Peer2Peer Finance News December 2021 by Alternative Credit Investor

LOOKING INTO THE CRYSTAL BALL

>> 10

The future of the industry

MORE RED TAPE?

>> 16

Tougher rules may be coming

Brickowner chief Fred Bristol on his platform’s rebrand >> 22

ISSUE 63 | DECEMBER 2021

“Door is open” for P2P firms to seek state-backed funding “THE DOOR is very much open” to fintech lenders seeking funding commitments from British Business Investments (BBI), Peer2Peer Finance News has been told. Judith Hartley, chief executive of the BBI, said that the commercial arm of the state development bank is open to investing through more peer-to-peer lending platforms and other alternative lenders who can deliver funding to small- and medium-sized enterprises (SMEs) across the UK. “From a BBI perspective all I can say is the door is open,” said Hartley. “The door is very much open for any applicant who should want to approach us and who believes they can meet our minimum criteria and from that perspective we would welcome applications.” Hartley added that the BBI will look at all proposals from fintech lenders. The BBI has already channelled funds through a number of P2P lending platforms, including Assetz

Capital and Funding Circle. Peer2Peer Finance News is aware of a new P2P commitment which had not been made public at the time of writing. “We have a separate investment criteria and as long as it meets those criteria, and given that our focus is on smaller UK companies most P2P platforms would hit that criteria,” said Adam Kelly, managing director of BBI. “In terms of where we look, we were an early investor in the likes of Funding Circle. We’re now looking at the smaller sized P2Ps that are coming through. In terms of the

ticket that we can write, that probably has the most impact. We would look to make more investments around P2P.” Hartley said that the BBI looks for fintech lenders “where we can see that lots of money is going to be going out to SMEs”. “We want to see in terms of investing into that loan debt that there’s a stable business there that we can back in the long term and partner with for the long term, and we’re also looking for market rate returns as well,” she added. However, P2P platforms will face some competition for BBI funds.

“Investing into fintech is still a big part of the portfolio – its important,” said Hartley. “But there are other sectors that are also important like life sciences and deep tech. There are other high growth and fast growth companies and areas which investors are interested in, but of course the UK has got a definite strength in fintech – it’s a key strength so of course investment will still go into it, but there are other sectors as well which are generating interest.” The BBI was set up in 2014 with the aim of bringing extra diversity to the SME finance >> 4

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EDITOR’S LETTER

Published by Royal Crescent Publishing

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

t’s difficult to talk about the past, present or future of the peer-topeer lending industry without talking about regulation. It’s been a key topic since we launched the magazine five years ago, due to the slow authorisation process for many platforms, the introduction of stricter rules in December 2019 and now the looming threat of even tougher regulations. The Financial Conduct Authority has said that it expects to publish a policy statement on strengthening financial promotion rules for high-risk investments, including P2P lending, in the second quarter of next year. While it seems likely that most of the City regulator’s focus will be on the unregulated world of cryptocurrencies, which are aggressively promoted on the likes of Instagram and TikTok, there is a concern that P2P lending will be collateral damage. What would stricter rules on the P2P sector entail? We already have appropriateness tests and investor marketing restrictions. Further constraints would likely cut out restricted retail investors altogether. However, I’m not convinced this group makes up a significant part of the P2P investor demographic. My sense is that most individual P2P investors would easily be classified as sophisticated – something which has been evidenced by the high pass rates on platforms’ appropriateness tests. Unfortunately none of us has a crystal ball, so we’ll have to wait and see what the regulator comes up with, but my hope is that the rules will bring other ‘high-risk’ products more in line with P2P regulations, rather than impose tougher restrictions on P2P.

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 market. It is a commercial subsidiary within the BBB group, which has its own board, its own accounts and its own website. Its mission is to increase the supply and diversity of finance for small businesses across the UK whilst producing positive returns for the taxpayer. “There are four different objectives of what we’re trying to do,” said Hartley. “One is to push more

supply of alternative finance out into the market. Secondly, it’s about generating that commercial return for UK taxpayers, so everything we do we match with other private investors. Thirdly it’s about supporting the development of alternative providers of different types of products in the market. And finally it’s about regions and trying to help address those regional

imbalances in terms of access to finance.” The BBI’s latest annual results revealed that it made a record 18 commitments in the 12 months to March 2021, delivering £473m to funding partners and fintech lenders. “£473m is the second highest amount we’ve ever done and we’re particularly pleased with it because the first few

months of the financial year was when the whole county was in lockdown and so the market was dislocated,” said Hartley. “For the first few months we weren’t doing new investments, so the fact that we have done what we have in a more concentrated period is a sign of how much we wanted to make sure we kept the money going out into the market.”

MoneyThing’s Action Group surpasses 300 members THE MONEYTHING Action Group has reached over 300 members, as it prepares for an upcoming court hearing with the administrators of the collapsed peer-to-peer lending platform. A judge has granted 21 investors, who are planning to speak on behalf of the group, a six-week extension to file evidence and arguments. The MoneyThing Action Group was set up in October to represent investors in the platform who are concerned about the level of costs incurred in running down the loanbook. The group is currently considering whether it should seek legal advice to help write a witness statement ahead of February’s court

hearing on fees and the distribution of loan realisations. “Over 300 lenders have come in and are actively engaging in the Facebook page that the group has created,” a member of the group told Peer2Peer Finance News. “We do have a filter to try to make sure they are true lenders and we’ve gone from circa 30 to over 300 in almost two weeks. The fightback really is all about the level of costs

being incurred in running down the loanbook and who pays for them. “As an active group if the objective was to allow people to join other likeminded people, I think we’ve achieved it, but what we haven’t achieved yet is a full consensus on how we might go to the next stage, because everyone’s situation and experience is different which can result in differing opinions on the position that should be taken.

