Peer2Peer Finance News September 2021 by Alternative Credit Investor

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ISSUE 60 | SEPTEMBER 2021

Industry braces itself for more investor restrictions THE PEER-TO-PEER lending sector is anticipating a regulatory clampdown on appropriateness tests and investor categorisation after a swathe of warnings from the City watchdog in recent months. In April, the Financial Conduct Authority (FCA) said it was considering toughening up its rules on the promotion of “high-risk” investments, including P2P lending. The regulator then wrote to the boards of P2P lenders in May, urging them to ensure their secondary markets, wind-down plans, loan disclosure and fees were fair and clear for consumers. And last month, the FCA published a letter it sent to bosses of equity crowdfunding platforms in July, warning that “too many” consumers are still investing in inappropriate, high-risk investments that do not meet their needs. The FCA expressed concerns that investors may be holding more than 10 per cent of their portfolio in investments

that “could pose a significant risk of harm”. Investor marketing restrictions have been in place within the equity crowdfunding space for a number of years and similar rules were subsequently introduced for P2P lending platforms in 2019. Platforms are currently restricted to marketing to sophisticated or highnet-worth investors, those receiving regulated financial advice, and those who certify that they will not invest more than 10 per cent of their net investible portfolio in P2P agreements – known as restricted investors. This means users have to select one of the categories to describe themselves before investing. Jatin Ondhia, founder of Shojin Property Partners, said the FCA’s approach

suggests that it does not believe restricted investors understand the risks of alternative lending. “It is wrong that restricted investors should be prevented from investing in equity crowdfunding projects and the further restrictions being considered by the FCA take us back many years by enabling only wealthy investors to take advantage of the new fractional investment models in this space,” he said. “The whole intention was that the market should be opened up to everyone.” He said the majority of operators in the P2P lending market are looking after investor interests and want to build a sustainable alternative investment marketplace to spread wealth across all sectors. “The FCA risks throwing

out the baby with the bath water,” he added. “In the long run this market will prevail and if the FCA doesn’t get a handle on this it will lose its crown to one of the many other competing regulated markets such as Singapore, the USA or Europe.” David Bradley-Ward, chief executive of Ablrate, agreed that the trajectory of the regulations seems to be to restrict access further for retail investors. “What effect this will have on the industry is a matter of how those restrictions are implemented by the FCA and whether certain models are given a different categorisation within those restrictions,” he said. “We have seen this coming for years. “I cannot count the number of times I have talked about liquidity being the key. If the industry in general had addressed these concerns in the past few years we would not be at this stage.” Compliance specialists >> 4 are picking up

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EDITOR’S LETTER

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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 Danielle Levy Reporter 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.

ast month was particularly quiet at P2PFN towers, compared to previous Augusts – I suspect this was because many people were taking the opportunity for a much-needed sunny holiday after the arduous winter lockdown. As well as giving me the opportunity to get through my admin list, and take some time off, it got me thinking about the mood of the industry. When the pandemic first hit in March 2020, most of the peerto-peer lending bosses I spoke to were understandably focused on safeguarding their business during this black swan event and there was an air of tension and uncertainty hanging over the industry. But what’s remarkable is how quickly that faded. While there were a few platforms that closed to retail investors or closed entirely during the crisis, the vast majority of platforms in the P2P space have been growing, innovating and fundraising. The general mood is remarkably different from 18 months ago and there’s palpable optimism in the air. I’m really impressed by how the industry has reacted to the Covid-19 crisis and I’m excited to see what other developments emerge this Autumn and beyond.

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 similar sentiments from the regulator. “The general feeling is the FCA is seeking to ensure the industry is more robust when it comes to failures and where firms do fail there is an adequate and reasonable wind-down plan in place,” said Gilbert van Roon, managing director of Fintech Compliance. “It won’t ban restricted investors outright but they could face further restrictions on the amount they can invest or the proportion. “I know there are already restrictions in place, but I think they could become tighter in future, or the regulator could say that retail investors can only

get involved if advised by an independent financial adviser. “That would be a very strong call to make by the FCA.” He said it would be complex to strengthen the current investor categorisations as you would need a lot of paperwork to prove you are sophisticated or high net worth, whereas currently investors just select a box to self-certify. Mark Turner, managing director in Kroll’s financial services compliance and regulation practice, said the key thing is for platforms to keep an eye on their user base to make sure investors are choosing

the right category to describe themselves. “I’m not expecting changes to the appropriateness test, those doing it correctly don’t have a lot to worry about,” he said. “We have seen particularly during lockdown that more interactions are online. “The FCA will expect firms to look at their data and if the percentage of people who are eligible has changed materially pre-lockdown to now, is this because the number of clients has grown or because people are clicking through quickly who maybe shouldn’t be qualifying?” In response to the

regulatory direction of travel, Bruce Davis of the UK Crowdfunding Association (UKCFA) highlighted the trade body’s recent survey of investors which found a high level of understanding of the risks involved. He added that the FCA has since been in touch directly with a sample of platforms to say that it will be carrying out further data collection and analysis to follow up on the evidence provided by the UKCFA and better understand investors’ perceptions and experience of the sector. The FCA has been contacted for comment.

