Peer2Peer Finance News December 2017 by Alternative Credit Investor

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TECH ON THE TUBE

The appeal of London Underground ads ARE EU UK?

The impact of Brexit on P2P

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RateSetter’s Rhydian Lewis on retail, rules and sustainability >> 8

ISSUE 15 | DECEMBER 2017

No Christmas cheer for P2P sector as Brexit pushes FCA review into 2018

PEER-TO-PEER lending platforms will need to wait until at least the new year for the outcome of the Financial Conduct Authority’s (FCA) postimplementation review as Brexit and other market issues have taken priority at the City watchdog,

Peer2Peer Finance News has learned. However, it can also be revealed that a snippet of the industry data compiled by the Cambridge Judge Business School’s Centre for Alternative Finance (CCAF) for use in the FCA report will be unveiled

before Christmas. It is almost 18 months since the FCA first announced a call for input into the P2P sector ahead of the review. Interim findings were released at the end of last year, but the full review is yet to be released

despite indications that it would be published during the summer. The report was mentioned as recently as July 2017 on the FCA’s policy development webpage, indicating that the consultation paper was still on the agenda, >> 4

EDITOR’S LETTER

Published by Royal Crescent Publishing

WeWork, 2 Eastbourne Terrace, Paddington, London, W2 6LG info@royalcrescentpublishing.co.uk EDITORIAL Suzie Neuwirth Editor-in-Chief suzie@p2pfinancenews.co.uk +44 (0) 7966 180299 Kathryn Gaw Contributing Editor kathryn@p2pfinancenews.co.uk Marc Shoffman Senior Reporter marc@p2pfinancenews.co.uk Andrew Saunders Features Writer John Fitzsimons Reporter Emily Perryman Reporter PRODUCTION Karen Whitaker Art Director Zac Thorne Logo design COMMERCIAL Amy St Louis Director of Sales and Marketing amy@p2pfinancenews.co.uk 07399 414 336 SUBSCRIPTIONS AND DISTRIBUTION info@p2pfinancenews.co.uk Find our website at www.p2pfinancenews.co.uk

he peer-to-peer lending industry has had to deal with critical coverage from mainstream media outlets in recent years, which often centres around whether the sector has a future at all. As a result, the industry can be quite wary of the media and this was certainly something I had to work hard to overcome when launching P2P’s first dedicated trade title. However, I argue – perhaps controversially – that the industry worries about negative media coverage far too much. I can’t think of a single sector that hasn’t been lambasted by the press and they certainly haven’t floundered as a result. Energy, resources, pharmaceuticals, banks…none of these sectors have withered and died. I’m extremely fond of the phrase, often incorrectly attributed to Aristotle: “To avoid criticism, say nothing, do nothing, be nothing”. The P2P sector aims to disrupt, which is surely the antithesis of doing nothing. Its track record will start to speak for itself and then the good news will come.

SUZIE NEUWIRTH EDITOR-IN-CHIEF

Printed by The Manson Group ©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.

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NEWS

cont. page 1 although the expected publication date was listed as “TBC”. An updated version of the policy development page, published in November, no longer has a mention of this document. Several industry sources who have met with the FCA about the report told Peer2Peer Finance News that the timeline had been pushed back because of the General Election and has now been delayed until 2018 as Brexit and other areas of regulation are taking up more of the FCA’s time. “If there was something material in the document they would prioritise it,” one source said. “The fact that the FCA has kicked it down the road is an indication that they are not concerned.” Another industry insider suggested the report may not come out until the second quarter of 2018 as it is still in the process of being checked by various FCA internal committees. There are concerns that the delay will negatively impact firms trying to enter the market. “We would like to see progress on the review as expeditiously as they can achieve it,” said a spokesperson from the

Peer-to-Peer Finance Association. “The proposals were fairly sensible. Our operating principles already go beyond the regulatory regime; they already met a higher standard than that mandated. “It would be good for potential market entrants and platforms in the sector if this process could be transacted as speedily as is practical.” Meanwhile, the sector will get an indication of the data that will contribute to the FCA’s thinking in the coming weeks as the CCAF is due to release some of the findings from a joint study of the sector it compiled with the regulator. The findings will contribute to the FCA review and will also be included in the CCAF’s annual report on the P2P sector. Researchers spoke to investors and fundraisers to identify any changes to the industry and its place in the financial services sector. It also looked at the demographics of investors and how they are changing, as well as how investors assess risks and how they use the information provided to them. All platforms were

FCA chief executive Andrew Bailey invited to survey their own users for the report and received results for their own firm back in March. A spokesperson for the Cambridge Judge Business School confirmed that some of the findings from the platform’s surveys would be included in its own annual report on the UK sector in the coming weeks. Julia Groves, partner at P2P bonds platform Downing and former head of the UK Crowdfunding Association, says it is

business as usual for the firm despite the lack of FCA feedback. “The post implementation review was something which the FCA always intended to do, given the groundbreaking nature of the crowdfunding and P2P regulatory framework thinking that has been widely copied around the world,” she told Peer2Peer Finance News. The FCA declined to comment on the delay and said there was no timetable available for the document’s release.