“Lenders have no choice in all this, we were served court documents and had no voice, now we have a voice, but the questions are what can we do and what do we do next?” MoneyThing originally entered into a solvent wind-down, but it was pushed into administration in December 2020 after announcing that it could not afford to defend itself against future litigation from a borrower.

NEWS

Kuflink mulls SIPP launch and IPO KUFLINK is set to launch a self-invested personal pension (SIPP) product in the third quarter of 2022, as the property lending platform eyes future growth. Kuflink’s chief technology officer Hari Ramamurthy told Peer2Peer Finance News that the platform is “in scale-up mode” and will be launching a variety of new products over the next year, including a SIPP.

In the longer-term, the platform is also open to considering an initial public offering (IPO), although this is unlikely to take place until 2024 at the earliest. “What we're looking at right now is making our product offering the best in the industry, in terms of making the business better and making the investor community grow,” said Ramamurthy.

“That's the first step with regards to acquisitions and IPOs. We have had conversations regarding an IPO, but we don't have a set timeline for that, so I think it's still early days for us. “We're still in scale-up mode. We're loving what we're doing in terms of building the product better. We just want to grow the business steadily at this point in

time. And then let's see what the future holds.” Kuflink’s chief executive and founder Narinder Khattoare confirmed that a public listing “is something we’d consider” but added: “not now as our plan is to keep the profitability in the group and reach our targets which we are ahead of, and look at it in 2024”. To read more about Kuflink’s growth plans, see page 21.

Assetz aims for 95pc of new homes to be EPC B or higher by end of 2022 ASSETZ Capital wants 95 per cent of all the new homes it funds to have an energy performance certificate (EPC) of B or higher by the end of 2022, as the platform continues to advocate for eco homes. The peer-to-peer lending platform has been a vocal supporter of factory-built eco homes to address the housing crisis. Chief executive Stuart Law says that small- and medium-sized enterprise (SME) property developers are best placed to deliver factory-built eco homes which are extremely energy efficient, and this is an area that Assetz will be investing in going forward.

“We definitely see SME housebuilders taking climate change more seriously,” Law says. “This is one of the areas where they can claim to have a USP.” Assetz uses the EPC rating system to determine how energy efficient its new homes are. EPC ratings run on a scale from A to G, with A being the most efficient

with the cheapest fuel bills and G being the least energy efficient. “We've seen a number of lenders talk about EPC level E,” says Law. “We've seen a few alternative finance houses saying they're okay with EPC C, whereas we're targeting something that is far, far beyond that. We're targeting 95 per cent of all the new homes we fund

will be EPC B or better by the end of 2022.” Energy efficient housing is expected to become more popular due to rising gas and oil prices, as well as climate legislation. The recent COP26 climate conference saw a number of countries agree to reducing the use of fossil fuels such as coal, while working towards a goal of net zero carbon emissions by 2050. Law has warned that older housing is going to go down in value due to the hidden costs of making these homes more energy efficient. He added that the cost of making the average home energy efficient could be as much as £50,000.

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NEWS

Calls to change 90-day open banking consent rule OPEN banking stakeholders have called for changes to the rule that requires consumers to reaffirm their consent every 90 days to share their data. Emma Steeley, chief executive of Equifax’s AccountScore, said customers can revoke their consent at any point but are asked every 90 days if they want to simply withdraw it or reaffirm their consent through a long process of going through the consent screen, logging into their online banking and then coming back. As part of a consultation on payment services and electronic money earlier this year,

the Financial Conduct Authority (FCA) proposed creating a new strong customer authentication exemption so that customers do not need to reauthenticate every 90 days when accessing account information through an account information service provider. “We fed into the consultation, and we expect the FCA maybe in January to come back for

further thought in and around that,” said Steeley. “I don’t think it’s unreasonable to ask consumers ‘are you happy to continue to share your data’ but going through the entire journey every single time is not necessarily best for the consumer depending upon what their situation is. “I think certainly if you look in the debt management and insolvency space where

you may be in some of those plans for five to seven years, reauthenticating every 90 days and having to go through the whole journey again causes fatigue and isn’t necessarily helpful.” Daniel Rajkumar, managing director of Rebuildingsociety, a P2P business lending platform that uses open banking, said that the 90-day consent rule is a “pain”. “The 90-day consent is a pain, and many don’t like it, people should be able to set the timeframe themselves,” he told Peer2Peer Finance News this summer. “I hope the restriction will be lifted; a lot have been asking for it.”

New EU rules to “shake out” crowdfunding sector A “SHAKE-OUT” of the EU peer-to-peer lending and crowdfunding space is being predicted after new regulations went live last month. The Regulation on European Crowdfunding Service Providers (ECSP) creates a harmonised regulatory framework, meaning that authorised crowdfunding platforms in the bloc can easily passport into other EU member states. There is a €5m (£4.5m) limit on how much can be raised for an individual

loan on a platform over 12 months. Firms will need to comply with anti-money laundering regulations and be transparent about returns and interested parties. Similar to UK regulations, investors will have to complete an appropriateness test to check they understand the risks. The rules go slightly further than the UK and will give nonsophisticated investors a “reflection period” during which they can change their minds about an

investment and get their money back. Firms have 12 months to apply for licences to be compliant with the new laws. Christin Friedrich, chair of the non-executive board at EuroCrowd, said firms shouldn’t delay applying for a new licence. “Time to apply will be shorter as the process of granting a licence may take three or more months in some member states,” Friedrich said. “Most likely, a number of platforms will stop

their operations in the next 12 months and others will need to adjust their business model and infrastructure. “But a number of platforms are already set up in relative alignment with the new rules and will be able to acquire the new licence more quickly. This will likely cause a shake-out in the industry, but also create exciting opportunities for growth and professionalisation.” For more on the new EU crowdfunding regulations, go to page 25.