Crowdstacker investors in the dark about Amicus recovery INVESTORS in one of Crowdstacker’s largest loans that subsequently collapsed are waiting to see how much of the remaining funds they will get back after a landmark legal ruling. The loan was made to property finance specialist Amicus Finance and attracted £15.3m from the peer-to-peer lending platform’s investors between 2015 and 2017. However, Amicus collapsed in 2018 and Begbies Traynor was appointed as administrator.

An update in February 2019 showed £4.1m was still owed to Crowdstacker investors. The document said that “based on current information it is anticipated that Crowdstacker will be repaid in full” and the

platform’s chief executive Karteek Patel told Peer2Peer Finance News at the time that capital and interest would be returned by the end of the year. But Brexit and the coronavirus pandemic delayed attempts to recover funds. In June 2021, Begbies Traynor proposed a new restructuring plan that would rescue the company as “a going concern” rather than letting it go into liquidation or be dissolved, as was previously agreed. Under the new plan,

Crowdstacker would receive £75,000 plus a share of £2.2m as a secured creditor. Crowdstacker opposed the move and called for the court to separate its claim from another secured creditor to ensure it could represent investors. The restructuring and Crowdstacker’s proposals were separately backed by the High Court in London last month. Crowdstacker declined to comment on whether it still expects to repay the £4.1m to investors.

NEWS

Can IFISA providers attract lockdown cash? WITH savings account interest rates at an alltime low and consumer savings boosted by multiple lockdowns, peerto-peer lending platforms have a big opportunity to attract Innovative Finance ISA (IFISA) money this tax year. This brings two questions to the fore. Firstly, will platforms market their IFISAs outside of ISA season? And secondly, will this spell a change in marketing strategies? Neil Faulkner, managing director of P2P research firm 4th Way, said there is much to be said for targeting new investors outside of ISA season. “The off-season lasts nine months, so providers

needn’t wait that long for their next burst of growth,” he said. Since the start of the pandemic, Faulkner noted that people are saving and investing more – and he suspects the threat of rising inflation will lure more people away from savings accounts into IFISAs. While the opportunity is there, Paul Sonabend, executive chairman of Relendex, highlighted the challenges associated with

targeting new investors via advertising, after stricter marketing restrictions were introduced in December 2019. “The comparison sites are outrageously expensive [for pay per clicks] if you can’t convert 90 per cent of the leads,” Sonabend added. Meanwhile, a Folk2Folk spokesperson questioned the benefits of offering incentives to new IFISA investors.

“We do not feel the need to entice investors with cashback or similar incentives as our IFISA product is attractive in its own right, offering 6.5 per cent per annum tax-free,” the spokesperson said. Her sentiments were echoed by a spokesperson for Crowdstacker, who said the P2P lender is not planning to change its IFISA marketing strategy this year. “All of the loans that we feature on our platform are ISA eligible so we always let our investors know how they can invest taxefficiently regardless of whether it is in the run-up to the start or end of the tax year,” the spokesperson said.

CapitalRise bucks Covid-19 crisis with strong growth in 2021 CAPITALRISE has reported a strong few months of loan originations, coupled with “huge growth in investor demand”, despite the challenges of the pandemic. The prime property investment platform reached its £100m lending milestone in early 2021 and since then lending volumes have continued to rise, with a further £20m originated over the last few months alone.

Loan applications have also jumped significantly. Over the 12 months to the end of July, it reported a £1.2bn increase in new enquiries compared to the same period in 2020. “In addition to the growth in demand from borrowers, we’ve also seen huge growth in investor demand in 2021,” Uma Rajah, chief executive of CapitalRise, told Peer2Peer Finance News. “In July, we processed over £11.1m in new investments on the

CapitalRise platform, a record-breaking month for our company.” While prime central London prices had been in decline since 2014, Rajah said the market appears to be at a turning point. She pointed to figures from estate agent Knight Frank which show prime London prices increased by 0.5 per cent over the three months to June 2021 – and she expects this upward trend to continue. “This makes it a

very attractive point in the property cycle for developers to acquire sites and to kick off new projects,” she said. Rajah added that the market continues to adapt to changes created by the pandemic. For example, developers are responding to demand to convert prime property assets from office to residential, as well as increased buyer demand for residential properties with space for home offices or gyms, or outdoor space.