NEWS

Industry heralds benefits of single regulator PEER-TO-PEER regulation in the UK is far more consistent than it is in the US, industry insiders have claimed. “Many of us in the US look with envy on the UK regulatory environment and the fact that there is just one regulator in financial services,” said Peter Renton, founder of the LendIt conference series that takes place in both countries. “In the US there are at least 10 federal regulators and then every state will have their own regulatory bodies as well. “It is a mess and it certainly stifles innovation in the US.” ‘Big three’ lender Funding Circle, which operates in the UK and the US, has been instrumental

in promoting regulation in the sector within both countries. It was a founding member of the Peer-toPeer Finance Association in the UK in 2011 and also helped start the Marketplace Lending Association (MLA) in the US in April 2016. “In the US, Funding Circle operates in a regulatory environment that can be as complex as it is extensive,” Conor French, US general counsel for Funding Circle, told Peer2Peer Finance News. “We are subject to federal, state, and local rules, many of which suffer from inconsistencies in scope or application or were written long before the advent of the digital

economy. These issues of overlap, fragmentation, and uncertainty can result in a more challenging regulatory framework here than we face in the UK.” As the US is bigger than the UK, both in terms of its population and the P2P market itself, there are also other important regulatory bodies that Funding Circle is involved with across the pond such as the Responsible Business Lending Coalition, the Small Business Borrowers’ Bill of Rights and the Conference of State Bank Supervisors’ Fintech Advisory Panel. “By comparison, in

the UK, Funding Circle benefits from a single national regulatory framework led by the Financial Conduct Authority,” French added. “This was a pioneering move and the regulator has shown foresight in striking the right balance between enabling the industry to continue to flourish while ensuring the protection of investors and borrowers.”

P2P split on benefits of product variety THE INDUSTRY is becoming increasingly divided between those focusing on a single product and those broadening their offering. Invoice finance platform MarketInvoice recently expanded into business lending, calling it “a natural move”, while buy-to-let platform LandlordInvest has said it is considering moving into development finance. RateSetter’s Rhydian Lewis has also emphasized the benefits of diversified

borrowing channels. Conversely, Funding Circle decided to wind down its property lending division earlier this year, leaving the platform to focus on its core product of business loans. “Platforms argue that broadening out into different kinds of loans lowers the risks for investors,” said Neil Faulkner, chief executive and founder of P2P analysis firm 4th Way. “If investors have all their

money in one basket, those platforms might have a good point. “However, investors can get a huge amount of diversification by lending across lots of platforms, which is clearly safer than lending through just one platform. “In my experience, the founders and first employees at most P2P lending platforms focus on the type of lending that they know best. “Hence, P2P lending

platforms that are diversifying into new kinds of loans need to prove that they are just as competent with those other loans as they are with the loans they started out with.” Stephen Findlay, chief executive of direct lending specialist BondMason, says he does not see a problem with a platform offering a range of products, but investors need to ensure they are not over-exposed to a particular segment of the market.

NEWS

Increase in fintech Tube advertising

PEER-TO-PEER lenders are among the fintech firms increasing their brand awareness by advertising on the London Underground. MarketInvoice recently told Peer2Peer Finance News about its plans to launch a new advertising campaign on the capital’s metro system, while Funding Circle has been advertising on the Tube since 2012. “We’re seeing that the burgeoning fintech sector in the UK is increasingly turning to advertising on the Tube to promote products and services to Londoners,” said Killian Barrins, head of Exterion Media Ventures, which manages advertising on

the London Underground. “From [payments app] TransferWise, to equity crowdfunding platforms like Seedrs, to P2P business loans provider Funding Circle – all are enjoying the benefits of reaching four million daily passengers.” According to a recent study by Exterion Media Ventures, almost all travellers are favourable to advertising on the London Underground and 80 per cent of those who don’t like social media or TV adverts enjoy them while travelling on the Tube. “On top of that, six out of 10 passengers notice when a new ad appears, so it’s an ideal place for fintech start-ups to get

spotted,” added Barrins. “The number of fintech start-ups in London has exploded over the past few years and the Tube has played an integral part in many of their marketing plans due to its ability to reach an audience of tech-

savvy professionals. “In addition to the consumer reach, we’ve seen many fintech startups use the Tube to get their brand in front of suppliers, the investment community and London’s talent pool.”

Uruguay’s TuTasa readies for UK launch A URUGUAYAN peer-topeer platform originating personal loans in Latin America is planning to launch in the UK in the next 12 months. TuTasa launched in Uruguay in August 2016 and has opened a London office ahead of applying for Financial Conduct Authority (FCA) authorisation to lend to UK borrowers. Currently investors from around the world, including the UK, can fund personal loans in countries including Argentina, Chile and Mexico via the platform and receive

returns of up to 30 per cent. The minimum investment is 10,000 Uruguayan pesos ($U), or around £260. Individuals can borrow $U10,000 to $U250,000, subject to credit and ID checks. The platform says it has not had any defaults and has lent more than £50m in its first year. It also offers a contingency fund to cover defaults, using money from borrowers. “We did a pre-application with the FCA and given the unique nature of our proposal we got good feedback,”

Marcelo Barreneche, chief executive of TuTasa, told Peer2Peer Finance News. “We are working with a recognised Londonbased compliance firm to file our full application next December. The FCA's handbook suggests resolution is expected within 12 months from filing.” TuTasa claims it can process loans in eight seconds, meaning borrowers can even apply for finance at a store’s checkout. “TuTasa is not solving the problem of ‘needing a loan’ but the problem of allowing

people to buy products or services they want, when they want,” Barreneche said. “This is a game changer, as lenders with one account will be able to lend in UK but also in all the countries we operate, including Argentina, Mexico, Brazil, Chile, Uruguay and more. “Not only do emerging markets offer lenders a return three times higher than developed countries, but also TuTasa's multi-country feature allows lenders to build portfolios with diversified country risk and offset currency volatility.”