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JOINT VENTURE

Assetz reveals emerging property trends as prices rise

ROPERTY PRICES WILL continue to rise firmly as people choose to move outwards from city centres and prioritise outdoor spaces and home working facilities, Assetz Capital has predicted. Stuart Law (pictured), chief executive and founder of Assetz Capital, believes that social trends are a key driver of the property market, rather than financial incentives such as the stamp duty holiday and historically low mortgage rates. “The property market has been very strong for well over a year now,” says Law. “There was a huge setback in the global financial crisis, with mortgages being hard to get. The market has come back consistently since then, but only at a modest rate. In some ways it was surprising to me that the mortgage rates being so cheap wasn't pushing prices up faster.” Law remembers when interest rates fell to a historically low rate of around five per cent in the mid-1990s and stayed low until the late 2000s and that this took a while to be noticed by the market and begin to drive prices up. Rates sank even lower in the aftermath of the Covid-19 pandemic, with historically low mortgage rates available from just about every lender on the high street. Again, it has taken several years for this to drive prices up again strongly, awaiting another driver in the form of the pandemic. Recently, the Bank of England has hinted at an imminent rate rise, which has already seen some mortgage rates tick up slightly, but

Law expects that this “won’t be the only way the Bank seeks to reduce house price inflation”. “The low cost of funding for mortgages has been around for years,” he says. “It's just interesting that price inflation hasn't really kicked off until this point. Much of the price growth indicates a supply/demand imbalance as the pandemic was a catalyst for something that should have probably happened earlier. “We expect the Prudential Regulation Authority (PRA) to step in shortly and begin to limit bank mortgage lending loan-tovalue levels again to take the froth off the market. It’s much more likely than strongly rising interest rates in our view.” The government recently revealed that average UK house prices rose by 11.8 per cent between September 2020 and September 2021, and Law believes that prices will keep on rising if the PRA doesn’t act soon. However, there has been a shift

in the sorts of houses that people want to buy. “People want to live in different places relative to where they were two years ago,” he says. “They've all wanted to move outwards generally. They want more outdoor space, and they want homeworking space. “Working from home and hybrid working has fundamentally changed for a lot of people the ability to work much further from their office in the place of work. So people are moving substantial distances away.” While Law hasn’t seen substantial demand for rural properties, he has noticed that far more people are moving out of the cities and into suburbs, towns and villages. On the commercial property front, the changes are happening much more slowly. “I think that the reason we haven't seen acknowledgement of a huge change in the commercial marketplace is because of the lag created by long leases, which is softening off how fast things are changing,” Law says. “Many businesses are struggling with a lease for a building far bigger than they really need, but maybe they've got five years left on their lease.” Assetz is already prepared for the shifting property landscape by funding houses rather than apartments, usually outside city centres and away from the South East and London. “Our investors will continue to see some very robust investment opportunities with our housing funding,” Law says.

PREDICTIONS FOR 2022

The future of P2P What does 2022 hold for the UK’s peer-to-peer lending sector? Michael Lloyd finds out

HE PEER-TO-PEER lending sector is at a turning point in its evolution. No longer the new kid on the block, the past couple of years have seen P2P platforms enter the mainstream, offering governmentbacked loans, inflation-beating returns, and unprecedented support for small- and mediumsized enterprises (SMEs). 16 years after Zopa launched the world’s first P2P platform, the sector has survived two economic

downturns, launched its own tax wrapper, and even embarked on initial public offerings (IPOs). Platforms are growing, expanding into new markets and continuing to innovate. What the industry wants in the year ahead is more respect. “I’d like to see public support for our innovative products, regulatory or from the government,” says Lee Birkett, chief executive of JustUs. “We want true support for fintech. Not once was fintech mentioned in the Budget and that is concerning.”

Industry stakeholders have made a strong case for the sector as a force for good. During Covid, several P2P platforms took part in the coronavirus business interruption loan scheme (CBILS) and bounce back loan scheme (BBLS), while others managed to navigate the economic downturn with low levels of default while continuing to produce consistently strong returns for their investors. “The impact of the pandemic on outstanding loans has not fully

PREDICTIONS FOR 2022

played out, but so far the industry has held up very well and even better than expected,” says Neil Faulkner, managing director of P2P ratings and research firm 4thWay. “The industry has demonstrated through two recessions that these investments are high quality and provide a complementary alternative to the stock market. “The main story for the P2P sector over the next 12 months is that lending volumes will grow, most likely surpassing the pre-pandemic peak in investment again. I think there will also be a few soft wind downs, caused by the pandemic, increasing regulation and failure to achieve scale.” Despite the economic impact of Covid, several platforms have embarked upon ambitious expansion plans.

