Peer2Peer Finance News December 2016 by Alternative Credit Investor

HOW TO WIN OVER IFAS

>> 4

The head of APFA talks to P2PFN

FINTECH MARKETPLACE IN TALKS WITH P2P FIRMS >> 7

The new online aggregator for consumers

Using your assets: The benefits and challenges of secured and unsecured loans >> 20

ISSUE 3 | DECEMBER 2016

Altmann: consumers should consider P2P

BARONESS Ros Altmann, the former pensions minister, has said she is “very, very much in favour” of retail investors putting money into alternative finance channels such as peer-topeer lending. The veteran consumer rights champion’s positive endorsement comes at a welcome time for the sector, which is trying to improve public trust and awareness as platforms ready themselves for the Innovative Finance ISA (IFISA). “I’m very, very

much in favour of alternative investing and diversification, particularly for long-term investors,” Altmann told Peer-to-Peer Finance News. “As long as people understand the risks and there are consumer safeguards in place, we should encourage people to diversify. “P2P finance could have a good role, as long as you’re with a good company that assesses who you’re lending to in a responsible way,” she continued. “That doesn’t mean none of the borrowers will fail, but it

does mean somebody is trying to assess the risk properly. That should give you better returns than just sticking your money in conventional bonds, for example. And certainly better than cash.” The launch of the IFISA, the tax-free wrapper around P2P investments, is hoped to propel the industry into the mainstream once the major platforms have received Financial Conduct Authority approval. So far, a dozen smaller lenders are authorised to offer the product, with Lending

Works becoming the first larger platform to gain FCA approval in October. The next stage is to receive ISA manager status from HMRC, but this is broadly accepted to be a formality.

Read the full interview with Altmann on page 12.

Platforms report booming business after Brexit vote PEER-TO-PEER lenders have welcomed a Brexit ‘boost’, which has sent an influx of new customers into the sector in search of better interest rates and accessible loans. Despite a period of uncertainty following June’s vote, the low base rate and depreciating value of the pound meant that September and October were

record-breaking months for P2P lenders across the UK. “We’ve had a lot of success in the aftermath of the Brexit with the base rate cut prompting people to look at their options,” said Luke O’Mahony, PR manager for RateSetter. “We think we’re well positioned to prosper in any kind of environment. We were founded in

a difficult economic environment and we continue to prosper in it.” RateSetter saw twice as many new investor accounts being opened each day in the month after the base rate cut compared to the month preceding it, while Zopa and Funding Circle both broke their own funding records in September 2016.

Assetz Capital had its biggest ever month in October, originating £26m in loans. “Since the Brexit referendum, Assetz Capital has seen record growth in both loan enquiries and investment funds,” said Stuart Law, chief executive of Assetz Capital. “From August, the loan enquiries have been both significant and consistent growth at >> 4

EDITOR’S LETTER

Published by Royal Crescent Publishing

PO Box 73680, London, W11 9GP 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 PRODUCTION Karen Whitaker Art Director Zac Thorne Logo design COMMERCIAL sales@p2pfinancenews.co.uk SUBSCRIPTIONS AND DISTRIBUTION info@p2pfinancenews.co.uk Find our website at www.p2pfinancenews.co.uk Printed by The Manson Group ©No part of this publication may be reproduced without written permission from the publishers. Peer-to-Peer Finance News has been prepared solely for informational purposes, and is not a solicitation of an offer to buy or sell any peerto-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.

016 has been a politically turbulent year to say the least and the outcome of the US presidential election was no exception. The victory of controversial, right-wing Republican Donald Trump has added a new layer of uncertainty to the global economy, although admittedly, the stock markets initially rallied on hopes of increased infrastructure spending and tax cuts. With the Brexit vote earlier in the year and the president-elect Trump, people are revolting against the establishment. But what does this mean for the peer-to-peer finance sector? As this month’s front page story and feature on Brexit (page 16) shows, the industry is optimistic in the face of uncertainty – in fact, it’s doing better than ever. Low interest rates are attracting more investors to the sector and with inflation set to soar, even more squeezed savers are set to consider alternative investments. But it is important not to become complacent. The full impact of Brexit is far from clear, as Britain is yet to negotiate its terms with the EU or even begin the long, costly, painful process of unravelling ourselves from the bloc. Yes, low interest rates and rising inflation will attract investors to P2P platforms, but a worse economy could put companies’ growth plans on hold, meaning less borrowing, or result in higher default rates. The P2P industry is innovative and nimble – resources it may have to rely on more than ever in this uncertain world. SUZIE NEUWIRTH EDITOR-IN-CHIEF

NEWS

IFAs want to see P2P lenders survive a downturn THE HEAD of the trade body for independent financial advisers (IFAs) has said that its members will be less cautious about recommending peer-topeer finance investments to their clients if the industry can survive a downturn. Chris Hannant, directorgeneral of the Association of Professional Financial Advisers (APFA), told Peer-to-Peer Finance News that the organisation’s members have “a healthy level of scepticism about something new” and would wait to see how the P2P industry develops. “The markets haven’t done too badly this year, but we’re facing uncertainty,” he said. “People may start looking for new things if the equity

markets start suffering. “A downturn would be the real test for P2P. If they can hold on to their lenders’ money and prove themselves when other asset classes are struggling, that could make the difference for IFAs’ perception of the industry.” Financial advisers have traditionally been rather cool towards P2P, which the industry argues is down to a lack of education around the products. Hannant eschewed this suggestion. “I think that’s slightly wishful thinking of the P2P industry,” he said. “It’s really just a question of time. IFAs want to see a proven track record.” He added that recent

scandals surrounding unregulated Self-Invested Personal Pensions (SIPPs) have made IFAs more cautious in general and has encouraged them to stick to tried-andtested products. “Financial innovation are two words that have

cost the finance industry a lot of money over the years in compensation and brought the banking system down,” he said. “It’s fair to say that IFAs are conservative with a small c – they have to be careful with people’s money.”

