differently when it comes to P2P lending.” If she was in charge, Farnish says she would introduce real-time monitoring using digital systems and data. She would also encourage FCA employees to expand their understanding of P2P. “I'm not sure that everyone at the

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FCA really understands what P2P lending or crowdfunding really is,” she says. “I think they just need to force themselves to go up the learning curve and put some smart people into the monitoring in real time of the platforms that they've already authorised.” But more than anything, industry insiders have repeatedly told Peer2Peer Finance News that they want to see the FCA standing up for alternative lenders and showing the world that the UK’s P2P sector is fulfilling an important role in the UK economy. “The most useful thing would be to hear a very strong statement from the regulator and government that they believe and support P2P,” says Gillespie. “That they believe that it's here to stay and they’re not going to do anything to stop it. I would like to hear them issue a strong, positive statement about how it's helping retail investors achieve stable returns on what is being predicted to be a long-term, lowyield environment.” The FCA may have taken a while to find its bearings in the world of P2P, but by welcoming the input of the industry at large and prioritising investor safety and platform innovation, the FCA is showing its support for the P2P sector in its own quiet way.

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JOINT VENTURE

Ahead of the regulations

Martyn O’Connor, head of risk and compliance at Wellesley Group, explains why SMCR is a positive step for the alternative lending community

MID A HOST OF NEW upcoming regulations, the Senior Managers Certification Regime (SMCR) often gets forgotten. Due to become law on 9 December, SMCR aims to make financial firms more accountable by creating a culture where all employees must take responsibility of the operational undertaking of the business – from the chief executive downwards. SMCR was implemented a couple of years ago for banks, but soon solo-regulated firms will have to come on board. While some firms are only just beginning to get to grips with the new regulation, Wellesley has been preparing for it for at least a year. “The key behind SMCR is the accountability improvement,” says Martyn O’Connor, head of risk and compliance at Wellesley Group. “SMCR effectively improves governance, reporting lines, product designs, operational policy procedures – the list goes on. And it ensures that we can show clear accountability within our culture and across to the regulator to ensure the nothing falls between the gaps.” The purpose of SMCR is to protect the consumer, and this is something that Wellesley has been supporting for years. Wellesley believes that by simplifying the accountability process, it will make it easier for the average retail investor to understand the opportunities and limitations of their alternative lending investments.

“With SMCR, all clients will have the opportunity to understand who is making key decisions within the business,” O’Connor explains. “I think in regards to the alternative investment world, it obviously helps that it continues to move us towards the mainstream investment area. So the more that we're caught within these regulations in a proportionate way then the better confidence we can offer to investors.” While SMCR represents a big step forward for the alternative lending community, according to O’Connor, the implementation within Wellesley “has been straight-forward.” “We’re a core firm which means that the more onerous and detailed issues that you might find in an enhanced firm were not required to be implemented,” he adds. “What we have done is embedded some of the best practice from enhanced firm requirements. This involves

adding things like responsibility maps, which aren’t required for a core firm but really helped us to identify key reporting lines and responsibilities. It's actually been a great way of enhancing how we look at things.” For Wellesley, SMCR has arrived at the perfect time – following enhanced permissions received earlier this year, the firm has recently launched a new investment platform to give investors both access and a sole focus onto its listed bonds, instead of peer-to-peer loans or minibonds. These new regulations mirror Wellesley’s own journey into the mainstream investor community. And just as Wellesley intends to learn and evolve through experience, O’Connor also believes that these new regulations will change over time. “As an industry we've come through eighteen months to two years of intense scrutiny,” adds O’Connor. “I think the regulations that have come out from that are really positive and move the industry toward the mainstream of what people would expect to see. “But like any new regulation, it probably needs time to bed in and to refine itself. It’s going to create some better client outcomes and transparency but I think it'll be definitely worth a review by the regulator similar to the banking stocktake report at the end of 2020 to find out that it's doing what we all want it to do.”