“ We want true support for fintech. Not

once was fintech mentioned in the Budget and that is concerning CrowdProperty has launched in Australia, JustUs is working on rolling out across Europe and the US, European P2P platform EstateGuru has revealed it aims to expand into the UK in January and Zopa is planning an IPO at some stage in 2022. The sector has also continued to cater to a wide range of both institutional and retail investors, and platforms have pledged to continue to support retail lending in the year ahead. “We absolutely believe that retail lenders have a future,” says

”

Stuart Law, chief executive of Assetz Capital. “Absolutely people will be putting some of their money into P2P and expect it to grow over time. Especially after people saw it has performed very well, passing through the economic cycle and pandemic. “Inflation is looking certain to be very substantial, the conditions are the worst savers have seen for many years and there is no hope of the bank savings rate going up so P2P looks stronger in some ways than it has ever been.

PREDICTIONS FOR 2022

“The Financial Conduct Authority (FCA) is pushing people to consider investing more money, as saving equals losing money. Saving is producing guaranteed losses, whereas investing is possible losses and possible gains. I think that’s the big thing for the next year.” Having survived the Covid-19 crisis, the P2P sector is now predicted to enter its next stage of growth. But there are a few challenges on the horizon. Further regulation for the sector is expected with the City watchdog set to announce a policy statement in the second quarter of next year on strengthening financial promotions for high-risk investments, which could see new restrictions on retail lending. Platforms have criticised the FCA’s classification of P2P lending as ‘high risk’, pointing out that it is hurting the industry by placing it alongside the likes of highreturn bonds or mini-bonds, unregulated collective investment schemes, land banking and cryptoassets. “I’d like to see P2P taken out of the crosshairs by the FCA,” says Law. “Putting P2P in the same bracket as crypto and land banking is really disrespectful and there are some really professional organisations with career professionals working in lending and credit and to be put in that box with scams and crazy highrisk things is very disrespectful. “That’s what I’d like to see change, P2P to be given the respect I

believe it’s now earned over the last 10 years or so for those larger and more established enterprises that have proven they can run a good business and should be treated as medium risk, not put in a high-risk category.” Earlier this year, a survey by the UK Crowdfunding Association (UKCFA) found that retail investors have a good understanding of risk in regulated crowdfunding and P2P platforms. “We’d like to see an approach to high-risk investments that more

“ Lending volumes will grow, most likely surpassing the pre-pandemic peak in investment again

”

clearly differentiates between unregulated investments and regulated platforms,” says a spokesperson from the UKCFA. “Beyond that we are still pro regulation, we think it helps but it should also encourage competition and innovation.” Looking beyond regulation, some P2P platform owners and stakeholders forecast increased adoption of technologies such as open banking and blockchain. Kuflink is working on implementing open banking for real-time borrower verification, payments and to improve processes, while Lendwise is looking to use it to help assess creditworthiness. New P2P consumer lending platform Plend is launching with the requirement

PREDICTIONS FOR 2022

“ More platforms will embrace open banking, it is absolutely on everyone’s radar I’m sure”

that borrowers and investors both opt in to use the data sharing initiative. Invest & Fund and Simple Crowdfunding have also expressed interest in open banking. “There will always be technology changes, that’s part of the beauty of what this is about,” says Atuksha Poonwassie, co-founder and managing director of Simple Crowdfunding. “Customer journeys will improve, and platforms are constantly evolving. “I think like blockchain, more platforms will embrace open banking, it is absolutely on everyone’s radar I’m sure. Potentially more platforms will look at artificial intelligence as well.” 4thWay’s Faulkner believes that

more P2P lending companies will implement open banking and blockchain, but there won't be a mass rush until the “trailblazers” show the scale of the business advantages these technologies offer. “The P2P lending sector will continue to implement new technologies as they arise,” he says. “Some of these technologies will incrementally improve efficiencies, credit analysis or customer service.” As well as additional innovations, some stakeholders predict more merger and acquisition (M&A) activity in the sector. “There was less consolidation than I had expected over the past couple of years, but surely the pandemic was part of that,” says Faulkner. “Undoubtedly, there will be some more mergers or acquisitions, but at present a large number of platforms have space to grow organically and are focused on that.” JustUs’ Birkett predicts plenty of deals on the horizon, and for P2P to go global with the rise of cryptocurrency. “There will be a lot of fintech M&A,” he says. “With crypto, P2P is global, I think the growth will be cross border. The barrier to entry is higher so more experienced players can enter other markets. That may encourage M&A activity.” However, Filip Karadaghi, managing director of LandlordInvest, disagrees. He points to Starling Bank’s acquisition of Fleet Mortgages in a £50m cash and share transaction as an example of a buyer with the strategic motivation and capital to

purchase an attractive seller with a huge loanbook worth over a billion pounds. And he does not see the same formula present in P2P. “Few platforms have a loanbook of that size or bigger so any M&A pricing or transactions probably wouldn’t happen,” Karadaghi says. “You need a buyer with capital, and I don’t think any P2P platforms are attractive for any buyer.” 2022 is sure to bring plenty of surprises for the P2P sector, whether through regulation, M&A activity, new technologies, or economic shocks. But over the past 16 years the sector has shown that it has the ability to weather all types of storms. It has already overcome its growing pains and dealt with the obstacles of an economic downturn and the reputational hit from highprofile platform collapses. The industry is on a continued growth trajectory, with investors predicted to flock to the sector to diversify their portfolios amid soaring inflation. We know that P2P platforms can adapt to any economic environment. We know that they can continue to keep default rates down and lender rates up. P2P lending has grown to become an important part of the UK’s financial services sector, filing a gap in the market and bringing flexibility and liquidity to the notoriously conservative lending sector. P2P platforms have shown what they are capable of doing – maybe 2022 will be the year that they finally get the respect that they deserve.