JOINT VENTURE

Special measures

Raja Daswani, the head of Hong Kong bespoke tailor Raja Fashions, delves into the intricacies of a well-made garment

T could be argued that bespoke tailoring is as much a science as it is an art, as there are a multitude of elements that need to be finessed for the perfect garment. Fabrics, fit, colours and any special requirements all need to be taken into account to satisfy a diverse range of customers. This is something that Raja Daswani, the head of Hong Kong-based tailor Raja Fashions, knows all about. With customers all over the world, including here in the UK, Daswani is used to tailoring clothes to the precise need of every individual. “Every garment requires a multitude of things,” he explains. “Every shirt has different collar styles, pockets, cuffs, buttons and threads. The customer may want different coloured thread on the button holes or specific inserts on the cuffs. “The same goes for suits. You can have different kinds of lining and there are a wide variety of pockets that can be custom-made accordingly.” Indeed, when it comes to special requirements, Daswani has seen it all. As well as the traditional businessmen’s suits, the

master craftsman has tailored garments for people with more specific needs. “We get requests from police officers, civil servants and armed forces that need to carry guns, for example,” the tailor says. “In these cases, we would need to reinforce trousers or jackets, by creating special linings or patches in leather that do not wear out. “Something very heavy like that would need a more durable fabric outside as well as for the pocketing.” It’s not just the likes of police officers who have specific requirements. “We have custommade additional inside pockets for magicians for example,” Daswani adds. This specialist experience undoubtedly benefits all of Daswani’s customers, as they can be assured that the same amount of time and care will be put into more standard items of clothing such as tailored suits or dresses. This is not only important when having the bespoke item made, but also for maintenance. Daswani explains that Raja Fashions’ service does not stop once the garment is delivered, as

the tailor is available to repair clothing as well. “We have many requests to mend shirts, when the collars or cuffs are worn out,” he affirms. “We replace them with brand new ones. “When we cannot match the exact same fabric, we will opt for white, but it all depends on what the wear and tear is. We try to accommodate. “People go to clubs, they burn holes with cigarettes in their clothes…we also take care of that. We make sure our customers are satisfied.” Raja Fashions offers tailored garments at highly competitive prices. Bespoke suits start at £350 for lightweight

fabrics and £435 for 100 per cent wool. Raja Fashions’ premium suits go up to £2,500, but the same garment could cost £12,000 on Savile Row. Raja Fashions is also promoting several special offers at the moment. Customers can buy two suits and two shirts from £580, six shirts or blouses from £298 and a bespoke suit with fabric by Ermenegildo Zegna from £850. Visit Raja Fashions’ website at www.rajafashions.com or email raja@raja-fashions.com to book an appointment. Hong Kong main shop: 34-C Cameron Road, G/F, TST, Kln, Hong Kong.

PROFILE

A world of opportunity Rhydian Lewis heads up one of the biggest and best-known peer-to-peer lenders in the country. The RateSetter chief executive talks to Suzie Neuwirth about the firm’s “relentless focus” on the retail investor, regulation and what he learnt from the wholesale lending episode

HE BUSINESS has never been healthier than it is today, which is great,” asserts Rhydian Lewis, chief executive and co-founder of RateSetter, now with the additional accolade of an OBE. “It’s older, it’s wiser, it’s bigger, it’s got better infrastructure, it’s got better people, it’s regulated.” Indeed, 2017 has been a pivotal year for the ‘big three’ peer-to-peer lender. In May, it announced a fresh £13m equity funding round from City investors and in July, it hit the £2bn cumulative lending milestone. In September, it was recognised among the country’s fastest-growing technology firms in the Sunday Times’ Tech Track 100 and in October, it finally gained full Financial Conduct Authority (FCA) approval after a lengthy application process. Of course, it hasn’t all

been smooth sailing for the company, now in its seventh year of operation. It hit the headlines over the summer for “interventions” it made with its former wholesale lending partners (more on which later). “The best sign of a business is how it copes with complexities and challenges,” Lewis continues. “That is what gives people confidence in the long-term sustainability of a business – how it reacts to things outside of its normal course of events. “We’re very proud of being a customer-focused business and we hope that will continue to shine through.” This customer focus is pivotal to Lewis’ approach to running the company. “We have 250,000 active customers, which makes us the largest peer-to-peer lender by some distance, in terms of people we are

touching today,” says Lewis. “We are motivated by the impact we have on customers. That matters to us, so we’re very happy about that.” Unlike some other P2P players, RateSetter has minimal institutional money funding loans through its platform, which Lewis attributes to their “relentless focus on the retail investor”. According to data from P2P analysis firm Orca, institutions lent £38.25m through RateSetter in 2016, compared to £626.41m from retail investors. This year, institutional funding has shrunk to just £12.79m, with the platform on its way to becoming 100

per cent retail funded. Lewis emphasises this is through choice rather than necessity. “We’ve had institutional investors [in the past] and we’ve absolutely considered it,” he says. “We want to make our product the best we can for the retail investor. Having a mixture of funding sources just means you end up having your attention diverted. “Also, we think the most exciting thing about P2P lending is that it’s opened up access to lending to people that previously couldn’t do it. That’s the big breakthrough that regulation and the government has enabled, which is terrific.”