DATA AND TRANSPARENCY

Clear as day

The City watchdog’s new rules mandate greater transparency from peer-to-peer lending platforms, so what does this mean for the industry and its customers? Hannah Smith reports

VEN THE SMALLEST peer-to-peer lending platforms generate a large amount of data on their investors, their borrowers and the interest rates and default rates on their loan portfolios. But how much of this data should they be sharing publicly? The financial regulator wants to see P2P investors given more detailed disclosures, but some industry stakeholders are concerned about ‘information overload’. Against a backdrop of high-profile P2P platform closures and a sharper focus on consumer protection by the Financial Conduct Authority (FCA), there will be no escaping the drive towards greater transparency in the sector. Platforms will need to be even more open about the risks involved for investors, pricing of loans and about what happens if things go wrong. In its final rules for P2P lending platforms issued in June, the FCA

called for greater disclosure from an industry which already prides itself on being much more open and transparent than the incumbent banks it seeks to challenge. The FCA wants to see firms give investors sufficient information about the nature of their P2P investments, the risks involved, fees and charges, and the role of the platform. Platforms will have to publish an ‘outcomes statement’ every year revealing actual and expected default rates and, where they offer a target interest rate, the actual return achieved. The regulator also reaffirmed that investors must understand what could happen to their portfolio if a platform ceased trading. “Transparency is absolutely paramount and lenders on a platform should be clearly presented with every bit of information about historical performance, years of operation, payback track record, asset expertise of the team, operational best practice and most

importantly the relationship between the rate received by the lender and the rate paid by the borrower,” said Mike Bristow, chief executive and cofounder of CrowdProperty. “This final point is critical as borrower rate is the strongest proxy for the risk being borne by the lender capital – as that capital is lent out in a competitive market. “Opacity across these factors should not be accepted and lenders must ask themselves why all these factors are not being made clear if they aren't.” CrowdProperty prides itself on the highest levels of transparency and Bristow says the firm already surpasses any increased disclosure requirements and recommendations made by the FCA. Currently, the amount and quality of data and information available varies considerably by platform. Some firms such as CrowdProperty, Lending Works and RateSetter publish a huge amount of statistics including details on arrears and

DATA AND TRANSPARENCY

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The less information platforms provide, the more assumptions investors need to make

bad debts, borrower characteristics, interest earned, the size of reserve or contingency funds and how they are used, and much more. “RateSetter has always been a market leader in transparency and disclosure of accurate, reliable and accessible data for investors,” said a RateSetter spokesperson. “For example, we display our market rates in real time and we publish the latest data on returns, lending volumes, risk management and the provision fund every month. We will provide a range of additional information in line with the new regulations.” In contrast, some platforms share “nothing or next to nothing”, according to Neil Faulkner, managing director of P2P research and ratings group 4th Way. Meanwhile, Funding Circle stopped publishing its full loanbook in the run up to its stock market float last year, instead offering a statistics page which is updated on a quarterly basis. It said few investors used the full loanbook data anyway: just 0.3 per cent of investors accessed it in the month before it was pulled.

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Almost simultaneously, trade body the Peer-to-Peer Finance Association changed its rules for members – which include Funding Circle – so that they no longer had to publish their full loanbooks, in a move which seemed to signal a shift away from total transparency for the sector. Since the FCA’s review, platforms have begun revealing more of their loan data. Faulkner said Proplend has now supplied its complete historical loanbook to 4th Way, while Kuflink will soon start publishing a number of additional statistics. “I think these sorts of changes will continue to trickle in,” Faulkner says. “Platforms that want to be taken seriously should publish their loanbooks to the general public, so that customers have the peace of mind that analysts and highly engaged amateurs will be probing the platform's data. The less information platforms provide, the more assumptions investors need to make when gauging the risk level.” Growth Street’s chief executive Greg Carter told Peer2Peer Finance News that, since the FCA review, his

platform is thinking about how best to communicate to customers the way it assesses loan risk. “Since the FCA change we are reviewing the way we categorise loans internally, and we will need to start disclosing loans we think are at risk of default,” Carter comments. “We’re working on clearly disclosing that to investors.” He explained that the platform is always monitoring the health of its borrowers, and where it sees a rising risk of default, it can reduce the borrowing limit or change the interest rate on a loan. It wants to be able to show investors at-risk loans and action it is taking on them. This would build on the data the platform already gives consumers, including monthly updates showing them who they are lending to, the number of borrowers and how much they are borrowing, and the probability of default. Growth Street also shares aggregate-level information on defaults such as the number and value of defaults and the cost to the loan loss provision, but not “confusing detail” about individual cases and technicalities of the recovery process. “We have plain English descriptions on the website of how we manage risk on investors’ behalf,” Carter adds. Asked how he knows whether

Together we build a better future Peer-to-peer lending is not covered by the FSCS and capital is at risk.