cont. from page 1 £50m per month. As a result, we will be handling £400m in enquiries in November.” Similarly, ArchOver told Peer-to-Peer Finance News that the company saw an uptick in both lenders and borrowers as the economic impact of the EU referendum began to sink in. “Borrowing gradually slowed down as the vote approached,” said Angus Dent, chief executive of ArchOver. “The Monday

after the vote all the to-Peer Finance News has pent-up demand hit the also learned that many platform, or so it felt at the P2P platforms are on a time, thereafter July and hiring spree, with Funding August were slow months. Circle, Lending Works “But now we’re on target and RateSetter all in the to facilitate twice as much process of scaling up their lending in 2016 as we did workforce. This is despite in 2015, with no losses, widespread fears that the defaults or arrears.” sector would struggle Dent added that “almost to maintain growth immediately after the vote amid uncertainty over had taken place lenders passporting rights and wanted to lend again” after a currency volatility. brief period of uncertainty. For more on the P2P sector Confirming the positive and Brexit, read the feature post-Brexit climate, Peeron page 16.

NEWS

BBA would welcome Zopa bank as a member ZOPA could become a member of the British Bankers’ Association (BBA) once it receives its licence, the trade body for the country’s banking sector has said. Last month, the UK’s largest and oldest peerto-peer lending platform announced that it is applying for authorisation from the City regulators to operate as a digital bank, alongside its existing P2P business. The news was a first for the industry, which usually positions itself as a disruptor to the conventional banking system. “Any organisation that has a banking licence can be a member,” a BBA spokesperson told Peer-toPeer Finance News. The spokesperson said

that Zopa’s P2P arm would not affect its eligibility for membership, as long as it had full regulatory authorisation to operate as a bank. “We have 200 members, including challenger banks,” the spokesperson said. “As an organisation we already cover lots of different types of banks.” If Zopa did join the banking trade body, it would mark an interesting progression in the P2P story. Commentators had speculated that platforms would apply for banking licences, but there has traditionally been a frosty relationship between the banking lobby and P2P. Zopa’s existing tieup with Metro Bank

throws another interesting quandary into the mix. The partnership was announced over a year ago, whereby the challenger bank lends directly to consumers through Zopa. Whether Metro Bank would want to lend through a competitor – and indeed, whether Zopa would welcome such a partnership once it has its banking licence – is debatable. A Metro Bank spokesperson said that the announcement had no “immediate” impact

on its relationship with Zopa. “We welcome all competition in banking, the more choice there is for consumers the more it will drive up competition and standards,” the spokesperson said. Zopa was contacted for comment.

REGULATION UPDATE: Three more platforms get FCA green light, IFISA approvals accelerate THREE more peer-to-peer lenders have been awarded full authorisation from the Financial Conduct Authority (FCA) in the past two months, while Innovative Finance ISA (IFISA) manager approvals from HMRC have also accelerated. In mid-October, Lending Works became the first major P2P lending platform to receive full FCA approval and in early November, both UK Bond

Network and Scotland’s LendingCrowd gained full authorisation from the regulator. Meanwhile, IFISA approvals have been increasing, with six firms authorised by HMRC to sell IFISA products in the two-month period between 17 September and 17 November. British Pearl, Downing LLP, KapSecure Asset Management, Platform One, Triple Point

Investment Management and Wilton Corporate Finance are now able to offer the tax-friendly IFISAs to their clients. However, one company has already had its IFISA authorisation revoked. Peregrine Asset Management no longer appears on the HMRC list of approved ISA managers. Investment trust P2P Global Investments (P2PGI) also won full

authorisation from the FCA for its credit-related regulatory activities. This was more of a formality, as the fund was already complying with FCA guidelines under the umbrella of its investment manager MW Eaglewood. However, a spokesperson said he believed this is the first time that a UK P2P lending-focused investment trust had received full authorisation.

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NEWS

Fintech marketplace in talks with P2P firms

A FINANCIAL Conduct Authority (FCA)-backed fintech aggregator is in talks with the UK’s largest peer-to-peer lenders to bring them on board. Bud is a new online platform and app that enables consumers to manage their financial

products on a single dashboard. This includes bank accounts, pensions, mortgages and investments. “The idea is to simplify the whole process,” said Jamie Campbell, head of customer experience at Bud. “We absolutely

welcome P2P lenders to integrate with the platform and we’re already in talks with the largest ones.” Campbell would not disclose the names of the platforms the company has been in talks with, but said the company’s strategy was to target the major players in each sector before going to the more niche firms. Bud is one of the startups that was recently selected by the FCA for its “regulatory sandbox” – part of the City regulator’s initiative to support fintech innovators. The regulatory sandbox aims to create a ‘safe space’ where start-ups can test out their business models in a live environment without fear of FCA punishment if something

goes wrong. Bud kicked off its beta launch at the start of November with one part of its product, providing bank account aggregation and analytics. The full launch of its financial service marketplace was scheduled for 1 December. The London-based start-up already has 35 partners signed up to its marketplace, including Nutmeg, PensionBee and Western Union. The company has been self-funded so far, raising £300,000 to start the business. Campbell said they are looking to raise a further £750,000 from external investors before Christmas and are talking to venture capitalists, family offices and angels.