PROFILE

ith such a strong focus on the retail investor, it is no surprise that Lewis expects the Innovative Finance ISA (IFISA) to have an “extremely positive” impact on the company. Now that RateSetter is fully authorised by the City regulator, it is able to apply to HMRC for ISA manager status and plans to launch its IFISA during this tax year. “It will allow our existing customers to earn more and it will widen the audience, which can only be a good thing,” says Lewis. “I think it’s right that P2P is able to offer ISAs now. The industry has the infrastructure and the capability to handle it.” Some P2P platforms have staggered the roll-out of their tax wrappers in a bid to avoid lengthy waiting times for investors’ funds to be matched. Earlier this year, Lending Works had to shut its IFISA to new money after receiving £1.5m in just 24 hours and Zopa is yet to open its IFISA to new investors. But Lewis is confident that this won’t be an issue for RateSetter. “With the investment we’ve made in the last couple of years, our originations on the borrower side could step

up pretty quickly,” he asserts. “Ahead of time, we’ve built quite a good origination capability and underwriting capability, so that will work well with ISA money coming in.” It’s full steam ahead for RateSetter, but the firm appeared to lose a little momentum over the summer when it emerged that it had purchased a struggling company that was indebted to one of its former wholesale lending partners. The platform also bought up two of its former wholesale

partners and a stake in another, which was subsequently acquired by Non-Standard Finance. Was Lewis surprised by the amount of attention the issue attracted? “The point is that we’ve moved through it, we’ve explained what we were doing,” he ripostes. “I think it’s a sign of the resilience of our platform that we’re able to explore different types of lending, which makes us a more informed and sophisticated business. “The reaction from

customers was not, in the end, a problem, so we’re going again. RateSetter has not gone backwards as a result.” RateSetter’s tardiness in disclosing the situation resulted in its departure from the Peer-to-Peer Finance Association for breaching the trade body’s rules on transparency, although Lewis states that leaving the organisation has not had an impact on the business. “We were one of the founding members of the P2PFA, so the idea

PROFILE

“ The most exciting thing about P2P is that it’s opened up access to lending to people that previously couldn’t do it” of trade associations is something we are supportive of, if they maintain a focus we agree with,” he adds. “It depends on the direction of a trade association as to whether we’d like to be a member or not.” The FCA cracked down on wholesale lending – whereby P2P platforms lend to other lenders – earlier this year, saying it flouts the rules if the borrower (i.e. the other lender) does not have the required deposits permission. It should be noted that RateSetter begun winding down its wholesale lending business prior to the FCA confirming its view on the matter. Lewis takes the opportunity to clarify some elements of the episode which he says “have got lost in translation”. “This was a technical issue, not a credit issue,” he explains. “The lending to those lending businesses has been successful and performed as we expected, as evidenced by the fact these businesses have gone on to be acquired by banks and listed companies. “RateSetter decided

that it was a grey area and - because of our confidence in our ability to originate our own loans we decided that we’d stop doing it.” The reason it resulted in “interventions”, Lewis says, is that the FCA’s ruling came as a surprise to its wholesale lending partners, which meant the firms struggled with the substantial challenge of overhauling their business models. “So when you start unpicking it, this was not a credit issue, this was a technical issue and it’s now behind us,” he reiterates. “Personally, I think that RateSetter has learnt a lot from it in terms of its penetration of the lending market, because it’s dealt with companies that themselves are in the lending market.” Interestingly, Lewis says that the issue has given him greater experience in the very sector that RateSetter is looking to disrupt. “If you consider the complexity of banking, it’s a good thing if P2P lending businesses are able to understand the complexity

that they’re competing against,” he says. “Wholesale lending is a very big part of banking and in order to understand that market very well, it’s advantageous to increase our knowledge within this business.” With Lewis emphatic that the wholesale lending episode is in RateSetter’s past, what about RateSetter’s future? It’s a case of deepening their lending in their existing markets, says the chief executive, confirming that further international expansion is “categorically not” on the agenda. “The plan is to focus on the UK, get to scale and focus on delivering a terrific product to UK lenders and borrowers,” he explains. “That’s the focus.” In terms of RateSetter’s proportional mix of business, property and consumer lending, and now motor finance, Lewis says “it goes in waves”, with some segments more attractive than others at different times. “It moves at different speeds, but the objective is to try and get a balanced portfolio across all of those

lending markets,” he explains. The Bank of England and the FCA have highlighted concerns about ballooning levels of consumer credit, but Lewis is unfazed. “We don’t anticipate a major shock, which normally results from a spike in unemployment,” he says. “That’s what we believe causes major credit issues and we do not anticipate that.” Lewis recently revealed that RateSetter will return to profit in the next financial year, after three years in the red from investing heavily in growing the business. Is there perhaps too much pressure on companies to become profitable while simultaneously looking to scale up? Lewis directs the attention to a Venn diagram on a whiteboard in his office. “Funnily enough, this thing here is a constant reminder in my room of the many pressures on a business,” he says. “The four elements are customers, employees, shareholders and safety. If

PROFILE

you scrimp on any of them, you might temporarily be able to give more to the other three parts, but it will come back and need to be fed in due course. “There’s no point having a business that gives a terrific product to consumers but is not sustainable itself. There’s no point having a business that gives a terrific deal to consumers, but doesn’t have any employees because no one wants to work there. “There’s no point having a business that gives a great deal to consumers but is cutting corners and therefore is not sustainable, which is what we mean by safety. “We’re always trying to work out what needs attention so that hopefully we are building a longterm sustainable business and that’s what the area in the middle of the diagram represents.” Of course, profitability will always be a pressure on businesses, Lewis adds. “RateSetter’s shareholders recognise that P2P lending has a big future,” he says. “They recognise that requires investment and that time is a very, very valuable thing because you’re building a track record. They’re not impatient.” Lewis is staying at the