DATA AND TRANSPARENCY

the data Growth Street publishes is even being read by customers and prospects, and how it is being used, Carter pointed to the platform’s appropriateness test. This is a requirement of the FCA’s new rules but Growth Street says it has had one in place since 2016. It checks investors’ knowledge of P2P lending before they can invest through the platform. “To pass that test you have to make yourself familiar with the Growth Street proposition and the key risks you’re undertaking by investing, so that’s one way we know the information is being looked at because they pass that test,” Carter explains. Carter believes transparency is vital to foster trust between investors and platforms, but said the data given must be explained properly.

“We work very hard to find the right balance between clarity and transparency because there’s a big danger that transparency can become an exercise in releasing huge amounts of information that retail investors can find difficult to understand,” he says. The increased emphasis on transparency could prompt more P2P platforms to undergo stress tests on their loanbooks. Buy-to-let specialist Landbay commissioned an independent stress test on its loanbook in May, which found its investors would still receive returns of more than three per cent in an economic downturn. “Landbay believes in transparency and has led a call for increased transparency in the sector by releasing the results of its voluntary Bank of England stress test,” a

spokesperson told Peer2Peer Finance News via email. “The firm discloses its full loanbook and performance, doing more than the FCA is requesting. As such, it didn’t need to change anything in light of June’s rules.” When it comes to transparency, BDO’s head of fintech and challenger banking, Matt Hopkins, thinks that platforms face a delicate balancing act to provide the right level of detail without bamboozling investors. He says there is “understandable caution in ensuring information is not confusing or misleading”. “It is too simplistic to assume that more disclosure can provide better client education – governance around the quality, relevance and accuracy of disclosure is far more important than volume,” he states.

DATA AND TRANSPARENCY

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Smaller platforms have to tread more carefully to ensure their disclosure is not detrimental to their business model

This was a key argument against full disclosure made in response to the FCA’s consultation, when platforms said they feared investors could be “overwhelmed with information”. Some suggested that disclosure documents need not include details of exactly how loan risk is assessed, for example, but would be better revealing only high-level information such as general borrower criteria and security details. The lack of a prescribed format could also mean it is hard for investors to make comparisons between platforms, they noted. But aside from the potential to overload investors, could too much transparency be bad for competition among platforms as commercially sensitive information is forced out into the open? There is also a concern that sharing too much information about the debt recovery process could undermine that process, for example, when investors discuss the details in online forums. Loan pricing might be one particularly tricky issue for platforms

”

as it is commercially sensitive data. The FCA could make things fairer by forcing banks and non-bank lenders alike to reveal their average borrower APRs, suggests Faulkner. “Most platforms hide their average loan prices, which makes it difficult for investors to estimate their investing total costs,” he asserts. “The total cost to the investor is the total paid by the borrower including fees, minus the interest paid to investors before bad debts. “The reason for secrecy on loan pricing is understandable: P2P lending platforms want to prevent other platforms – or banks – from secretly using that information to undercut prices. “The FCA could create a level playing field by forcing all platforms, banks and non-bank lenders to publish their average borrower APRs, which is an interest rate that incorporates all arrangement and exit fees into the total cost paid by the borrower.” Hopkins said smaller platforms have the most to fear from increasingly onerous disclosure rules.

“Smaller platforms have to tread more carefully to ensure their disclosure is not detrimental to their business model,” he explains. In fact, the volume of data available across platforms of different sizes could end up distorting the picture for investors. “You could be in a position where a platform is unfairly prejudiced by the default on one loan, or conversely where a platform’s default rate is flattered due to minimal data points rather than the actual quality of their book,” Hopkins says. “For a smaller platform with a niche product offering, there may be sound reasoning as to why their risk factors, outcomes, and default rates are divergent to other market participants.” This means more analysis will be needed alongside any published data, to put it in context for people, Hopkins suggests. “All data needs a health warning, as with limited data sets there is a risk that you are giving assurance to quality that is not currently tested.” As the wave of data coming out of the P2P lending sector grows to a deluge, platforms will have to ensure they are explaining properly what it really means, to avoid their investors being swept away by the flood.