Be Prepared. Plan ahead and mitigate risk. BTG Advisory can help. With government-backed lending schemes coming to an end, a surge in restructuring and refinancing activity is predicted. As lenders look to restructure borrowers debt, it is important that they undertake a detailed assessment of the borrowers projections and understand the long term viability of the business as it recovers post Covid.

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JOINT VENTURE

Post-Covid refinancing surge creates opportunities for P2P

EER-TO-PEER LENDERS can benefit from a predicted surge in restructuring and refinancing activity, as the government-backed lending schemes finally come to an end. According to Sorca McGeown, partner at BTG Advisory in London, the alternative lending community has “massively stepped up to the plate” since the start of the pandemic and alternative lenders are set to play a major role in the post-pandemic recovery as banks seek to restructure billions of pounds in business debt. Since April 2020, there has been an unprecedented national effort to provide emergency funding to businesses across the UK. McGeown says that the coronavirus business interruption loan scheme and bounce back loan scheme have been hugely successful in this sense. However, as these governmentbacked lending schemes have begun to be wound down, new financing opportunities have emerged.

“The recovery loan scheme (RLS) was launched in April 2021, with the key aim of providing financial support to borrowers as they recover from the impact of Covid and enabling lenders to provide better terms to borrowers,” she explains. “At the end of December, the scheme changes, and therefore it is key to ensure any restructures that will be impacted by the changes are currently being assessed.” Ahead of the end-of-year deadline, lenders are speaking to their borrowers to assess the viability of their business and to discuss whether restructuring options are required. However, after more than two years of economic instability and uncertainty, this is no easy task. “Due to these challenges, many lenders are engaging us to work with their borrowers, assess, stress test and evaluate the financial projections and debt serviceability. “In certain scenarios we assist

management in the preparation of their financial forecasts and forward planning particularly where businesses have recently lost qualified financial staff. This gives the lender comfort with regards to the viability of the business post-Covid, and often supports a medium to longer term debt restructure, thereby giving the business the financial support and assurance it needs to recover and grow,” McGeown says. These financial assessments can be complex, as they must consider the state of the business pre-Covid, during Covid, and project up to the next five years. “In our review, we also highlight operational issues and shortcomings including recruitment needs, as in many cases the current staff level is not sufficient to support the growth plans due to essential redundancies made during covid, particularly business development roles,” says McGeown. “Whilst this may lead to a Catch-22 scenario as growth requires investment which many businesses are not able to support financially, our review will help businesses make informed decisions and develop strategies to address these scenarios. This includes parachuting staff in at short notice whilst longer-term staff are recruited. This scenario also represents an opportunity for lenders who are able to advance additional funding to businesses to financially support their growth plans.” When proposing restructuring solutions, McGeown believes that P2P lenders can be more flexible than traditional lenders and are often able to make decisions quicker. She is confident that the alternative lending community will have an important role to play in the Covid recovery era.

REGULATION

Raising the regulatory bar

Tougher rules on ‘high-risk’ investments – including peer-to-peer lending – are expected next year. Michael Lloyd investigates the prospect of additional regulation…

ORE REGULATION is coming for the peerto-peer lending sector, just two years on from the postimplementation review. In the year ahead, the City regulator is expected to clamp down even harder on the P2P industry, introducing new rules that will make it harder for restricted retail investors to access parts of the market. And the Financial Conduct

Authority (FCA) continues to classify P2P lending as a ‘high-risk’ product, alongside unregulated investments such as cryptocurrencies. Many industry stakeholders have already sounded the alarm, worrying that the sector may soon be overregulated to the point where it will no longer be a viable investment option for retail investors. Gillian Roche-Saunders, partner

at Adempi Associates, says she would not suggest more regulation for P2P, as more time is needed for the previous changes to be embedded and assessed before further changes are proposed. “If you were just looking at P2P, we wouldn’t suggest more regulation at present but the FCA’s concerns around retail investments are industry-wide and it is very likely that P2P will be caught up

REGULATION

in the planned changes,” RocheSaunders says. In October 2021, the regulator published a three-year strategy to enhance consumer protections and said it is aiming to halve the number of consumers putting money into

choice for retail investors if these restrictions come into force as predicted.” The FCA’s upcoming policy statement on strengthening rules for high-risk investments stems from a discussion paper

“ Ultimately it will mean less choice for

retail investors if these restrictions come into force as predicted high-risk investments who indicate a low risk tolerance or demonstrate the characteristics of vulnerability by 2025. And last month, the FCA said that it expects to publish a policy statement on strengthening financial promotion rules for highrisk investments, including P2P lending, in the second quarter of next year. Platforms and stakeholders believe the FCA will make it tougher for ordinary retail investors to take part in this asset class, perhaps through additional restrictions or suitability checks, and are worried that this could effectively reduce the number of people who can invest in P2P. “I think they’ll tighten up the framework and there’ll be more hurdles for retail lenders to jump over in relation to putting money into these so-called high-risk investments,” says Frank Wessely, partner at advisory firm Quantuma. “We know what the FCA’s targets are in terms of reducing retail investment into high-risk lending opportunities on P2P platforms and I have no doubt this will be a step going forward to the FCA achieving that goal. “Ultimately it will mean less