We want to make our “product the best we can for the retail investor”

helm of RateSetter for the foreseeable future, as it enters its next stage of growth. “I don’t have any plans to move into a non-executive role at RateSetter,” he affirms. “While I add the value, I will be fully executive and then, when the time comes, I will move fully on. “I think execs becoming non-execs is sometimes confusing for people. “Of course, under regulation and corporate governance, people moving from chief executive to chairman is not considered right and proper. I think it’s the same going from exec to non-exec.” Looking at the

wider industry, Lewis is confident of P2P’s resilience in a recession, even if some firms fall by the wayside. “I think we can say until we’re blue in the face that this is a sustainable industry, but the single thing people trust in life is proof and a track record, so time is our friend in that way,” he says. One thing that Lewis would like to see change is mainstream media coverage of the sector. “I’m frustrated that people aren’t giving this industry as much of a chance as they should do because it’s got a lot to offer,” he says. “I do find it a little bit frustrating that after

seven years, when you look at the track record of some of these businesses, that people are still questioning their ability. “I think customers are missing out. It’s about financial inclusion and giving people the opportunity to earn more on their money. “This is something we’re very passionate about, giving people that opportunity. Access is the key thing here and that goes to the heart of financial education and financial inclusion, so if it’s not explained well, people miss out. That’s something we work hard to change.” With Lewis’ relentless focus, that change seems very likely indeed.

JOINT VENTURE

Back to basics Terry Fisher at Huddle Capital explains why, when it comes to business lending, old-school principles are paramount

HILE THE front end of fintech is the tech, the back of it must be solid financial principles,” asserts Terry Fisher, founder at peer-to-peer business lender Huddle Capital. “No matter how fancy you make the front end and how slick you make it for the investors, oldschool, tried-and-trusted principles must remain when it comes to looking at borrowers.” This ethos is at the heart of Huddle Capital, which launched in April this year, by its parent company Access Commercial Finance, a balance sheet lender that was established four years ago. “Our management team is built up of business people, as opposed to the stereotypical bankers and lenders,” Fisher explains. “So we very much know what it’s like to be a borrower and our team understands the

challenges that can face a business. We have first-hand experience of running struggling businesses and turning them around so we really can relate to and communicate with our customers and potential borrowers.” Huddle Capital offers loans to growing businesses, including ones that may have been rejected by high street

difficulty in the past but those days are behind them,” he says. “We look at the positives of a growing business, not the negatives.” Huddle Capital’s investors typically enjoy enviably high annual

Fisher affirms. “We don’t treat the deal any differently than we would if we were lending our own money. All borrowers go through a very rigorous credit and underwriting process and all of that

All borrowers go through a very rigorous credit “ and underwriting process and all of that information is made completely public to our investors” banks. Just because a company is somehow ineligible for a loan from a traditional lender does not mean that they are a poor-quality borrower, Fisher argues. “It may be that they need greater speed and certainty than they would get at a high street bank, or they may have fallen into financial

returns ranging between 12 and 14 per cent. “With any high yield there’s always a concern that it must be high risk, but the level of security and the quality of the underlying borrowers on our platform are the same or potentially better than other deals in the market that are paying a lot less,”

information is made completely public to our investors.” Furthermore, parent company Access funds any shortfall on the deals on Huddle’s platform, meaning that borrowers can be assured they will get the money and investors can feel confident that the deals they invest in will complete.

JOINT VENTURE

“ We look at the positives of a growing business, not the negatives” G

oing forward, it’s a case of “more of the same” at Huddle Capital, as the team grows its investor base to keep up with a strong pipeline of deals. The platform is set to launch its Innovative Finance ISA in this tax year, which will give customers the added incentive of

tax-free earnings on their investments. An auto-bid function is also on the horizon, which should attract the more passive investor, although Fisher is quick to highlight that the emphasis will remain on a select range of highquality deals, rather than shifting to “an instant

access account where you don’t know where your money goes”. Indeed, it is this discerning approach that Fisher says sets Huddle Capital apart from the rest. “We understand our borrowers better than most other lenders do and therefore are able

to structure deals in a way that other lenders probably wouldn’t,” he comments. “Our default rates are absolutely minimal because we’ve got that real-world experience of how to collect – which is just as important as knowing how to lend!”

SPONSORED CONTENT

Uncharted waters

Keith Maner, compliance and technical manager at compliance specialists Thistle Initiatives, explains how the UK regulators are approaching Brexit and how fintech firms in particular are reacting to the issue

n April 2017, the Prudential Regulation Authority (PRA) issued a “Dear CEO” letter to all its regulated firms asking for information on their contingency planning for the UK’s withdrawal from the EU. This is to ensure that the UK maintains a position of financial stability. The PRA will also use the information received to inform its own Brexit contingency plans and the chair of the Treasury Select Committee, Nicky Morgan, requested details of this exercise to assess just how ready firms really are. Meanwhile, the Financial Conduct Authority (FCA) has posed a series of questions to twenty of the UK’s largest asset managers on their Brexit contingency plans, asking for information such as anticipated capital impacts and the status of overseas licence applications. Whilst there remains an enormous amount of uncertainty surrounding Brexit negotiations, there are also clear benefits to planning for the worst. Should no agreement be in place by the time of the UK’s withdrawal in March 2019, there will be far-reaching implications for any firm currently relying on passporting arrangements for crossborder EU business. In order for impacted subsidiaries or branches to continue operating in their current jurisdictions (UK and mainland Europe), new authorisations or licences may be

required. Indeed, some firms may wish to consider withdrawing from certain markets altogether. Each firm will be faced with a range of options, some of which will clearly be less palatable than others. The shockwaves caused by the UK’s decision to vote for Brexit in last June’s referendum have certainly reached the fintech sector, with three questions in particular now troubling many: • Will the UK now become less attractive as a talent pool for young entrepreneurs? • Will start-ups’ access to capital be jeopardised? • What access will UK fintech companies have to the single market once Brexit is completed? It is important to stress that such concerns remain purely hypothetical, given that negotiations over the terms of Brexit are unclear. However, despite this uncertainty we have found the impact Brexit has had on early stage start-ups to be minimal at the moment. One of the key areas of speculation is whether London will remain the ‘fintech capital of Europe’ or be surpassed by cities such as Paris or Berlin. However, rather than seeing these cities as competition, there is a positive story to be told around increasing innovation across Europe. It’s also important to stress that London’s pre-eminence in the

fintech space is the result of a number of disparate factors, many of which are unaffected by Brexit. The UK has always encouraged innovation and “critical to this has been a forwardthinking, open and collaborative regulatory regime driven by the FCA,” according to industry body Innovate Finance. The fact that London is home to such a large concentration of financial services businesses and technology companies, in close proximity to one another, is also a natural advantage.