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JOINT VENTURE

Next-level transparency

Mike Bristow, chief executive and co-founder of CrowdProperty explains what true platform transparency looks like

LATFORM TRANSPARENCY is a hot topic among investors and regulators at the moment. After a clutch of high-profile peer-to-peer platform collapses, due diligence has become an increasing priority for P2P lenders – but according to Mike Bristow, chief executive and cofounder of property P2P platform CrowdProperty, true transparency involves more than simply looking at a platform’s target returns and default rates. “You need to look at the lending record to date and the platform’s track record,” he says. “Now, there are a number of elements to that. There's amount of money lent, which is not the best measure. For me, it’s more important to look at the amount of money that has been returned to the platform, because a platform is only a lender when the capital and interest successfully comes back in, otherwise it’s a charity without a cause. “It is also important to look at the amount of time the platform has been operating. While historical performance is not an indicator of future results, it is a reflection of experience and system efficacy. “And finally, I firmly believe in independent third-party verification and that's why we became Brismo Verified. Brismo has looked at every single loan cashflow, thereby validating our performance and putting it into a standard, pan-industry comparable methodology. This

gives lenders critical comfort that an independent, sectorexpert third party has trawled through our books.” Other independent analysts include 4th Way who also thoroughly analyse platform operations and – crucially – asset class expertise amongst the people. Lending record, expertise in the asset class, operational best practice and independent third-party verification are the pillars of P2P due diligence, but Bristow says it doesn’t stop there. “There's another element of transparency which is much more forward-looking and businessmodel related and that is being transparent about borrower rates and what the lender gets,” he adds. Transparency around borrower versus lender rates is not often seen in the world of P2P, and Bristow believes that this is due to the “big, big difference” between the two figures. “In some cases, a lender might be getting eight per cent in returns, but capital is lent to a borrower who is paying 15 per cent,” he

says. “There is a hugely different risk profile on the capital that the lender is providing and it’s their capital that is at risk. I find it shocking that the sector is not more transparent about this.” Ideally, the difference between the borrower rate and the lender rate should be minimal – platforms need to cover costs and earn something for their relatively efficient services, but they should never be earning anything close to what their lenders are earning. If a borrower is being charged 15 per cent, while a lender receives eight per cent, the lender is investing in a much riskier loan than the target returns suggest. Borrower rates are typically set in a market – if a borrower is paying 15 per cent on a loan, it’s likely they have not been able to find cheaper capital, probably for good reason. According to its most recently updated statistics through five years of operating, the average CrowdProperty contracted borrower interest rate has been 10.01 per cent, while the average return to lenders has been 8.05 per cent – less than a two per cent spread. The platform has originated £43.5m in loans and returned £14m of capital to investors, plus £1.3m in interest with a 100 per cent capital and interest payback track record. “If you can't find this level of transparency, ask yourself why,” says Bristow. And as the appetite for due diligence increases, many more lenders should be asking this very question.

PROFILE

Getting down to business Small business minister Kelly Tolhurst MP talks to Kathryn Gaw about the challenges facing smaller firms in the Brexit climate and the role of alternative finance in supporting the sector

EPENDING ON WHO you ask, the government is either doing a great job of promoting alternative lending options and small business funding; or it is the reason why peer-topeer lending has yet to enter the mainstream. But like it or not, the opinions which are formed in the hallways of Westminster Palace will go on to influence legislation, regulation and public perceptions of the alternative finance community. So what do our politicians really think about P2P lending for small- and mediumsized enterprises (SMEs)? “I’m very much in favour of P2P lending as a finance option for SMEs,” says Kelly Tolhurst, MP for Rochester and Strood, and the current small business minister. “When you actually look at the options that are available to SMEs for financing, P2P lending has opened up new opportunities, and as small business minister, I am pleased to see the growth in that area.” However, despite these encouraging words, it is clear that there is still some way to go before P2P is fully embraced by the powers that be. When asked to name five P2P platforms, Tolhurst was only able to name one – she would later ask Peer2Peer Finance News to withhold the name of the platform she was familiar with, to avoid showing preference. She also admitted that she does

not personally invest in P2P, although she wouldn’t rule out an investment in the future. “It’s not something that I’m particularly focussed on,” she says. “I know people who invest and it is

a great opportunity for people who want to use their capital and maybe invest in schemes that they actually like. A lot of the people I’ve come across like the fact that it’s something different and they feel like they’re