Brits lend to friends and family to plug £4bn funding shortfall MORE than 1.6 million Brits have lent money to a loved one to help them start or grow a business, as it is revealed that UK banks turn down 26 per cent of business funding applications. According to new research by ThinCats, at least £7.2bn has been lent by family and friends, with an average loan size of £4,479. This coincides with new data from the Treasury

which found that in 2015, 324,000 business funding applications were turned down by British banks, leaving small- and medium-sized businesses with an annual funding shortage of almost £4bn. “Since the financial crisis in 2008, SMEs have had a pretty torrid time sourcing finance from traditional avenues, so it’s inevitable that some business owners are turning to friends and

family for help,” said Kevin Caley, founder and chairman of ThinCats. “However, this sort of lending comes with all sorts of personal and emotional baggage and it’s important that anyone in this position knows there is a healthy alternative finance market out there, with greater flexibility to lend when the banks will not. “The good news is, this tightening of

lending from banks has encouraged us to become a nation of peer-to-peer lenders, giving everyday investors the opportunity to make healthy returns through the emergent alternative finance sector. Over 160,000 people have already lent money through a P2P platform and based on the 1.6 million already [lending] through loved ones, we could well see many more.”

FINANCE BLOG SET UP BY UK NATIONAL NEWSPAPER JOURNALIST SUZIE NEUWIRTH, PROVIDING FRESH BUSINESS NEWS AND ANALYSIS, AS WELL AS LONDON-BASED BREAKFAST AND NETWORKING EVENTS WWW.HOTCOMMODITY.CO.UK FOR MORE INFORMATION REGARDING THE BLOGâ&#x20AC;&#x2122;S CONTENT OR FUTURE EVENTS, GET IN TOUCH AT INFO@HOTCOMMODITY.CO.UK FOLLOW US ON TWITTER @HOTCOMMODITYUK

NEWS

UK P2P platforms lent £2.6bn over the last year A NEW alternative finance index has found that eight of the UK’s largest peer-topeer platforms lent £2.6bn over the last year. Online aggregator OFF3R, which produces the index, also revealed that the P2P platforms were lending an average of £197m per month, with September 2016 proving to be the strongest month, with almost £234m being lent (see image). “I’m entirely bullish around the P2P space,” Lex Deak, chief executive and co-founder of OFF3R told Peer-to-Peer Finance News. “The platforms are being backed by more institutional investors and they are becoming more refined, the government is getting behind them,

Image: OFF3R

interest rates are down, we have a tax break in the form of the IFISA – it feels like a cocktail of things to suggest that the industry is not going anywhere.” The OFF3R Index tracks the performance of eight P2P platforms: Zopa, Landbay, RateSetter,

ArchOver, Marketinvoice, Lending Works, Funding Circle and Thin Cats. The index also tracks the equity crowdfunding sector and found that £18m was being raised per month across seven crowdfunding platforms including Seedrs and Crowdcube.

Deak said that he would eventually like OFF3R to become “the MoneySuperMarket for the alternative investment space”, with a dynamic, real-time index, adding that he was “excited to be launching this report at such a critical time”.

No respite for savers despite dip in inflation THE LATEST inflation figures showed a fall in the cost of living, but this is “very likely a temporary blip on an otherwise upwards trajectory,” experts have warned. Contrary to forecasts, the rate of inflation dipped to 0.9 per cent in October, from one per cent the previous month. This came despite a multitude of warnings from economists that inflation would hit 1.2 per cent and just keep on

rising, due to higher food prices and the rising cost of petrol. Consumers were told that the combination of high inflation and low interest rates would drive down the value of their savings. The latest inflation figures were largely down to cheaper clothing prices and these bargains are not likely to last for long. Furthermore, inflation figures have not yet absorbed the full impact of the ongoing weakness

of the pound and the socalled ‘Brexit tax’ which has been threatened by food manufacturers such as Unilever and Walkers. “Inflation may have nudged down slightly in the year to October but it’s very likely a temporary blip on an otherwise upwards trajectory,” said Richard Wazacz of Octopus Choice. ThinCats’ chairman Kevin Caley added: “This will be a double blow for anyone relying on their

savings or investments to sustain them, especially pensioners living without an inflation-linked income. When price rises do kick in, likely before Christmas, people will face increased costs and meagre interest on any savings they keep with the bank.” The central bank warned last month that inflation will rise well above its two per cent target to 2.8 per cent in 2018, before falling slightly to 2.5 per cent in 2019.

COMMENT & ANALYSIS

A match made in heaven?

Richard Wazacz, head of Octopus Choice, explains why P2P lenders and financial advisers can – and should – see eye to eye

“ P

EER-TO-PEER LENDING AND FINANCIAL ADVICE AREN’T EXACTLY NATURAL BEDFELLOWS. For most advisers, P2P lending is a disaster waiting to happen. At best, it’s an unproven industry engaged in low quality lending to the unbankable. At worst, it’s a group of disingenuous fraudsters hoodwinking unsuspecting investors with the prospect of false reward. The fledgling market’s fragile reputation hasn’t been helped by some hiccups along the way. Platforms have come and gone – sometimes unceremoniously. American market leader Lending Club has covered itself in scandal. And, back in April, the former chief of the now-defunct Financial Services Authority knocked some of the wind out of the industry’s sails by infamously declaring – in words he would later come to soften – that the losses soon to be witnessed would “make the worst bankers look like absolute lending geniuses”. For an audience who are naturally cautious of new developments, such developments have been anything but reassuring. When it comes to advisers, at least, P2P lending has an image problem. At the same time, it’s probably fair to say that advisers aren’t at the top of most P2P lenders’ Christmas