”

earlier this year, which also set out proposals for a possible mass marketing ban for P2P agreements which have similar features to speculative illiquid securities. The FCA noted similarities between P2P agreements – using the example of a property development loan – and speculative illiquid securities and raised the question of whether this should impact the marketing of such products to retail investors. P2P development lending platforms were particularly dismayed by these proposals. Neil Faulkner, managing director of P2P ratings and research firm 4thWay, does not understand the City watchdog’s thinking when it comes to possible marketing restrictions on P2P property development loans, but warns that

this may come to pass. “Development lending is not the safest form of P2P lending in aggregate, but it has a wide spread of risks, with a large part of the P2P market focused on the safest side of development lending,” he says. “Despite this, I think there's a reasonably high risk that the FCA will go ahead with a ban. Once it launches a consultation, it often determines new regulations along the lines it was hinting at in advance.” Platform bosses and other stakeholders have expressed their concerns about the tightening of the regulatory screw on the sector. Stuart Law, chief executive of Assetz Capital, says increased retail restrictions will mean more platforms will leave the space in favour of institutional capital and only those that are not as high quality, and thus unable to pass the due diligence of institutions, will remain. He says that banning the mass marketing of P2P property development loans would lead to the closure of many platforms with no alternative funding, restrict investment options for everyday investors and harm the small- and medium-sized enterprise (SME) housebuilding industry. “I don’t think it should happen, but I think it’s definitely possible

REGULATION

that it could and that would cause immense detriment to the housebuilder industry and investors earning money from that,” Law says. “I’m worried if the wrong decisions will be made. The reason we’re worried is if we’re put in the same box as land banking and cryptocurrency – if the FCA makes the wrong decision many more platforms will close. There would be big investor detriment if the regulation changed, as it would close a lot of companies.” However, some platforms are less worried about further regulations, accepting the new rules as a necessary part of doing business. “I’m not concerned,” says Atuksha Poonwassie, co-founder and managing director of Simple Crowdfunding. “We know this space is constantly evolving and as long as the proposals or suggestions are not hindering platforms that are trying to do things properly and the conversations happen with operating businesses then it’s an evolving marketplace and that’s okay.” However, the consensus among platforms and industry stakeholders appears to be that additional rules are not required, as the current legislation is more than sufficient and any more would threaten the closure of platforms. The UK Crowdfunding Association (UKCFA) has repeatedly argued that additional rules could only serve to push out platforms supplying their loans into the unregulated space or overseas.

Earlier in the year, the UKCFA surveyed 2,512 investors on their views of the asset class and found that lenders investing in regulated crowdfunding or P2P platforms tend to have a good understanding of risk, while many were against the idea of being restricted from seeing certain investments altogether. The industry trade body used this

research to respond to the FCA’s discussion paper. “I don’t understand the need for change,” a spokesperson from the UKCFA says. “As our research showed, customers of regulated platforms demonstrated a high level of understanding of the risks of the investments they were making and

“ This space is constantly evolving and as long as the proposals or suggestions are not hindering platforms that are trying to do things properly…then it’s an evolving marketplace and that’s okay

”

REGULATION

“ Classifying investments in this way is not

the best approach to encourage better customer outcomes in the retail investment market”

whilst no one is saying it’s a low-risk investment, we don’t think it’s clear to put regulated firms alongside unregulated firms when it comes to considering what’s high risk. “The UKCFA will continue to argue that classifying investments in this way is not the best approach to encourage better customer outcomes in the retail investment market.” Earlier this year the FCA wrote to P2P platforms to warn them that all secondary market transactions must be priced fairly. The regulator also used the ‘Dear CEO’ letter to underline the need for a credible wind-down plan.

Assetz Capital’s Law says both of these have been requirements already and the regulations are “completely satisfactory”. He says the FCA just needs to better monitor and enforce the current rules. “We don’t need new regulation, we need existing regulation applied firmly and fairly,” he says. “I still believe regulation is absolutely where it needs to be, it doesn’t need to be worse, it just needs to be enforced. The problems we’ve seen have been down to a lack of oversight.” Lee Birkett, chief executive of JustUs, agrees that the rules are sufficient and warns of the danger of overregulation, but says that the FCA has ramped up its monitoring of platforms. “The regulatory bar has been raised considerably and the work they have done is in-depth and is a solid foundation going forward for those that remain,” he says. “With the amount of work by the regulator over the last few years I’d imagine most would have had an in-depth audit of their financial promotions. There’s plenty of regulation, you don’t want to overregulate it anymore because it will close the sector down.” Some industry stakeholders have gone further and questioned whether the FCA is up to the job of governing the P2P sector following several scandals such as the collapse of P2P platforms Lendy and Collateral

and mini-bond provider London Capital & Finance. Jonathan Segal, partner and head of fintech and alternative finance at law firm Fox Williams, says the FCA has tightened its P2P platform authorisation process and may be looking to introduce further regulation to “right some of its historic wrongs”. “The FCA is introducing regulations which will make operating P2P platforms much more difficult, both in sourcing new investors and operating on a day-today basis,” he says. Whether the FCA is looking to introduce further regulation to right historic wrongs or not, P2P platforms are worried about the effect that this will have on an industry that has shown a willingness to adapt to multiple regulatory hurdles, even amidst an economic crisis. Furthermore, there are whispered concerns that the FCA may not fully understand the P2P sector – as evidenced by the ‘high risk’ label and debate over whether P2P property development loans are speculative illiquid securities. Stakeholders have told Peer2Peer Finance News that they wholeheartedly believe the rules are sufficient and think the FCA should just monitor platforms better. Hopefully the FCA will listen to all industry input when it draws up its policy statement. But for now, platforms are waiting with bated breath to find out what the future of the industry will look like.