PROFILE

contributing, so that’s a really good selling point to get investors to look into these platforms. “In regards to me, no – my focus is trying to manage my constituency of 100,000 people and hold down a junior minister’s job, so looking at my own financial interests going forward is the least of my particular worries. But would I invest in a P2P platform if I wasn’t a minister or involved in politics? Yeah, I may well do.” If this doesn’t exactly sound like a resounding endorsement of the P2P lending community, it is only because Tolhurst – like most of her colleagues in the Department for Business, Energy and Industrial Strategy (BEIS) – is still learning about the opportunities of P2P as a viable alternative to bank lending. Banks are still very much

“ I’m very much in favour of P2P lending as a finance option for SMEs”

the first port of call for small businesses in need of start-up capital and growth funding. According to the most recent Bank of England statistics, business borrowing soared to £3.3bn in June 2019, representing the highest growth in SME borrowing since August 2017. However, 75 per cent of that funding came from banks. The remaining 25 per cent came from a combination of debt financing, commercial papers and equity fundraising. While banks still dominate the SME lending sector, there is an interesting shift taking place. A recent survey, commissioned

by P2P lender ThinCats, found that younger SMEs are increasingly seeking out alternative sources of finance. Just 31 per cent of SMEs under 10 years old will approach their bank first when seeking funding, compared to 61 per cent for businesses established between 10 and 20 years ago. Tolhurst says that the statistics prove that there is “absolutely” an opportunity for alternative lenders to fill this gap. “As small business minister my overall objective is to make sure that SMEs who want to borrow and who are in the right place and have got

PROFILE

the right plans to borrow money are able to do that,” she states. “And as a government we are keen to work with all kinds of financial institutions and investors to look at ways in which we can make sure that the finance is getting out to our business sector, so I very much welcome the increase in lending that we’re seeing in this sector and hopefully working together with the industry we’re able to see that growing over time.” Tolhurst understands the pressures of running a small business. In 2002, 13 years before becoming an MP, she started a marine survey business with her boat-builder father, and she still remembers how difficult it was to find funding. “At that time the only options were very, very, limited,” she says. “You could only go into your high street bank and unless you had particular contacts you were very limited.” In 2011, an interest in local issues inspired Tolhurst to run for Medway Council as a representative for Rochester West. When former Tory MP Mark Reckless defected to UKIP in 2014, she was picked as the Conservative Party candidate for Rochester and Strood. Although Reckless held on to his seat in November 2014, just six months later, Tolhurst won his seat with a majority of more than 7,000 votes. She was re-elected in 2017, and in July 2018 she was appointed Parliamentary Under Secretary of State for the Department of BEIS – in other

words, small business minister. As an MP, she has been vocal in her support for small businesses, even as Brexit politics threatens

“ The government’s top priority is around

supporting businesses as we prepare for Brexit, and I’m pretty confident that’s happening

”

to drown out any other issues. Tolhurst campaigned as a Remainer, but in the recent Tory leadership race, she backed Boris Johnson for prime minister, and she has indicated in the past that she would support the PM through a no-deal Brexit. But she insists that the UK’s small business community would not suffer in the event of a no-deal.

PROFILE

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It’s an education process as well

“When I’m out and about talking to small businesses they tell me the main problem is the uncertainty,” she says. “All small businesses have said to me that certainty is what they need; they can put their plans in place to deal with all eventualities but it’s the uncertainty that’s caused them the problem.” She has pledged to work closely