When it comes to advisers, P2P lending has an image problem

”

card lists. After all, most of them created platforms explicitly to cut out the middle man, not collaborate with them. But the simple fact is this. Neither party is going anywhere. The P2P market continues to go from strength to strength, growing at a year-on-year pace of over 80 per cent and running into the billions each year. According to the P2PFA, of the £5bn that’s now been lent through P2P platforms, £2.5bn was lent in the last year alone. Meanwhile, according to Yorkshire Bank’s (admittedly regretful) prediction, half a million new investors will try their hand at P2P lending as a result of the tax incentive and mainstream approval brought by the Innovative Finance ISA (IFISA). But it’s precisely this influx of new and inexperienced investors which, I think, makes the role of financial advice so important. In spite of its relative infancy, the P2P universe is already hugely diverse, spanning everything from unsecured credit card debt to secured residential property lending. It’s complex and confusing. With a vast array of products out there, each one offering a different

risk-return profile, it’s important that investors know exactly what they’re getting into. Anyone unsure about what’s right for them should seek independent financial advice. And plenty of people do. Just as most of us would consult the doctor before taking a serious decision around our physical health, millions of us place our financial health in the hands of trained intermediaries. Across the UK, financial advisers collectively manage billions of pounds. They’re a crucial feature of our financial landscape that it pays not to ignore. But winning them over won’t be easy. Financial advisers are paid to be conservative. We entrust them with one of the most serious tasks anyone could be given – to look after our money. And, at the end of the day, it’s their neck on the line. It’s not in their interests to take any more risk than they need to, and to satisfy their compliance teams and professional indemnity insurers, they’ll need to undertake a level of due diligence research and suitability assessment that most P2P lenders simply aren’t cut out to support. But it’s high time they start making the effort. Just as financial advisers should accept that P2P lending isn’t going to go away, lenders should do more to work with this important sector of the UK’s financial community. The prize is there to be seized. Time to seize it!

COMMENT & ANALYSIS

The real deal

Stuart Law, founder and chief executive of Assetz Capital, discusses tangible assets and their importance in the P2P sector

HILE THE PEER-TOPEER FINANCE MARKET CONTINUES TO GROW STEADILY, one on-going question remains: what is the best way to safeguard investor funds? The market to date has lured early adopters, high-net-worth individuals and other savvy investors, but in order to grow and expand, one thing is critical – attracting a large number of retail investors. Mitigation of risk is important for the experienced investors who understand the risks and are willing to jeopardise a little for big returns. However, in order to convert new retail investors to P2P, more reassurance is definitely required. Financial Conduct Authority accreditation will go a long way in helping to achieve this reassurance and facilitate growth. So too will much clearer methods used by P2P platforms that can protect investors and minimise the impact of loan defaults. Retail investors will be lured by the headline return figures, but they also don’t want to have to pore over countless credit reports to make a decision on a £1,000 loan. They want to trust the methodology and best practice implemented by the P2P platforms. Ultimately the success of individual P2P players and the market as a whole depends on defining and implementing a unified code of best practice in relation to the use of tangible assets. From our perspective, the use of tangible assets are best for larger

loans, yet there is no clear definition of what this means. Here’s the abridged dictionary definition: tangible – something that is touchable and enduring; intangible – something that is ethereal and untouchable. Applied to banking, there are two clear distinctions and some very grey middle ground. Property, plant and machinery and stock are all tangible assets. They are physically present and we can touch them and value them against recognised

Loose definitions “ of key concepts, such as tangible assets, risk damaging the industry

”

valuation methods. Goodwill is completely intangible. A brand has an intangible value. The Coke brand is just a name - you can’t touch it or lock it away but it has $100bn+ value just as a brand name. The product (the drink itself) is tangible and people pay for it by the litre. It’s cheap as a product but the value of the company is in the brand name. Now for the grey area. In B2B finance, this specifically refers to the assessment of debtor books. Invoices can be tangible as they exist physically, but the value of each and every invoice varies for many reasons, including retention on title

issues, call-off stock, contra invoices and failure to complete contracts. In a default situation, the ability to get back 100p in the pound on the debtor book is near on nil, which means there is an element of intangibility to it. As an example, one legal services business applied for funding through Assetz. Its tangible asset was its work in progress (WIP). Our definition of tangible assets didn’t include WIP, as the work isn’t completed and if the business goes bust it’s hard to sell part-finished work. However, as the company’s WIP are verified law suits awaiting settlements which have been agreed and guaranteed by the defendants, in this case it is a tangible asset and the company got its loan. The progress of the P2P market ultimately depends on platforms adhering to the pure definitions of tangible; any wavering from this will lead to risk, defaults and ultimately losses. Loose definitions of key concepts, such as tangible assets, risk damaging the industry. While gaps and loopholes may appear from time to time, responsible lenders need to continuously adapt with a single purpose in mind: safeguarding investors in order to grow the reputation and future of the market.