The UK’s fintech “sector has continued to progress since the Brexit vote

”

In fact, the UK’s fintech sector has continued to progress since the Brexit vote. Some examples include the fintech bridges forged with China, South Korea, Singapore, India and Australia. Japanese tech firm Softbank, meanwhile, has said the headquarters for its £80bn technology investment fund will be located in London, which is an encouraging sign for investment. Thistle Initiatives offers Brexit advice services to all types of firms who may be affected.

BREXIT

See EU later

The UK’s decision to split from the rest of the bloc sent shockwaves around the world, but what does it mean for peer-to-peer lending? Andrew Saunders delves into the implications of the divorce

HERE IS A blight on the land, and its name is Brexit. As we progress towards B-day (29 Mar 2019 in case it slipped your mind), that seems to be the message booming loud and clear from most of the UK’s largest financial and corporate institutions. Would Nissan have demanded its famous guarantee letter, for example, if it were not so? Would the Bank of England have warned that Brexit will cost 75,000 jobs in the City? Or would Paul Drechsler, the president of the

Confederation of British Industry – traditionally the voice of corporate Britain in Westminster and not given to hyperbole – have likened the negotiations to a “prime-time soap opera”? So it’s clear that for those in the rarefied atmosphere of the multinational, many more glasses are half empty than half full. But what about life closer to ground level, the millions of ‘ordinary’ small- and medium-sized enterprises (SMEs) and consumers who between them account for such a large chunk of the UK

economy? And who also make up the population of borrowers and investors that the peer-to-peer lending sector relies on. Could a bad Brexit bring the slick new machinery of alternative finance shuddering to a halt? It certainly doesn’t seem to be having that effect so far, says John Goodall, chief executive of Landbay, a P2P provider of buy-to-let mortgages with a total of £67.42m of loans under its belt to date. “Has Brexit had an effect on our business so far? The short answer is no,” he affirms. “We’re

a UK business serving UK borrowers with UK mortgages. We don’t import anything from the EU for example so we are not directly affected by Brexit.” The point that the majority of P2P platforms are essentially domestic and thus less at risk from the threat of downgraded access to the single market - or even the dreaded prospect of having to resort to World Trade Organisation rules – seems like a fair one. It’s also helped insulate the sector from the sharp decline in the pound

BREXIT

uncertainty is impacting on small “ Brexit business investment decisions” against the euro since referendum day that has been the most obvious economic consequence of the Brexit decision so far. Goodall is also pretty sanguine about recent signals from the property market. Estate agent Savills has forecast that house price growth across the UK is set to halve over the next five years, and the bosses of big housebuilders (including the famously canny founder of Berkeley Homes Tony Pidgley, and Redrow’s Steve Morgan) have been cashing in shares, suggesting harder times ahead. “The housing market is not rising like it was three years ago,” he says. “Partly due to increases in stamp duty but also because prices got out of sync with earnings. But I am not someone who thinks there will be a big crash; it doesn’t keep me awake at night.” Companion to the falling pound, the other recent macroeconomic shift has been the first rise in the Bank of England base rate in a decade, up a modest 0.25 per cent in November to 0.5 per cent. “It won’t be a one-off but there will be a gradual tightening,” says Howard

Archer, chief economic adviser to the EY ITEM Club. Inflation may not get much higher than three per cent, he says, and may well fall once the impact of the shift in sterling drops out of the calculations. But no-one should be blind to the fact that Brexit has hit the economy hard. “There is no sign of real wages growth, and businesses are already being very cautious because of not knowing what is going to happen, or whether there will be a transition agreement or not,” Archer explains. “It’s clear given the strength of the global economy that the UK would be growing at more than 1.5 per cent if it weren’t for Brexit.” Karteek Patel, chief executive of curated business loans platform Crowdstacker, agrees that the uncertainty over the outcome of Brexit is a problem. “The Brexit fog – we’re in it now and it is unhelpful,” he says. “It could slow business investment. A slowdown would impact all of us – investors and borrowers – so we all hope it will be a soft one.” But for many SMEs,

worries over the political and macroeconomic climate come a distant second to the more pressing day-to-day concerns of running a fast-growing business. “The rate rise is marginal: long-term the spread [between savings and P2P returns] will be squeezed but with the guidance saying there will be two more 0.25 per cent increases by 2020, there’s a long way to go before that becomes an issue for us,” says Patel. “Right now we are seeing a positive impact – a dramatic increase in enquiries to borrow. The banks are taking a more cautious stance, possibly as a result of Brexit, and companies are looking to widen their options in terms of funding.” And who can blame

them? Many SMEs were abandoned by their banks following the 2008 crash so who would be surprised if they are eager not to put all their eggs in one basket again. hairman of the Federation of Small Business Mike Cherry says that there has been an impact on his members already and there could well be more to come. “It seems as though Brexit uncertainty is impacting on small business investment decisions,” he asserts. “Seven in 10 are not planning to increase capital investment in the next three months. “Nine in 10 small firms that sell overseas export to the EU, and one in five small business employers have EU staff on their