NEWS

The regulatory sandbox – a history THE FINANCIAL Conduct Authority (FCA) recently announced that it will be opening its regulatory sandbox all year round, giving even more financial services firms – and fintechs – the opportunity to innovate. The City watchdog’s initiative was launched in 2016 to let firms test new financial products in a safe space before launching them to the market. More than 120 firms including banks, charities and start-ups have gone through the sandbox in seven groups, known as cohorts, to test products

such as budgeting tools or payment apps. It previously was only open to applicants at certain times of year but will now operate all year round. No peer-to-peer lending platforms have gone through the sandbox to date. However, former P2P lending aggregator Orca was one of 18 companies in the 2017 sandbox, where it tested its proposition that let investors put money into a range of platforms. Orca allocated investor money to brands such as Assetz Capital, Lending

Works, LendingCrowd, Landbay and Octopus Choice. But it wound down in 2020, blaming regulatory changes and a shift in market sentiment. It said “high customer acquisition costs… were unsustainable” and that regulatory changes “made the firm’s retail aggregation structure unfeasible”. Other users of the sandbox included money app Bud, which let consumers access financial products in one place, including some P2P platforms. The Open Banking

Implementation Entity used the sandbox in 2019 to work out how consumers could use the technology to make and receive payments. And consultancy DLA Piper used the sandbox last year to test a regulatory compliance tool. An invoice financing platform called Crowdz UK was also in the 2020 cohort and uses smart contracts to tokenise invoices so small businesses can access cash from unpaid bills. It invites banks to compete for the invoice by offering the best rate.

P2P property loans grow in size ARMED with growing numbers of institutional and retail investors, peerto-peer property lending platforms are originating increasingly large facilities. Bridging lender SoMo last month launched a larger loan product based on broker demand for loans worth more than £300,000. Meanwhile, CrowdProperty’s publiclyavailable loanbook data shows that its average loan size is increasing. In 2019 its average loan size was £367,039, rising to £396,344 in 2020 and is at

£437,142 so far this year. The Birminghamheadquartered platform has a minimum loan size of £100,000 but no upper limit on its products including development finance and bridging loans. Similarly, bridging and property development lender Kuflink has also seen its average loan size grow, going from £490,000 in 2019, to £440,000 in 2020 and £730,000 this year. Kuflink’s minimum loan size is £50,000 and its maximum is £750,000. Other P2P property

platforms also offer sizeable facilities. Commercial property lender Proplend offers loans of up to £5m, while Shojin Property Partners has a typical loan size ranging between £2m and £4m. CapitalStackers has no minimum or maximum criteria, although it says

that the pricing associated with listing a deal of less than £250,000 may make the borrowing costs unattractive. “We’re seeing lots of good deals and expect that to continue,” Steve Robson, managing director of CapitalStackers, told Peer2Peer Finance News earlier this summer. “Apart from certain localised pockets, the property market is strong and we believe there will continue to be good opportunities for the right products in the right locations.”

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Shojin unveils expansion plans SHOJIN Property Partners is planning to launch two more international offices over the next five months and is considering offering other alternative investments to its growing investor base. Founder and chief executive Jatin Ondhia said office launches were planned in India and the Middle East by the end of the year, potentially followed by mainland Europe in 2022. The property investment platform currently has offices in the UK,

Kenya and Hong Kong, which helps to service its international customer base. Investment is inbound to the UK, where the platform focuses on junior property development debt and equity. Ondhia also pointed to early-stage plans to expand into international real estate development markets. “We are seeing a less established financial system for real estate development in other countries and that creates a lot of opportunity,” he told Peer2Peer Finance News.

In addition, the business is open to offering other alternative investments via its platform, but Ondhia said no decision had yet been reached on a specific sector. “If we see a good opportunity for our investors in another sector, it is something we would explore with the right partners,” he said. His comments follow a strong 18 months for Shojin, in spite of the pandemic. Last year, the company swung into the black with a £234,000

Relendex eyes SIPP market RELENDEX is targeting the self-invested personal pension (SIPP) market through its new associated company Farringdon Portfolio, which is authorised to advise clients on loans and to manage portfolios on their behalf. The peer-to-peer property development lending platform created Farringdon Portfolio to help its lenders to optimise returns and to take the effort out of due diligence when choosing loans to invest in. It takes into account the investor’s specific requirements by using an algorithm to

invest in Relendex loans. “You can invest your Innovative Finance ISA and there will be SIPP solutions,” Paul Sonabend, Relendex’s executive chairman, told Peer2Peer Finance News. “The next thing we expect to see is Farringdon licensed as a fund manager.” While plans are still at an early stage, he said the goal is to offer a Relendex fund via third-party SIPP platforms. As the platform supports sustainable methods of construction, the first fund launch is likely to have an environmental, social and

governance focus. These plans follow a strong 18 months for the platform. It moved into the black with a £136,000 profit over the year to the end of January 2021. “We are profitable every month now, whereas we used to be profitable only some months," Sonabend

profit on revenues of close to £1m. Although 2020 was a quieter year for deals, the chief executive said things are now picking up. “It is only since March of this year that we have started to see serious deals come to the table, where the numbers stack up and the risks are fairly low or well-contained – ones we feel comfortable backing,” he said. “A lot of those are in our pipeline at the moment. We are expecting a bumper year.” said. “Being profitable makes everything easier and more enjoyable. It helps to build confidence that we will be around forever and a day.” He said the biggest challenge the platform faces is that the loanbook is not as large as they would like because loans are being repaid early. “So many large loans are being repaid early rather than late,” Sonabend said. “We have out of town developers who thought they would take 15 months to do the development and three to six months to sell. Two months into the development, they have pre-sales on virtually all of the development.”