”

with all lenders to ensure that SMEs still have access to finance and the funding that they need to grow. “The government’s top priority is around supporting businesses as we prepare for Brexit, and I’m pretty confident that’s happening,” Tolhurst confirms. “We’ve stepped up a gear for our preparations, even in the eventuality that we leave on 31 October without a deal. “What I want is to leave the European Union on 31 October,” she adds. “That’s what we want to deliver, we’ve got a Prime Minister who would much rather be leaving the European Union on 31 October with a deal, but we are committing to leaving on 31 October and if that means without a deal that is what we’ll be doing.” The government has conducted stress-testing on banks to ensure that they have enough resources to continue lending to SMEs in the event of a no-deal Brexit. For the wider lending community, the British Business Bank (BBB) is there to offer a safety net for SME lenders. The BBB is wholly-owned by the government, and under Theresa May’s government a £200m ‘topup’ was offered to replace the European Investment Fund cash that is likely to be discontinued after Brexit. More than £7.5bn is expected to be invested in British businesses over the next decade, via the BBB’s investment arm, British Patient Capital. According to Tolhurst, if a P2P lender is keen to get onto the

government’s radar, the best route is via the BBB. “The BBB is our main partner in regards to working with the industry to get alternative funding,” she says. “If P2P funding platforms are interested and – I would hope – if they’re good, then I would definitely encourage them to come forward and to talk to us.” Speaking on condition of anonymity, a representative of the BBB told Peer2Peer Finance News that Tolhurst works closely with them and is well liked for her hard-working attitude and accessibility. When Tolhurst asks P2P lenders to “write to me” with concerns and suggestions about how to improve access to SME funding, you get the impression that she genuinely wants to hear from lenders, of all stripes. “The development of P2P lending has opened up options for SMEs,” Tolhurst says. “It’s now more widely available, and we are supportive of new products and ways of working to make sure that funding and the accessibility of finance gets out to the SME market. “It’s an education process as well,” she adds. “A lot of small businesses, if they’ve not had experience of raising finance before, they won’t have heard of P2P lending.” These words will likely ring true with the many P2P lenders who have struggled to get their message across. And while the government’s focus on educating SMEs is admirable, and badly needed to ensure the growth of the P2P sector, it is clear that some further education is also needed within Westminster itself. Tolhurst is open to learning – it is up to the lending community to teach.

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JOINT VENTURE

Mind the (advice) gap

John Mould, chief executive of ThinCats, explains the importance of filling the business funding advice gap

RE WE IN THE MIDDLE of an advice crisis? According to John Mould, chief executive of ThinCats, the rise of online banking and the availability of alternative finance has created a profound shift in the way that businesses seek out and receive advice. This is creating an ‘advice gap’ – but it is a gap that peer-topeer lenders and other finance providers are ready to fill. “Historically when business owners wanted to borrow, they would go and see their bank manager,” says Mould. “There would be some wizened person who would give them some advice – ‘I know you think you should borrow more, but I don't think you should. You will be stretching yourself too much’. But as banks become more computer based, there's no-one helping people to make these decisions.” This means that small- and medium-sized enterprises (SMEs) across the UK risk going into new funding agreements without having all the information at hand. As Mould says: “If you're looking to borrow a couple of million pounds, you need someone to bounce the ideas off!” “We, as a lender will always make sure the person can afford the loan that they are applying for,” Mould adds. “Because businesses are now leaving the banks and looking to lenders like us, our role is not only to fill the funding gap but actually to fill the advice gap as well.” ThinCats uses a network of qualified introducers to source its

loans, complemented by its own internal processes as well. For example, it uses its proprietary Propensity and Risk Model (PRISM) software to benchmark more than 400,000 medium-sized UK business across a number of metrics, including insolvency risk. This information is shared with accountants and brokers, as well as the businesses themselves – the benchmark can tell them where they sit in the market, and how they stack up against their competitors. “The banks have lots of this data, but because they are not interested in mid-sized businesses, they have not invested in how to interpret it as accurately as we have,” says Mould. “So we can actually offer more useful information to an SME than a bank could. And with the advent of Open Banking, we're going to be able to provide even more useful insights.” When ThinCats’ credit analysts look at an SME loan, they ask a

series of questions: What are you borrowing for? What is the loan going to do for your business? Will you be able to afford the interest or capital repayments and have money left over so you don't put your company in stress? “We absolutely believe that when we lend money, we need to be certain that these businesses are borrowing money responsibly and that they know what they are doing and why they are doing it,” says Mould. “That's really key for me.” In fact, Mould believes that this is such an essential part of the lending process that it won’t be too long before the regulator will insist that SMEs of a certain size will have to do their own affordability tests. As alternative business lending becomes more and more popular, and Open Banking creates a new expectation for transparency, a growing community of advisers coupled with better data will be key to closing the advice gap.