BREXIT

had an effect on our business “ Hasso Brexit far? The short answer is no” books. A bad Brexit deal could massively stifle growth amongst these firms.” Even Landbay’s upbeat Goodall admits that hardening official attitudes to immigration are a worry. Partly because fewer overseas workers could hit the rental income of the landlords who are his customers, and partly because of fears that recruiting good people to help grow the business could get harder. “Several of our employees especially on the tech side are from the EU,” he comments. “I think that everyone who is here already will get the right to remain, but will we still find it as easy to attract tech talent in 2020?” He’s not the only one concerned about the impact of free movement changes. Earlier this year Zopa chairman Giles Andrews told Peer2Peer Finance News that the decision to open an office in Barcelona was largely a defensive measure against any Brexit-related damage to the UK skills market. “Opening the

Barcelona office is an acknowledgement of the challenge of recruiting highly skilled developers in this country, and a concern that the situation might get worse because of Brexit,” he said. “I don’t think it makes you a radical pessimist to say that now.” It’s also possible that anyone looking to branch out overseas might put plans on hold until the Brexit fog clears, although the differences in regulatory regimes across the EU are already large enough to put off most P2P platforms. Zopa’s Barcelona office is strictly a tech hub, with no lending done there, and only Funding Circle has been tempted to take on much in the way of EU expansion so far. Rising levels of consumer debt – unsecured lending on cards, personal loans and car finance have hit a whopping £200bn – have also led to fears that a big household spending squeeze is on the way. “We are worried about consumers,” says

economist Vicky Pryce, board member at the Centre for Economics and Business Research. “They have sustained the economy so far – last year’s growth was all consumer spending.” This has led to speculation that consumer P2P lenders are in for a harder time than their SME lending counterparts. “That’s the perception, but is it reality?” asks Iain Niblock, chief executive of P2P analysis firm Orca. “Whatever market you are in the reality is that risk changes over time, it’s not as simple as saying that one market is less risky than another. Just like any other investment, the only free lunch is diversification.” One thing that is unlikely to change as a result of the interest rate rise is the paltry return on bank savings accounts. “Savings rates are unlikely to go up, because the banks need to boost their margins,” says Pryce. Good news for the P2P sector which has benefitted from the

negative real returns offered by deposit accounts in recent years. Another point in the industry’s favour when it comes to surviving troubled times is that the risks of P2P lending are relatively simple and discrete – no CDOs or CDSs or PPI scandals here. “P2P doesn’t pose a systemic risk,” says Pryce. “Look at the banks and the trouble they have had – P2P lenders can say we are cleaner and better.” Crowdstacker’s Patel agrees. “One area where P2P has done well is on transparency,” he asserts. “It’s very important that people understand the nature of the risks they are taking, and our investors appreciate that we are open with them.” So long as it can maintain that openness, he thinks the sector will continue to outperform more secretive rivals. So even in the event that the Brexit blight does take hold of the economy, there is a fair chance that P2P will stand up to it at least as well, if not better, than traditional lenders.

TECHNOLOGY

Digital evolution Technology is at the very core of peer-to-peer lending, but is the industry in danger of losing its competitive edge? Marc Shoffman investigates

EER-TO-PEER lending has blossomed off the back of innovative technology and is now providing a viable alternative to mainstream financial services. But as traditional providers start to see the benefits of fintech, how can P2P maintain its market position as a disruptor? Industry observers say the key pillars of P2P technology are improved

borrower and investor journeys compared with banks, faster decisionmaking capabilities and loan book transparency. P2P platforms come in all shapes and sizes, but most are in agreement about the importance of in-house technology to create their core infrastructure and set themselves apart from their competitors. This was the approach that P2P property

platform Landbay took when readying for launch. “The value of being inhouse is that you can set the architecture yourself and drive change more quickly,” explains Julian Cork, chief operating officer for Landbay. “There is no big legacy technology to build on.” Greg Carter, chief executive of business P2P lender Growth Street, agrees that it is beneficial to develop your own

technology. “When we started we tried to find third-party providers ranging from bespoke software houses to big players,” he says. “But we couldn’t find anyone that could provide the platform we wanted to build.” However, while P2P platforms often prefer using in-house technology for building up their loanbook and bringing on borrowers and investors,

TECHNOLOGY

The value of being “ in-house is that you can set

the architecture yourself and drive change more quickly

”

they are happy to outsource more specialist functions such as client money protection and anti-money laundering. “We wanted to focus on our core competencies, but there is no point building something new when you can buy generic capabilities such as security checks,” adds Landbay’s Cork. “We don’t want to be in the business of checking passports, it is much better buying that than building.” Another element where some platforms have been outsourcing their technology is in managing their Innovative Finance ISA (IFISA). Platforms such as Landbay, Ablrate and LandlordInvest use P2P software provider and

administrator Goji to manage their IFISA reporting. Asset-backed P2P lender Ablrate said back in June that it would be more “cost effective” to use a third-party provider for its tax wrapper. “We decided to go with Goji as it’s easier for us to outsource the technology,” chief executive David Bradley-Ward told Peer2Peer Finance News at the time. David Genn, chief technology officer at Goji, says they are also seeing increased requests from platforms looking to become more adviser-friendly. “Financial advisers and wealth managers don't want to have to deal with individual platforms and want to be

able to access diversified lending products that are structured in products suitable for their clients,” he explains. “We've created a diversified bond that invests across multiple direct lending providers and is structured as a regulated, fixed-term bond that is IFISA eligible. This is only possible using technology as it allows us to integrate with multiple providers and handle maturity matching, diversification across sector, asset and platform, and manage credit risk. “We've also created a web-based platform to enable financial advisers to manage their client's accounts and investments. “Individual platforms could, and have, produced

their own financial adviser offerings but the feedback we get from the market is that diversification and a regulated product structure are key features they want, so we expect there to be a continued role for companies like Goji to provide the technology to make this possible.” Mambu, which offers a platform for managing deposit and credit products and works with P2P lenders such as Flender, says outsourcing certain aspects helps firms focus on their key differentiators. “We are talking to lenders who are now starting to expand but from a technical perspective they realise what they build in-house won’t empower them