JOINT VENTURE

Partnerships, product launches and IPOs: Kuflink enters scale-up mode

EER-TO-PEER PROPERTY lending platform Kuflink is in scale-up mode, with new product launches on the horizon, soft partnerships planned with proptech firms, and the possibility of an initial public offering (IPO) in the future. According to Hari Ramamurthy, chief technology officer at Kuflink, this is all part of the platform’s plan to grow in a robust and flexible way while continuing to make it secure for its investor community. “We would like to make our investment products much more investor centric,” says Ramamurthy. “Any new technology offering will be used to power our products and it will allow us to understand our investors’ preferences much better, which will allow us to actually provide better deals on the platform. So we are looking at a few new offerings on the platform itself.” Some of these new offerings have already been revealed. Last month, Kuflink released an Innovative Finance ISA (IFISA) wallet to separate lenders’ ISA allowance for the current and previous tax years and allow them to invest directly into ISA-eligible deals. “What this means for investors is that they can take advantage of this wallet to ensure their money works harder for them,” Ramamurthy adds. “They get that little bit extra in terms of ability to reinvest their interest while not tampering with their ISA

allowance for the year. “With regards to the previous investments in previous tax years, that remains within a wallet itself, so that keeps on making money for you as long as the money stays within that wallet.” Ramamurthy adds that Kuflink would like to start offering selfinvested personal pension (SIPP) products sometime next year with a similar structure. An insurance proposition may follow, depending on investor demand. “We are also looking to integrate with other services to ensure that the technology we provide is robust and scalable,” says Ramamurthy. “What that means is that we are looking to partner with the sorts of technology products which

are pretty new to the industry, but at the same time, they have really taken off with regards to what their services provide to us. These include infrastructure services, and services that help us understand our customers' behaviour much better in terms of what their preferences are.” Kuflink is currently in talks with a few proptech companies about creating a “soft partnership”. In the future, the platform may also seek to partner with insurtech companies, adds Ramamurthy. Over the coming months, Kuflink is expanding its sales team, and may make some new senior appointments to its tech division. In terms of an IPO, Ramamurthy says that “we are not thinking that far ahead” but adds that “it's something that we would love to work towards.” For now, the platform is focused on making its product offering the best in the industry and growing its business in the property lending space. “Kuflink is in a very exciting period right now,” says Ramamurthy. “We have been through the pandemic, and from that, have learnt a lot of lessons. We have come out of it with flying colours, we were able to streamline many of our processes and our software has been an integral part of that. “We're constantly listening to our investors and we will be offering more products and more services on the platform in the future.”

PROFILE

Building for the future

Fred Bristol, chief executive and founder of Brickowner, speaks to Peer2Peer Finance News about the platform’s rebrand, regulation and his outlook for the property market

RICKOWNER ENTERED the property investment space in 2015, aiming to give the public access to asset managerquality developments. It works with asset managers and developers such as London Property Ventures, SN Developments and Evolve to source and manage residential, commercial, industrial and hotel development projects through the platform. Investors can fund projects with comparatively lower minimum sums than they would in a property fund and more than £16m has been invested so far. The platform has also been busy with its own fundraising activities, having raised more than £5m through several Seedrs crowdfunding campaigns. Brickowner has successfully navigated Brexit and the pandemic, while others have faltered. Its founder and chief executive Fred Bristol attributes this to a focus on professional, sophisticated and corporate investors. That is a different approach to when it first launched, as the platform initially expected a lot of younger customers to invest small amounts. But most of its investors are older and are putting an average of £20,000 on the platform. This has facilitated a rebrand, an increase in the minimum investment and a change in the way

Brickowner operates to cater for a more professional market. Bristol explains to Marc Shoffman how Brickowner is building for the future. Marc Shoffman (MS): What did you do before launching Brickowner? Fred Bristol (FB): Property is all I have done since I left university in 2002. I went to Eastern Europe and ran a pan-Baltic property fund in Estonia until 2010.

From 2010 to 2015 I was in the UK just running personal investments and then became interested in setting up a property fund which led to the launch of Brickowner. MS: Why was Brickowner set up and what gap is it filling? FB: Rather than a property fund where there are high minimum investments, I thought it would be interesting to set up a platform where we could automate the

PROFILE

onboarding and then take smaller increments of money. We focus on being the platform. We don’t want to be the developer and the platform. We are a registered fund manager, an investment management wrapper and work with existing property developers and asset managers which gives us access to lots of sectors in the UK. From an investor’s perspective, we offer a broad spectrum of investments, not just residential. We have done everything from care homes to developments, hotels. It is a nice way of diversifying. From the property side, because of the clean-out in the property investment sector, there are very few left who are actually working with developer asset managers to help manage their own investments. MS: How do you spot investment opportunities? FB: The property world is pretty small. A lot of people we work with I already knew. People also come to us through the website. MS: Why did you decide to increase the minimum investment from £100 to £500? FB: Our average investor puts in £20,000 so the minimum is a bit of a red herring anyway. When we launched originally, we thought our average investor would be 20-something-year-olds, but the average investor is actually 40- to 70-year-old men putting in £20,000. People in their 20s aren’t interested. They have less disposable income. MS: Are you planning more equity crowdfunding campaigns? FB: There are no more fundraises planned yet. We found it a good way of raising money and closed our first round