JOINT VENTURE

Kuflink mulls new BTL product suite as demand heats up Narinder Khattoare, chief executive of Kuflink, reveals his plans to launch an innovative new term loan product, in response to investor demand

UFLINK IS SET TO introduce a new suite of buy-to-let (BTL) term loans, in response to soaring demand from both investors and borrowers. Narinder Khattoare, chief executive of Kuflink, says that his team is looking at how to package those loans at the moment, but the roll-out is likely to take several more months. “Its something that we are looking at,” he says. “From an investor's point of view, they are putting their funds into a platform which predominantly offers short-term loans, as well as some medium-term products too. “But what if they want to deploy their funds over a slightly longer term? So we are looking at a three to five-year product, which investors can put their funds into. Yes, they're going to earn a lower margin on it, but the actual product itself and the profile of the borrower is totally different to that of a property developer or somebody going to buy a property from auction.” The BTL term loans would be for landlords or anyone who has a portfolio of income-producing properties. Khattoare points out that these properties typically generate more than enough rent to cover the interest payments on a term loan, which reduces the risk of a default. Kuflink will try to match the existing BTL bank rates of between two per cent to 4.5 per cent as closely as possible. These BTL term loans are just one example of the ways in which Kuflink continues to innovate and

stay ahead of market trends. Over the past year, the platform has made a few tweaks to its existing product suite. Investors can now compound their interest to maximise their gains, and Kuflink has also introduced an Innovative Finance ISA wrapper around its individual loans, again, in response to investor demand. “We listen to our investors,” says Khattoare. “Most of our bigger investors like to go into individual deals rather than spreading the risk across our portfolio. Our team has been listening and about six or seven weeks ago that was launched on our platform. And it's going down pretty well!” Covid has also created a changing landscape for borrowers. Khattoare says that Kuflink has seen “a massive influx of development enquiries that come our way” as the country came out of lockdown. However, he is aware that the property development market is facing its

own set of unique challenges. “I think there's going to be a bit of a challenge over the next 12-18 months on some of those funds because of the shortage of supplies,” he cautions. Kuflink intends to handle the rising risk of defaults by taking an even more detailed approach to its due diligence, and ensuring that forbearance measures are available to borrowers who need them, while investors are kept informed about any potential delays in their interest and capital payments. “The loan term is key,” explains Khattoare. “We're trying to encourage some borrowers to take a longer term on their loans, knowing that they may not be able to get the supplies that they need to complete their project.” When Kuflink becomes aware of a forthcoming payment delay, it notifies its investors immediately. However, investors should always be aware that not all investments pay back on the due date due to circumstances out of the platform’s control. Therefore, investors should allow some time to receive their funds if they need them for a particular purpose. This back-and-forth relationship between the platform and its investors ensures that Kuflink can respond quickly to demand, even in a rapidly changing market. As Khattoare explains: “Innovation means doing something which people have done previously, but doing it even better, faster, and with more flexibility than before.”

BUSINESS LENDING

The new normal

The distortion of the business lending market is coming to an end and P2P platforms are adapting to the next stage. Michael Lloyd reports

EER-TO-PEER BUSINESS lending platforms are enjoying a transition to ‘the new normal’ after operating in a distorted market last year. The government introduced a number of Covid-19 loan schemes which were a lifeline for struggling businesses. However, those lenders which were not accredited to offer government-backed loans found it difficult to compete, creating a ‘two tier’ P2P business lending market. Furthermore, mandatory forbearance measures to support businesses meant that default rates were near zero for many platforms, which was unlikely to

be representative of the health of the UK’s small- and mediumsized enterprises (SMEs) when the measures ended. The good news is that the typically agile P2P sector has adapted to the pandemic and is continuing to adjust as we come out of the other side. “On the whole I think we are looking at a positive future for P2P – it’s been a tough year, but we are seeing a lot more opportunities coming through,” says Ian Anderson, chief operating officer of ArchOver. Most platforms have tightened their lending criteria and some are avoiding lending to firms in sectors

most affected by the pandemic. Peer2Peer Finance News has learnt that platforms look set to keep these changes in place for the foreseeable future. Lee Birkett, chief executive and founder of JustUs, says platforms had to enhance their due diligence to ensure they do not lend to hospitality firms. He expects this policy to continue despite the lifting of lockdown restrictions, as the sector has still only reached a fraction of its prepandemic customer numbers in some areas. “There’s still a very conservative approach to lending,” he says.