TECHNOLOGY

AI potentially has more use in “ P2P than blockchain technology”

to scale further,” says Michael Pierce, account executive at Mambu. “We allow them to focus on what differentiates them and we sort the tech. “From a business perspective, traditional P2P lenders all have the same commonality, something built in-house, but now they realise there is a new country or product line or area of finance and the cost of doing that with their existing system is higher than using an outsourced platform that takes it off their plate.” Of course, the risk that comes with building an individual tech proposition is culpability if something goes wrong. For example, earlier this year, Lendy had

a problem with new deposits not showing up on certain accounts, but emailed investors quickly to inform them of the glitch. And in August, Zopa experienced a technical issue that resulted in a small amount of money seeming to have disappeared from some investors’ accounts, which was also quickly resolved. But there can be IT problems outside of a platform’s control. For example, if a banking website goes down, the lender is no longer able to accept deposits or let users withdraw funds. This is something that P2P pawnbroker Collateral knows about only too well, as its banking partner Santander temporarily had a problem with its

online portal in July. “Dependence on a supply chain may create problems,” explains Lucian Morris, a fintech specialist at Deloitte. “There is a question about your supply chain and making sure you don’t have a knock-on effect if things go wrong. We should see more delineation of responsibilities in future.” Goji’s Genn believes security is one of the biggest reputational challenges in P2P. “There are some platforms that have great technology and take security and resiliency extremely seriously,” Genn says. “There needs to be an acceptance that regardless of a platform's size, if a customer loses personal

data or money or a transaction fails then the impact for that customer is the same regardless of the size of the platform. “This means platforms need top-grade technology from day one. There is currently a large disparity in the sophistication of the technology between different companies and it is difficult for investors and borrowers to assess this. “When you choose a plumber to service your boiler you can check their certification - there is no way to do this for the technology that is storing your personal data and processing your money. I think there would be value in the industry selfdisclosing more details on

TECHNOLOGY

their underlying technology so customers can make informed choices.” But Laurence Wilks, head of IT for P2P property platform Lendy, says many of the challenges may be linked to technology but are more about how issues are managed. “The key challenges are in fact less technically focused and are more centred around generating a reputation for reliability, usability and providing offerings that are attractive to the target customers,” Wilks says. “Reliability and resilience of the platform are key aspects of building confidence. The innovative use of proven technologies backed by solid IT principles around uptime, availability and data protection feature strongly. “Well-defined procedures, processes and monitoring reflected in the platform are key to providing transparency which helps to highlight and eliminate abuse and fraud. “That’s not saying we don’t occasionally have glitches – they are inevitable in any fastmoving business. Key though is being able to react quickly when they occur, and our lean and agile IT environment helps to ensure we are highly responsive.” One emerging way P2P lenders are set to have their reputation and

reliability tested is with the imminent introduction of open banking, as banks will have to share consumer data with thirdparty providers, including alternative lenders. “A number of interesting changes are occurring, potentially giving P2P lenders the opportunity to access data about borrowers that they never previously had,” Morris adds. “A lender could ask for access to bank accounts and make more informed decisions on borrowers. “It means you can make a better decision on

access open banking once it launches. “We will be able to ask customers for access to their bank current account data and we can then access their full transaction record, which is one of the most important data sets that banks use to underwrite loans,” explains Carter. “P2P lenders will be able to offer more flexible loans as we will be able to understand transaction history, be more aware of expenses and can check affordability more easily and automatically.”

technology,” he asserts. “You could get AI to understand variables and teach itself credit scoring. Teaching the AI to track a loan through its lifetime could end up with AI smart enough to make much more informed decisions. “This increases profit margins whilst adding efficiency and profitability.” There are other areas where some feel P2P could do more. For example, very few P2P lenders offer apps, in contrast to the banking arena where such technology is

advisers and wealth managers don’t want “ Financial to have to deal with individual platforms” whether you want to lend and what the appropriate rate to lend at is. “There will be a race to implement that technology to keep yourself on the leading edge.” Carter says Growth Street sees open banking as an “iPhone moment” for financial services. Growth Street is one of 20 fintech firms participating in innovation charity Nesta’s Open Up challenge, which supports the development of tools and loan products to help small businesses

But Landbay’s Cork is more hesitant, warning that customers may not want to be bombarded by their P2P lender. Instead, he says it is important to be linked with aggregators involved in open banking such as fintech firm Bud. The other emerging technology currently shaking up the financial services sector is blockchain, but Morris says P2P lenders could benefit more from using artificial intelligence (AI). “AI potentially has more use in P2P than blockchain

commonplace. “P2P is behind on the consumer side of technology as it has invested most of its resources in the core infrastructure of a new business model,” Carter admits. There are plenty of challenges and opportunities for P2P technology and platforms have already shown how quickly a sector can grow and innovate, in contrast with banks. It is how the platforms capitalise on their historic creativity that will now determine their future.