PERSONAL FINANCE PROFILE

The pensions warrior Ros Altmann is renowned for her longstanding efforts in fighting pensions injustices and she’s not finished yet. She talks to Peer-to-Peer Finance News about the latest threats to savers, the importance of good financial advice and what she really thinks of P2P lending…

OS ALTMANN, OR BARONESS ALTMANN OF TOTTENHAM TO USE HER FULL TITLE, is synonymous with pensions. The veteran consumer rights champion and former pensions minister has made her name by battling pensions injustices, which has won her a slew of awards as well as her peerage. But the former Chase Manhattan banker is not resting on her laurels – not when there are still plenty of battles to fight. “I think we’ve got the makings of a really brilliant pension system,” she says. “The problem is that government policy could snatch defeat from the jaws of victory, confusing people by promoting Individual Savings Accounts (ISAs). Actually pensions are the best way to save for retirement.” Altmann is highly

sceptical about ISAs being used as retirement savings products, arguing that they encourage spending at 60 “and nothing left at age 80”. She reasons that pensions offer more benefits, as recent freedom and choice reforms mean they can be passed on after death free of tax, removing the pressure to spend one’s entire pension pot. “If you turn pensions into ISAs, you destroy pensions. Let’s be clear,” she says. “There is no doubt in my mind that by trying to turn pensions into ISAs you destroy them and you will be heading for millions more poor people in later life. “You will be leaving a problem for the government of the future and if you’ve incentivised ISAs as well, you’ve really wasted today’s taxpayers’ money.” Altmann is a little wary of politicians’ involvement in the pensions system –

unsurprisingly considering her rather short-lived tenure as a government minister. She stepped down in July after 15 months in the role, amid new Prime Minister Theresa May’s reshuffle. In her resignation letter she said that she was not convinced the government had done enough to address the hardship facing women who had their state pension age increased at short notice. Altmann did not have a particularly enjoyable time in government. In an interview after her departure, she was reported as saying that it was “the most terrible experience” and that she felt “silenced” by officials. It makes sense that

frontline politics didn’t suit Altmann, who is used to fighting the system, rather than being part of it. “My concern is that politicians don’t seem be able to resist this idea that we should be tinkering all the time,” she says. “Sometimes, especially with pensions, you need to leave things alone to develop. The policy of auto enrolment started in 2012, it’s not going to be finished until 2019. But there’s a real, serious danger that before it’s finished, government will have lost patience and said oh we need to change something here. And that’s the worst way to make policy.” Altmann’s enthusiasm about pensions does not

PERSONAL FINANCE PROFILE

mean she is blinkered to the variety of investment options open to consumers. “Anything we can do to encourage more saving is great,” she says. “If we’ve got the retail investment market working and we keep the pension system working well, there would be nothing to stop people transferring money over into the pension wrapper once they’re ready. “In your 20s you might prefer to put your extra discretionary money into a different retail savings product. That’s fine, but have a plan to move it over into a pension – which is the best way to save – when you’re ready.”

Refreshingly for a high-profile figure, she is positive about the benefits of peer-to-peer lending for consumers looking to build a nest egg. “I’m very, very much in favour of alternative investing and diversification, particularly for long-term investors,” she asserts. “As long as people understand the risks and there are consumer safeguards in place, we should encourage people to diversify. Especially in the current interest rate environment, where nobody knows what the Bank of England’s policies have done to investment risk anyway.”

ltmann has been typically outspoken about central bank policy in the past, arguing that quantitative easing and very low interest rates have had a detrimental effect on savers. “There is no guarantee that you won’t lose money in any investment,” she declares. “There’s certainly no guarantee that central bank policy hasn’t distorted what was supposed to be the risk-free asset; therefore having a diversified range of options may well be the better way to reduce risk, rather than sticking with what are supposedly safer assets. “P2P finance could have

I think “ we’ve got the

makings of a really brilliant pension system. The problem is that government policy could snatch defeat from the jaws of victory

”

PERSONAL FINANCE PROFILE

ALTMANN TAKES ON… …the Bank of England’s chief economist Andy Haldane, who said property is a better investment for retirement than a pension “That was one of the most irresponsible comments I’ve seen for a long time. Pensions are so much better than property. Anyone that suggests you should focus on only one asset, especially an asset that has been artificially distorted and driven up to incredibly high levels, surely needs to understand personal finance better.” …Sir Philip Green and BHS “I can’t tell you how upset I’ve been at the BHS situation, as most employers are not trying to avoid pension liabilities. I actually do think Philip Green will sort this one out, but in the meantime people are left with the impression that unscrupulous employers are trying to diddle all their pension scheme members and I don’t believe that’s the case. “I think Green meant what he said when he told parliament that he was going to sort it. I don’t have any views on [whether he should lose his knighthood], all I care about is the pensions aspect. He needs to do the right thing by his workers and pay the money.” …the new Lifetime ISA, which encourages people to save for a first home and their retirement simultaneously, but puts a five per cent penalty charge on early withdrawals “The Lifetime ISA is the next big mis-selling scandal waiting to happen and if I was a provider I would not want to sell one carelessly. If you sell it to people without explaining the risks, you run the risk of them coming back in a few years time saying, hang on a minute, you didn’t tell me I shouldn’t have opted out of my workplace pension and given up my employer contribution, you didn’t tell me that there was this huge penalty if I actually want to access my money. “Carelessly distributing this product would be against the interest of the providers, never mind the customers.”