BUSINESS LENDING

“It’s certainly not at the appetite it was pre-coronavirus and if anyone is they need sacking!” Daniel Rajkumar, managing director of Rebuildingsociety, reveals a similar approach to protect his platform during the pandemic. Rajkumar says that the P2P business lender ensured it worked with businesses that would trade through the Covid-19 crisis, such as convenience stores, rather than those unable to do so like tourist attractions. The platform has issued a Covidspecific survey of questions to its borrowers to help understand how their businesses are coping. “I think we’ll review the survey in our next credit review meeting due quite soon and businesses will be able to answer questions more favourably,” says Rajkumar. “We have received an uptick in

“ There’s still a very conservative approach to lending

”

enquiries, but few are meeting the criteria.” David Bradley-Ward, chief executive of Ablrate, similarly says that his platform has tightened its criteria, explaining that it is not lending to any more pubs. He predicts that business lending will return to normal but notes that Covid-19 has set the precedent for future lockdowns. “If you’re lending and not taking into account the possibility of a partial shutdown then you’re not factoring in everything,” he says. “Before this I wouldn’t have thought about being shut down for

six months to a year, but a precedent has been set now.” Armed with tighter lending criteria and a recovering economy, platforms should be well placed to take on the inevitable rise in defaults as furlough, tax deferment and the moratorium on rents are tapered off. “Lenders which have sufficiently diversified can still confidently expect to keep making a profit, but lending results will tick down and be less impressive,” says Neil Faulkner, managing director and head of research at 4thWay. “With a more stable economy, businesses will have had time to recover and will see customers spending money. Bad debts will be higher than the long-run average for a while, but still profitable for investors.” However, Bradley-Ward warns

BUSINESS LENDING

that some of the less innovative platforms could face trouble. “There are some fantastic platforms out there doing brilliant things, raising money for great ideas and to scale and that’s fantastic,” he says. “But some are doing the same thing and not really improving, raising money year in and out without raising turnover and at some point, the music will stop, and investors will notice.” Despite the challenges, industry stakeholders are broadly positive about the future of P2P business lending. 4thWay’s Faulkner says the uptick in the economy means that more

investors and quality businesses will again want to take part in P2P loans as either borrowers or lenders in the coming months. “The market for non-property business lending will pick up again slowly and for property business lending it is already ramping up speed,” he says. “However, expect P2P lending companies to keep their underwriting criteria especially tight for a while longer.” The recovery of the market will be a relief to those alternative lenders who did not participate in government schemes. Although the recovery loan scheme (RLS) is running until December, this

“ Bad debts will be higher than the long-run average for a while”

successor to the government’s previous loan schemes offers less financial support than its predecessors so should not create such an unlevel playing field. “For those that have managed to lend through the crisis some have potentially gained new customers, experience and links with institutional investors,” a spokesperson from the British Business Bank said. “However, for others this may well have put back their plans and the markets they targeted pre-pandemic may not be as large as before. “Many non-bank lenders and their investors show signs that they are ready to resume a greater level of activity throughout 2021, as some have been operating at a reduced level during the pandemic.” Furthermore, the participation of some P2P platforms in state-backed

BUSINESS LENDING

“

If you’re lending and not taking into account the possibility of a partial shutdown then you’re not factoring in everything loan schemes has highlighted the vital role the sector can play in the business lending ecosystem. Platforms such as Funding Circle, Assetz Capital and LendingCrowd provided funding through the coronavirus business interruption loan scheme and Funding Circle also offered loans through the bounce back loan scheme. More recently, both Funding Circle and Assetz Capital have been accredited to RLS. With high street banks tightening their lending criteria, alternative lenders can step in and support growing businesses as we come out

”

of the pandemic. A recent survey of 500 highgrowth SMEs from law firm Walker Morris found 77 per cent were unable to secure traditional bank financing, showing the need for alternative finance to fund their expansion. The pandemic spurred record lending to SMEs in 2020, hitting £54bn over the first nine months of the year as 1.5 million businesses drew on government-backed loans, and the research found that many companies now require additional finance to invest in growth. This goes some way to demonstrate

the size of the opportunity for P2P business lenders. “We expect challenger and nonbank lenders to play an important role in the provision of finance alongside the high street brands and as liquidity tightens later in the year, working capital support such as invoice finance will become more important once again,” says Stephen Pegge, managing director of commercial finance at trade body UK Finance. P2P lending platforms have provided a lifeline to businesses during the Covid-19 crisis, whether accredited for the government loan schemes or not. And once again, the sector has shown it can adapt and thrive in challenging market conditions. The next stage is coming, and P2P business lending platforms are ready for it.

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

Assetz gears up for recovery loan scheme

Mark Standley, national commercial director at Assetz Capital, explains how the government-backed loan scheme will benefit all types of investors on the platform

AVING SUCCESSFULLY delivered more than £370m of funding to small- and medium-sized enterprises under the government’s coronavirus business interruption loan scheme (CBILS), Assetz Capital has now been approved for the recovery loan scheme (RLS) and is ready to help businesses reach their next stage of growth. “We applied right away, though the accreditation is a lengthy process and we received our final approval in the second half of July,” says Mark Standley, national commercial director at Assetz Capital. “As you can imagine, we weren’t sitting on our hands either – we were busy getting ready and so we were able to get going straight away once we received our approval. “We enjoy strong demand for our services, and RLS has shown to be a good fit for property development and commercial mortgage lending. We have been reviewing eligible cases and already have a healthy pipeline building up.” There are differences between CBILS and the government’s successor initiative, RLS. The former was introduced at the height of pandemic, a desperately worrying and uncertain time for business, and consequently provided significant financial assistance with borrowing costs. With a vaccination programme well underway and a generally more positive outlook, it makes sense that RLS as the successor scheme supports access