BRICKOWNER IN NUMBERS Launched: 2015 Loanbook: £16.6m Average investment: £20,553 Types of investments: Development, residential, commercial, hotels, industrial

in 2016. It helped with the costs of technology, building a team and getting the structures in place on the legal and regulatory side. MS: Why have you decided on a rebrand? FB: When we originally branded it was for a slightly younger investor type. Our new branding will be more linked to what our natural investor type is, professional individuals. We are also updating the whole front end of our platform, including the dashboard. MS: How are you regulated? FB: We have two main companies under the group, a small registered alternative investment fund manager and our new limited liability partnership (LLP) structure approved by the Financial Conduct Authority. We haven’t done an investment with the new structure yet but will do so before the end of the year and it will become the main route. One of the benefits is tax, as an LLP is not a taxable entity. Rather than a company having corporation tax, in an LLP each member is taxed based on their own rate of income tax. We stopped taking restricted investors two years ago. We could take them under our old structure but our new structure won’t allow restricted investors. Our present investments are all done in share classes within a master fund. In the new structure, each

development will be in a separate LLP. This is more scalable. MS: Have projects been impacted by the pandemic, the supply chain crisis or Brexit? FB: There have definitely been delays, which has been due to a number of factors. A big one was to do with the beginnings of Covid. Even if people were on site, things were slower. A lot of what we do is developments where the return is at the end. We haven’t done any investment where a regular interest payment has been delayed. MS: What is your outlook for the property market? FB: There are a lot of issues in terms of material shortages and increased costs, and there is a backlog due to Covid. I am guessing it will take nine months to sort itself out. Covid is hopefully coming under control, we don’t do central London so hopefully we won’t be affected by Brexit. I’m still positive about the next few years. In terms of our platform, we are in a lucky position as the barriers to entry are higher than they have ever been. Some competitors have pulled out of the market, which from our perspective is a good thing. It’s harder for a new entrant to come into the market. It’s becoming more regulated but it is getting the balance right. Regulation is a good thing for the market.

27 markets, 1 license and 1 network. The making of history. We have been working hard to harmonise capital market rules for tradeable securities and loan based crowdfunding…

Our members are prepared. Are you?

Join us! - I N S P R I R I N G TO M O R R O W ‘S F I N A N C E WWW.EUROCROWD.ORG

JOINT VENTURE

How the EU crowdfunding rules came to be

AST MONTH, NEWLYharmonised European crowdfunding laws came into effect following years of consultation with industry representatives such as the European Crowdfunding Network, also known as EuroCrowd. The European Crowdfunding Service Providers Regulation (ECSPR) rules allow platforms to be licensed at the member state level while issuing securities and business loans to investors across the European Union. The ECSPR aims to make it easier for European crowdfunding and some peer-to-peer platforms to operate across the continent without the additional paperwork that comes with launching products in multiple jurisdictions. “The start of the new European crowdfunding regulation will increase the quality of the European crowdfunding investment ecosystem,” says Christin Friedrich, chair of the non-executive board at EuroCrowd. “The regulation will create a largely harmonised framework and makes investment crowdfunding finally available in all European countries under similar conditions. It will lead to the creation of pan-European crowdfunding platforms” However, Friedrich warns European platforms to pay attention to the small print, as the regulation also includes compliance requirements and may create regulatory competition between some member states. “There is a 12-month transition period for platforms currently holding licence under national law, but time to apply for the new licence will be shorter as the process

of granting an ECSPR licence may take three or more months in some member states,” she explains. “Most likely, a number of platforms will stop their operations in the next 12 months and others will need to adjust their business model and infrastructure. But a number of platforms are already set up in relative alignment with the new rules and will be able to acquire the new licence more quickly. This will likely cause a shake-out in the industry, but also create exciting opportunities for growth and professionalisation.” The regulations signal a new era for European crowdfunding, and it all began back in 2012. Nine years ago, EuroCrowd entered into its first discussions with policymakers in Brussels, suggesting that crowdfunding could help to finance small and medium-sized business, promote innovation and create jobs, executive director at EuroCrowd, Oliver Gajda remembers. This led to a years-long review of the P2P and crowdfunding markets by the European Commission (EC), culminating in a 2014 decision not to harmonise EUwide crowdfunding rules. From this point onwards, EuroCrowd noticed a “significant shift of interest of platform operators to national opportunities.” In 2017, crowdfunding was granted an exemption to the prospectus law that enabled the growth of the sector in individual member states. “For the first time, we saw sizeable transactions, platforms grow a noticeable presence and a clear indication that our vision of crowdfunding to become an innovative way of funding our

economy with the direct involvement of citizens was working,” says Cristina Moreno, head of operations at EuroCrowd. This growth spurt helped to reignite the interest of the EC in the crowdfunding sector and in 2018 the EC published the proposal for ECSPR alongside a fintech action plan and launched a review of the Capital Markets Union. Over the years, EuroCrowd and its members have been actively working with the EC and the European legislator to share their concerns and ideas, engage with the market, and work together to create an EU-wide framework that makes it easier for borrowers to access finance, and for investors to support European businesses and consumers. The ECSPR is the culmination of years of hard work behind the scenes, and paves the way for a new era of European crowdfunding and P2P for business. “We believe this is a historic moment,” says Francesca Passeri, deputy director at EuroCrowd. “We are extremely excited about the opportunities this will offer to crowdfunding service providers in the years to come and we are very glad that the rules are flexible enough for platforms to switch from their incumbent national licences to a European one without too much hassle. “By creating this new law as a stand-alone regulation, the sector has been protected from regulatory arbitrage of other market actors and will be able to develop a professional financial services sector.” 2021 is the year that EU crowdfunding became harmonised, but for EuroCrowd, the work has only just begun.

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