Peer-to-peer finance “could have a good role, as long as you’re with a good company that assesses who you’re lending to in a responsible way

”

a good role, as long as you’re with a good company that assesses who you’re lending to in a responsible way,” she continues. “That doesn’t mean none of the borrowers will fail, but it does mean somebody is trying to assess the risk properly. That should give you better returns than just sticking your money in conventional bonds, for example. And certainly better than cash.” aking informed choices is pivotal to Altmann’s investment ethos and she believes that paying for finance advice should become more commonplace. “I think people need to better understand why it is actually a good idea to consider paying for advice,” she says. “Yes, we need to offer free guidance; that would be a first step and would certainly help. We need financial education and better public awareness of financial planning. But that in itself wouldn’t be enough. “If you wanted to build an extension to your house, you would pay an architect to draw up plans for you. You wouldn’t expect to have somebody do it for you for nothing. If you wanted to buy a house and

PERSONAL FINANCE PROFILE

needed expert legal advice, you’d expect to pay a lawyer for their expertise and experience that you don’t have. “In a way that’s like professional financial advice. Somebody is qualified and supposedly working in your interest to help you do something you want to do.” Altmann blames this disconnect on financial providers’ past behaviour of using salesmen paid on commission recouped from individuals’ investments, rather than advertised as an upfront fee. “It wasn’t really advice, it was more like sales, but it was called advice. As the fees were hidden away, lots of people are used to the idea that advice should be free.” She thinks there is room for improvement when it comes to overseeing the financial advice market. “The FCA has been trying to regulate it and I think it’s made a bit of a Horlicks of it to be honest,” she says. “The retail distribution review was well intentioned and was meant to help establish a clear dividing line between sales and advice, but unfortunately the word advice is just not clear enough. “The word advice should only refer to the professional individual financial help that people get which they pay for. But at the moment the word advice is just so confused.” The former director-general of Saga Group is similarly sceptical about robo-advice – this year’s hot fintech trend for automated advice services. “Robo-advice has a very confused name, because mostly it’s not advice, it’s more like information,” she comments. “But I think there’s a huge role for more information and more financial planning guidance. Just telling people they’re not saving

enough all the time is a stuck record and it doesn’t help.” Altmann sees opportunities within the wider technology space to revolutionise the savings and pensions market. “I actually think younger people are pretty smart and there is an opportunity via technology to engage them in ways the industry never engaged older people,” she says. “That doesn’t mean it should be exclusively for younger people, but I do think that appealing to people with different technology has the potential to revolutionise financial selling and financial products and saving.” She thinks existing pensions

providers have missed a trick by not riding the fintech wave and suggests a disruptor could enter the market. “You can imagine something like the Amazon pension, where a pound goes into a long-term savings pension vehicle every time you buy something off Amazon,” she says. “Or if you get a refund you could put some of it into your pension. Technology at the point of sale of anything unrelated to pensions could be harnessed to help people save more. “The fact is, people should automatically think about saving in a way they don’t,” she adds. But you can bet anything that Altmann will make her very best efforts to change that.

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No Bregrets P2P lenders have experienced a very welcome boost in the immediate aftermath of the EU referendum. But will the realities of the Brexit tell a different story?

t’s natural to be cautious about the future in a world where the UK government has yet to reveal its plan to leave the European Union, where the value of sterling is tanking and where the US recently gave out its own anti-establishment message by voting for Donald Trump. But amid the chaos and uncertainty, one group of people seem to be thriving: peer-topeer lenders. While the Brexit effect has resulted in currency depreciation, market volatility and historically low interest rates, the UK’s P2P sector has been reporting record results, as more and more new investors start to consider alternative finance for the first time in the face of diminishing bank returns. In fact, things have never looked better for the P2P sector. According to a new index from OFF3R, eight of the UK’s largest P2P lenders lent £2.6bn between October 2015 and October 2016, with a sharp uptick in loan

funding in September 2016, just after the base rate was cut. With the recent acceleration of IFISA approvals, a slowdown in bank lending to SMEs and many savings accounts offering little more than zero per cent to customers, it’s no wonder that more borrowers and investors are willing to consider P2P lending. “We’ve had a lot of success in the aftermath of the Brexit vote with the base rate cut prompting people to look at their options,” says Luke O’Mahony, PR manager for RateSetter. “We think we’re well positioned to prosper in any kind of environment. We were founded in a difficult economic environment and we continue to prosper in it.” But despite the recent success of the P2P lending market, there are still some concerns that Brexit could stymie Britain’s emerging industries. London has built up a reputation as the fintech hub of Europe, but Berlin

is hot on its heels. n early October, Zopa chief executive Giles Andrews, Abundance managing director (and Zopa co-founder) Bruce Davis and Daniel Morgan, head of policy and regulation at Innovate Finance, appeared before a select committee in the House of Lords, where they warned of a possible migration of talent from London to Berlin. Andrews noted that the European fintech sector was “catching up fast and probably growing quicker than the industry here.” Davis added: “In terms of the EU we are seen as a leader but the catch-up rate is remarkably swift. Before the Brexit vote we

In terms I “ of the EU we are seen as a leader but the catch-up rate is remarkably swift

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Bruce Davis, Abundance

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THE BREXIT BOOST

had ministers coming to the UK to talk directly to fintech firms – I’m talking about finance ministers from Ireland and Germany in particular. “They were really wanting to understand how they could develop their regulations to attract businesses and also to keep businesses, so they were slightly bemused when they were met by three or four German guys as to why they hadn’t stayed in Germany. “I think we’re going back in time and that does reduce opportunities for expanding businesses.” The UK’s P2P sector is staffed by a diverse mix of UK, EU and non-EU citizens, and the ability

to continue to attract international talent is vital to the continuing growth and success of these rapidly growing companies. In lieu of any concrete information on how passporting rights will be affected postBrexit, industry experts are forced to make their own assumptions. “I don’t think at this stage that people are fretting too much about this because they assume that the talent they have will be allowed to stay and that the UK government is going to make it easy to bring in better talent in the future whatever happens,” says Emily Reid, a partner at Hogan Lovells. “I think everyone’s