to funding for business at a reduced cost to the taxpayer. “The key fundamental difference is that there is no business interruption payment, whereas under CBILS the government was essentially paying the full loan finance costs for the first 12 months,” Standley explains. “That’s no longer the case, so it’s a step back towards a more normal situation. “RLS is a valued enabler by way of the government guarantee. It’s a great assist for lenders in helping them to support borrowers impacted by the pandemic without the huge cost of CBILS which of course could not go on indefinitely.” Assetz takes the same disciplined and professional approach to assessing loan requests with RLS as it does with all of its lending. “What’s very important to understand is that it’s not an opportunity to transfer risk unfairly across to the government,” Standley asserts. “We approach our due diligence and credit review in a very similar way to how we would have conducted it prior to the pandemic, but of course with the ability to

take a pragmatic view on the shortto medium-term impact of the pandemic.” Like CBILS, RLS can only be funded by institutional investors. However, as well as RLS lending, Assetz has also fully restarted retail lending and is providing separate loan opportunities that investors can participate in. Both parts of the business are complementary rather than competing, as Standley explains. RLS enables Assetz to fund loans of up to £10m in size, which it can then use to provide larger commercial mortgages and development facilities. “We’re not inclined to lend at those levels on the retail platform so whilst there may be some areas of overlap, in many cases we’re providing a different type of loan under RLS,” he says. “We are seeing very strong demand for both retail and RLS loans at present, so going forward I see both as incredibly important to Assetz.” While the government schemes can help Assetz scale up its lending, retail investors are still at the very core of the business. “The retail platform has been there since Assetz’ inception,” Standley affirms. “It’s a very precious thing to us, it’s something we want to maintain going forward and it’s central to what Assetz is all about. “In terms of our ability to do other types of lending, the government schemes help us to be commercially successful which means we can invest in the business and ensure its growth and longevity, which is a great thing for retail investors.”

PROFILE

Meet P2P’s newest pawn star Daniel Grimes, director and owner of Connective Lending, explains how he took his pawnbroking empire to the world of peer-to-peer lending

ANIEL GRIMES describes himself as an entrepreneur who just happened to spot a gap in the peer-to-peer lending market a few years back. Before launching P2P pawnbroker Connective Lending in February of this year, he was the proud owner of a string of pawn shops across the south of England, as well as director and owner of a luxury watch store. But when he realised that there was a need for an experienced pawnbroker in the world of P2P, he knew there was only one man for the job. Six months in, Connective Lending has reported no losses, and Grimes is planning an expansion into the property market, with a view to becoming a boutique lender of quality. Grimes speaks to Kathryn Gaw about his journey from pawnbroking to P2P and beyond… Kathryn Gaw (KG): What did you do before you entered the world of P2P? Daniel Grimes (DG): I was working for BMW dealerships, selling cars, and wanted a break from the nonstop hours and low loyalty levels in that kind of business. I got involved in a pawnbroking business with my father. When he took ill about a year later, I took over the reins and over the next 10-12 years, I opened another four stores and became quite an experienced pawnbroker. I had to change the business model a few times to survive,

as many people do. What I was always aware of was the fact I got my accounts done accurately, within a week of every month, so I always knew whether we had made or lost money so I could react quickly. It’s surprising how many people don’t do that. Throughout this time, we always bought and sold luxury watches. I’ve been doing this for years and in the early 2010s I opened a website called watchbuyers.co.uk. Back then, Google used to count your URL quite highly, so within a week, we were on page one of Google and it became a monster. We went from £1.4m, to £1.9m, to £2.4m, to £3.5m just before the pandemic. That gave me a deep, deep understanding

of watches, which are assets, and through that time as a watch valuer, I met Noman Akram, one of the founders of FundingSecure. He came to see me in early 2018 and asked if I could help him build a sustainable business. My thoughts were, I will, as long as I am making the decisions. KG: How easy was it to enter the P2P world? DG: We spent a long time getting the licence and we jumped through many, many hoops. We wrote many documents and spent thousands on compliance consultants, solicitors and legal agreements. To cut a long story short, we finally got our licence in November 2020. We could have got it a year earlier based on my

PROFILE

experience, but we wanted the option to be able to do property in the future, so we decided to bring some property experts on board. We started lending in February and have been building up loans nicely and organically, through various means, whether it’s via Google or refinancing loans from other companies, or receiving broker recommendations. What we’ve done so far has been very encouraging. KG: Why did you decide to enter the P2P space? DG: The industry was lacking an expert in pawnbroking. It’s not as simple as people think. It’s fraught with danger and people trying to pull the wool over your eyes and I hate to use the word streetwise, but I could see there was no ‘streetwise’ pawnbroker in the P2P pawnbroking field. The key to successful pawnbroking is so simple – you should lend an amount on an asset that the customer can afford to get back and that they do get back because the profit in pawnbroking is by earning interest on the loan. That’s where maybe there had been a bit of naivety in the P2P field and I thought I could come in and make a success of it. KG: Can you talk us through the life cycle of the loan? DG: We’ll get offered an asset that somebody wants leverage against. The key to our business is the asset – you don’t have to do affordability checks with borrowers because you’ve got their asset. We look at the asset and establish a quick disposal value, and then we’ll establish a loan amount. Our aim is to make sure there is enough equity for our investors to always get their capital and interest, and for the platform to get its admin fee and

interest as well. If a loan is accepted by a borrower based on those initial investigations, we will go and collect it in person, get a valuation and check that it matches the description that’s normally been obtained digitally. We will make a final loan offer and if the borrower accepts, we’ll then launch the loan on our platform and notify investors. We put a loan up today for a collection of luxury watches and it was filled within minutes. At that point, we issue the loan contact, get it signed, and take possession of the assets. KG: What’s the most expensive item you’ve taken possession of? DG: In financial amounts so far, the most expensive was £156,000 and second was £110,000 – both for cars. KG: And the strangest? DG: We’ve taken American Harley Davison motorbikes – army ones, all painted green with machine gun holders on the back, so you could ride between posts in whatever war you were fighting and deliver messages. We’ve taken gold teeth, boats, art – even a restaurant. KG: Tell us about your regulatory journey. DG: We submitted our application to the Financial Conduct Authority (FCA) in mid-2018 and got our licence in November 2020. I’ve been in financial services since 1997 and the regulators are so much more active now. In my day, if you wanted to become a pawnbroker or a moneylender, you filled in a one-page form and that was it. Debt collecting? Yeah, we’ll do that. Nobody ever checked. To be kind to the FCA, they’ve got a job to do, they’re under lots of pressure, and everyone loves to moan. Overall,

they’re doing an OK job. It’s nothing more than a bit of regulation and at least it gets rid of all the idiots, the thieves and the Ponzi scheme boys. It can be frustrating, but we’ve all got a job to do. KG: When do you plan to enter the property lending market? DG: When we choose to enter the property market, it will only be when we build a sustainable pawnbroking loanbook that is paying enough interest to keep our investors happy and create income for the business, because obviously the business has to be profitable at some point. When we do enter property, we would only want a niche property loanbook. We will probably say no to quite a few loans because we don’t want risky loans and we certainly don’t want disposals. KG: Where do you see Connective Lending in five years? DG: The plan is to have a selffinancing, profitable loanbook of a few million pounds. I hope that in five years, we could build a £10m loanbook over a multitude of different asset classes, most importantly, only lending money that gets paid back. I call it the Goldilocks loan. Getting it right is the key to success. If we could get to £10m in five years and have a boutique of £10m pounds worth of investors who would be very happy earning 12 per cent per annum, and have absolute trust in what we do, that’s us. Nothing grandiose – just a really good, sustainable business that gets people a good return on their money. We want a successful business, but we want to do it in a nice way, we want to do it in an honest way. That’s what I’ve done for 25 years, and I’ve never had a failed business.

LITIGATION FINANCE

See you in court

Litigation finance is a growing industry, but is it an appropriate opportunity for retail investors? Michael Lloyd investigates

“L

ITIGATION FINANCE is a little like a John Grisham novel, there’s an interesting narrative to cases, a good guy and a bad guy, and human interest,” says Cormac Leech, founder and chief executive of online litigation crowdfunding platform AxiaFunder. The litigation finance market is an intriguing, growing area with many advantages, from high returns to a social benefit of enabling claimants to take their cases, such as house

repairs against landlords, to court. There are currently limited options for restricted retail investors wishing to access the sector. Litigation funders either tend to be balance sheet lenders or they are looking for institutional, sophisticated and high-net-worth lenders. However, there could be more avenues for everyday investors as the sector increases in size. “What’s interesting with litigation is that investors can make a nice return because it's

an area of finance that has not had as much capital access,” says Leech. “There’s also a social positive, as you can provide capital for meritorious claims, such as protecting property rights, making society function better so you can feel good about the investment from a moral point of view. “Furthermore, the cases are intellectually stimulating.” The area is certainly on a high growth trajectory, with figures from law firm RPC showing that

LITIGATION FINANCE

the value of court cases and cash directly held by UK litigation funders reached a record high of £1.9bn in the 2018/2019 year. This represented a 46 per cent rise from £1.3bn the previous year and is a huge jump from £378m in 2014/15. “The market is growing rapidly,” says Kenny Henderson, a litigation partner at law firm CMS. “We haven’t yet seen the swathe of Covid-related litigation that many have predicted, but it remains early days and Covid likely will lead to significant claims in the coming years.” UK retail investors can invest in litigation funding through P2P business lending platform Money&Co, while EU investors can access the sector through European lending marketplace Mintos. Money&Co was attracted to this

area due to having several lawyers within its team. It lends to a legal firm which decides on which cases to pursue. Within litigation finance, the platform focuses on financial misselling and housing disrepair claims with the average funding per claim being around £3,000.

investors. It is particularly attractive to hold in an Innovative Finance ISA as the average yields after fees are seven per cent.” Mintos added UK litigation funder Fenchurch Legal to its marketplace in July, as another option for its retail, high-net-worth, sophisticated and institutional