Following the EU Referendum, one of the first acts of the Bank of England was to lower its base rate to a record low of 0.25 per cent. Governor Mark Carney said at the time that the cut would “reduce uncertainty, bolster confidence, blunt the slowdown and support the necessary adjustments in the UK economy.” What actually happened was that high-street banks passed the cuts onto their customers, slashing the interest rates on a slew of savings accounts including cash ISAs. Frustrated with the prospect of zero or negative returns on their savings, more and more people began looking at alternative investment options such as peer-topeer lending. In fact, there is a direct correlation between the base rate cut in August, and a spike in P2P lending in September. According to data by OFF3R, eight of the biggest P2P platforms lent £234m in September, compared with a monthly average of £197m. Meanwhile, Zopa, Assetz Capital, RateSetter and Funding Circle all reported lending milestones in September. Zopa funded a record-breaking £67.8m in loans throughout the month, breaking its own previous record by more than £10m, while Funding Circle funded £25m in loans in the 39th week of the year (2630 September), making it the most successful week in the firm’s history. At the start of October, RateSetter announced that it had doubled its new investor accounts since mid-August, when the rate cut was announced.

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just assuming that it won’t turn out to be an actual problem. “I would have thought that if anything, fintech companies might have easier access to a broader range of talent because if the government is persuaded that the lifeblood of the sector depends on recruiting people from outside the UK, then I think they would have to extend that to easier job permits for

people outside the EU.” necdotally, it is believed that between 25 per cent and 35 per cent of the UK’s P2P sector are EU nationals, and Peerto-Peer Finance News is aware that most of the bigger platforms have made a point of reassuring these employees that their jobs are safe. However, until the thorny issue of passporting rights has

been resolved, the truth is that no one really knows how Brexit will impact recruitment and the existing workforce. On the other hand, the movement of people (and businesses) across the continent does not appear to be giving P2P lenders much cause for concern. Cross-border lending is so difficult that it almost never happens in the consumer finance industry, so most

business models should remain unaffected. “Very broadly speaking, under English law you can generally do something unless the law says you can’t,” explains Reid. “Whereas on the continent it tends to be the opposite – you can’t do something unless the law says you can and has a regulatory framework that is relevant and works. So the whole concept of individuals lending

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to individuals or small companies using spare cash to lend to individuals isn’t easily transferable to the continent. Where it does happen, the whole structure has to be different.” Thus far, there has been very little crossover between the UK and European lending markets, with the exception of Funding Circle, which has a presence in Germany, Spain and the Netherlands thanks to last year’s acquisition of German P2P platform Zencap (since rebranded as Funding Circle). In 2014, RateSetter established a base in Australia and Reid predicts that it may be easier for UK platforms to expand into commonwealth countries such as South Africa, Canada and New Zealand, rather than grappling with the complexities of EU law. “Almost all the fintech companies that we know have global rather than European aspirations,” she says. “I think the modus operandi is to perfect your systems and your product in one jurisdiction - and the UK is a good place to do that - and then take what you’ve developed and test it in another jurisdiction. “A lot of the

commonwealth countries will have a historic link to English law so it would be reasonable to expect there to be a strong similarity in those countries.” This is certainly true for RateSetter who have “no short term plans to expand into the EU” according to O’Mahony. However, it is hard to grow a business when expansion is limited to the domestic market and long-distance trading partners. here is a hope that the UK government will step in to protect the fintech sector by encouraging STEM education in schools and offering new graduate and post-graduate training programmes, as well as offering support at a regulatory and taxation level. But no matter what the future holds, there is every reason to be optimistic about the UK’s postBrexit P2P sector. “We were founded in a time of massive disruption and so were other companies like us,” says O’Mahony. “Obviously some big changes are to be expected, but it’s not something that we can’t deal with. “There is opportunity in change, and if anyone’s going to make the most of it it’s going to be fintech companies.”

is opportunity “ There in change, and if anyone’s going to make the most of it it’s going to be fintech companies

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Luke O’Mahony, RateSetter

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Using your assets Secured and unsecured loans are plentiful within the P2P sector. Peer-to-Peer Finance News investigates the benefits and challenges of both

EEP DOWN, EVEN THE MOST RISKAWARE INVESTORS WANT SOME LEVEL OF SECURITY. While they may be able to tolerate some losses, they aren’t going to put their hard-earned money in a company which has no

back-up plan should their investment go AWOL. This is why security is so important in P2P lending. As the sector grows and regulation increases, investors are becoming more and more discerning when it comes to the quality of

loans. And the platforms are listening. There are a number of P2P lenders who only deal in secured loans, while even the unsecured loan books tend to be protected by personal guarantees and platform-funded provisional funds.

However, there is a world of difference between the different forms of P2P security and it is a subject which tends to provoke strong opinions across the industry. “We invented secured loans,” claims Kevin

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understanding everything that goes into “theIt’svalue of an asset that makes you a good secured lender ” Andrew Holgate, Assetz Capital

Caley, chief executive and founder of ThinCats. “Back in November 2009 we had the first idea for doing this. We came at it from the point of view of having a really low-risk investment opportunity and knowing that banks weren’t offering it. We started off assuming that everyone would want security – it didn’t occur to us to not ask for it - so we were surprised when other people came along offering unsecured loans.” owever, not everyone has the same perspective as Caley. Among the three largest platforms, RateSetter and Funding Circle offer both unsecured and secured loans, while Zopa’s loans are all unsecured. So far, industry default rates do not show a discernible contrast between secured and unsecured lenders. “Just being a secured lender isn’t the be

all and end all,” says Andrew Holgate, chief credit officer at Assetz Capital. “Certain assets fluctuate in value. Things like agricultural land – its only ever going to be another farmer that wants it. It’s understanding everything that goes into the value of an asset that makes you a good secured lender.” Most P2P lenders agree that there is a general hierarchy of quality when it comes to loan security. At the top of the pile is property and other tangible assets such as machinery, land and vehicles, although as Holgate says, any of these assets could fluctuate in value over time. “Lenders like property,” says Guy Weaver, a director in KPMG’s debt advisory team. “But it comes down to the type of property – where it’s located, the strength of

the property and the type of property. “It can be an owned property, a business over a property or a commercial property which is lent to a third party, so the strength could be the bricks and mortar but also the lease contract. You have to ask – what would it be worth in a worst-case scenario?” fter property, there are the less tangible assets such as debentures, bank accounts and the company’s own balance sheets, although again, you won’t know what these are going to be worth until the business fails. Most debtors will try to do a deal by offering investors 80p on the pound, or less. This may represent the best value for an investor when the alternative is a protracted legal battle which may not work out in their favour. Finally, there are

personal guarantees. These are legally-binding documents which list any assets of the borrower which could be used to repay the loan if they should default. However, they are controversial. “You don’t have anything tangible to use that on apart from some due diligence that you’ve done that says whether that person is reliable,” says Holgate. “You’re basically going on that assumption that they’ll pay – it’s a very dangerous assumption. “We do take personal guarantees but they’re normally the conduit for then taking a secondary charge on other assets. We want the director to feel a little bit of pain – if something goes wrong that they’re on the hook.” Personal guarantees may work for some lenders, but when they don’t, they can leave a lot of damage in their wake.

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CAN A PERSONAL GUARANTEE EVER TRULY BE ENFORCED? Personal guarantees are an extremely popular form of security for smaller loans and are widely used throughout the P2P sector. But they are not without their critics. Some people have suggested that they are little more than a gentleman’s agreement – a mere promise to pay back any loan by using their existing assets. The risk is that an unscrupulous borrower will sign a guarantee, then sign those assets away to a spouse or business partner the following day, making asset recovery next to impossible. “When things start to go wrong, it’s natural for people to look for ways to protect themselves,” says Andrew Holgate of Assetz Capital. “Will they hide assets? Will they move money in to their wife’s name? Yes, they will. “You need to be able to prove that they had ownership of that asset at the point at which they went into the loan. You might have to get forensic accountants involved and at that point you’re into lengthy court processes.” And as ThinCats’ Kevin Caley says, “there’s a whole industry of lawyers there to advise people on how to get out of their personal guarantees.” However, the law is wise to these scams and there are some measures in place to protect lenders against personal guarantee fraud. There have been a number of high-profile insolvencies where the court has ruled that the debtor has to pay the investor, regardless of whether or not they are still attached to the assets in the original document. However, as Holgate pointed out, these battles can be costly and lengthy, so may not be worth the hassle in the long run.

When ThinCats dabbled in unsecured loans, they ended up with hundreds of thousands of pounds in debt, some of which they are still chasing to this day. In both of those cases the borrowers signed personal guarantees and in both cases ThinCats was unable to recover the money. “In our second year we got caught out quite early on and that’s where we made the most losses,” admits Caley. “The first failure we ever had was a conference management company and we relied on personal guarantees and the value of the debtor book. We lost £100,000£150,000 on that one.” In the second instance, the company took a personal guarantee from the chairman of a cleantech company, however “the company ran out of money and the chairman managed to shift his assets into other areas so we had no assets to go after,” says Caley. “We probably lost around £200,000 on that. “By the way that still shows up on our records so we learnt a hard lesson.” t would be easy to take these examples as proof that unsecured loans are to be avoided at all costs. So why do the three biggest platforms continue to use them?

“The attraction of unsecured loans is the flexibility,” says Weaver. “They’re going to be cheaper to put in place because there are additional legal costs about putting in place security.” Weaver says that when it comes to unsecured lending, the speed that they can move at is “phenomenal”. “Within minutes of someone applying for borrowing, they can actually secure that loan,” he says. This speed is one of the major selling points of retail-focused P2P

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The attraction of unsecured loans is the “ flexibility. [Unsecured loans] are going to be

cheaper to put in place because there are additional legal costs about putting security in place Guy Weaver, KPMG

platforms, who rely on a high turnover of borrowers to match their growing community of lenders. By avoiding a complex security approval process, they can also cut down on admin fees and pass

on the savings to their clients, who are generally using P2P loans as a way to either save money (on borrowing) or make money (on investments). n such a dynamic sector, there certainly seems to be room for both

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secured and unsecured lending. And while most lenders tend to come down on one side or the other, they are happy for different types of security to exist, as long as the investors understand the various risks.

“Within the business space, there is a place for unsecured loans,” says Holgate. “However, I think certain markets – such as the real estate market for bridging loans – should be secured.” The diversity of P2P platforms, borrowers and investors makes this mix of unsecured and secured loans an essential component of the sector. “Security is very complicated,” says Caley. “You need a lot of expertise and experience to be able to judge it properly. “The people doing smaller loans, there’s no point in them taking security because the cost of taking it and enforcing it is disproportionately high. It isn’t really worth it until you are taking loans worth £250,000 or more.” In the end, it’s a numbers game. For some lenders, the ability to approve loans cheaply and quickly far outweighs the risk of losing assets, particularly when those losses have already been built into their projected returns. For others, unsecured loans are simply a risk too far. As long as the platforms are doing everything in their power to protect and inform the investor, every form of security has a place in P2P.

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