“ There’s also a social positive, as you can provide capital for meritorious claims” “It has taken us a long time to fully learn about the market and establish a position,” says chief executive Nicola Horlick. “It isn’t for everyone, and it is difficult to break into without knowledge of how lawyers work. “It is a good opportunity for retail

investors based in the bloc. Each separate claim is listed individually as a business loan on Mintos and the majority are small ticket claims which take between nine and 12 months, and are for house repairs. If the case is won in court, the

LITIGATION FINANCE

claim is repaid by the defendant. If unsuccessful, each claim on Mintos comes with an attached insurance policy that covers the repayment upon the case resolution. Lukas Alijošius, partnerships executive at Mintos, says adding Fenchurch Legal loans was one of the platform’s most successful launches in over 18 months. “The first batch of loans was wiped out in the first day,” he says. “There’s a lot of demand in the market especially post Covid. Litigation finance in the UK is gaining traction and is a growing area for investment due to the UK’s favourable legislation environment.” However, investors need to do their due diligence and only invest if they believe it is right for their risk profile. Cases are complicated and illiquid, money can be tied up for years and investors face the possibility of losing all their funds. In the UK, litigation claimants can be responsible for paying the defendants’ legal fees if they lose, so many funders take out After the Event Insurance (ATE). This is where an insurance company agrees to pay costs to the defendant if the claimant loses the case, in exchange for getting paid a premium – either the full amount upfront or contingent on the claimant winning the case. “It’s quite high risk but in strong cases with reasonable prospects of recovery, reasonable returns can be made,” says Luke Harrison, partner at law firm Keidan Harrison. AxiaFunder has been exclusively catering to high-net-worth and sophisticated investors for the past two years. It offers a whopping 55 per cent average annualised return on cases won to date. “This is a very high number, in

the long run we expect our average returns to come down to 20 to 30 per cent per annum, and we expect to have some losses,” Leech explains. AxiaFunder checks potential cases across 10 different criteria, including the defendant’s ability to repay. The platform also has ATE insurance and is soon launching a secondary market to bring investors more liquidity. Leech says the majority of AxiaFunder cases settle and avoid

“ It’s a relatively complex, risky product

”

the courtroom. He says they expect to win 70 to 75 per cent of cases that settle and factor in a 50:50 outcome for those that go to trial. “If we go to trial, maybe we miscalculated the situation because

LITIGATION FINANCE

“ The market is growing rapidly”

the defendant would settle unless they think they have an ace up their sleeve or a strong position,” he says. “There can be an adverse selection in those going to trial, it depends on the day how the witnesses perform and what mood the judge is in. There are more wild card factors going to trial, so we want to settle beforehand to avoid any surprises.” Before onboarding Fenchurch Legal, Mintos says that it completed its comprehensive due diligence

process, then decided on its risk score for the litigation funder. Alijošius says Fenchurch Legal only accepts claims that have an insurance policy, but investors should still do their own due diligence. “We invite each investor to do their own due diligence and evaluate the investment opportunity according to their own investment strategy, considering the related risks,” says Alijošius. “I personally think it is a very interesting investment opportunity with tremendous potential.” Neil Faulkner, managing director at P2P research firm 4thWay, says that litigation finance is suitable for any investors willing to make a lot of effort to understand what they are doing and who want to take more risks for more potential profit. However, he adds that most investors should limit the amount they allocate to the sector to a relatively small proportion of their investing pot. He says without deep, historical datasets on the risk-reward balance of litigation finance, assessing these opportunities is based on qualitative factors, but case assessors with lots of experience can predict the result correctly about 90 per cent of the time. “So broadly speaking it's possible to take a view on the risk-reward balance, which I expect will prove to be more than generous over time,” he says. “You can only invest wisely and avoid selling into unnecessary losses if you are confident in what you are doing. That applies to any investment.”

Robert Hanna, co-founder of litigation funder Augusta Ventures, says litigation finance can be an appealing option for investors. “I believe that a diversified pool of litigation financing is a very attractive proposition for investors and as such should be available for retail investors if they fully understand the risks and processes involved,” he says. “Saying that, it is practically very difficult for retail investors to gain access to litigation funds apart from through the listed shares of some of our competitors.” Leech goes one step further, claiming that litigation finance is not suitable for mass marketing to retail investors, but reveals that AxiaFunder may work on a product better suited to this type of lender. “We think it’s more suitable for high-net-worth investors and sophisticated investors, as it’s a relatively complex, risky product,” he says. “I think over time we will work to create a solution that gives investors the opportunity to invest into a larger number of cases via a single fund which will create a much higher level of diversification. It would be less risky and more suitable for massmarket retail investors.” Litigation funders and lawyers predict continued growth in the space, but some warn that returns may come down as competition rises. “I think it’s a fascinating space, evolving for the last 10 years or so and is now really taking off,” says Hanna. “That evolution will continue.” It’s not John Grisham’s ‘A Time to Kill’ or ‘A Time for Mercy’, but it may be a time to consider investing.

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