Peer2Peer Finance News February 2017 by Alternative Credit Investor

IFISA SPECIAL Who wants them, who’s got them, what they’re doing with them >> 16

Banks bite back

ISSUE 5 | FEBRUARY 2017

High street banks are investing in innovative technologies and developing peer-to-peer “hybrid” models, as competition with the sector heats up TRADITIONAL LENDERS ARE RAMPING UP investment in new technology, amid intensifying competition from P2P platforms, say industry insiders. “The need for banks to innovate is clear,” said Katrin Herrling, chief executive and co-founder of alternative finance platform Funding Xchange. “Some have lost significant market share, for example to Funding Circle in the business lending space. “Banks need to ask themselves, how do I compete with the slicker experience that [P2P lenders] provide and how do I reduce my underwriting costs

by automating some or all of my underwriting so I can compete with newer players?” Alistair Hutt, head of third-party

partnerships for RBS, said that “without a doubt,” P2P was one of the factors that had caused banks to change. “What the emergence of P2P

did for some banks was make sure they were accelerating their own development and sorting their legacy systems,”

he said. Last month Barclays launched a SME lending app, which drastically reduces the amount of time that the bank takes to approve a business loan, from a few weeks to under an hour. “We have seen businesses choosing funding from P2Ps due to the speed and ease with which they could provide funding, even where this has cost the customer a premium,” said Daniel Fairhead, head of lending product management at Barclays. “We recognised this some time ago, and by enabling preassessed lending for our customers, we can process a loan >> 4

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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 Marc Shoffman Senior Reporter marc@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.

HE Innovative Finance ISA has dominated conversation around the P2P sector over the past 18 months and that looks set to continue in 2017, as more platforms finally gain authorisation to offer the tax-free wrapper. Speculation has been rife about why the regulatory process has taken so long and why the UK’s largest and oldest platforms are still waiting for the licences, while a number of smaller players – who are far from household names – appeared to fly through the process with ease. The industry is waiting with baited breath, but could the IFISA be too much of a good thing? Platforms are already facing the challenge of attracting more borrowers to meet an influx of investor demand, so will dangling a tax-free carrot just exacerbate the imbalance? Conversely, will the IFISA attract the hoards of investors that some may have us believe? Or will it be somewhat of a damp squib, simply used by existing customers to transfer their investments? With most major platforms still awaiting their licences, only time will tell.

SUZIE NEUWIRTH EDITOR-IN-CHIEF

NEWS

cont. from page 1 application in as little time as one hour through our latest mobile application – meaning we can also be fast and convenient.” Several banks are in the process of creating a hybrid between the P2P customer experience and bank lending, according to Herrling. The new lending solutions will use the same type of technology, processes and understanding of underwriting as fintech firms. “It’s happening, but it will take banks quite a while to build viable business models around

platform lending,” she said. “Many P2P lenders have built deep expertise in specific sub-segments of the market – either from a customer or product perspective – and are thriving because they understand the needs and risk profile of their chosen niche.” As well as competing with P2P, banks may start expanding into the sector. Last month, it emerged that London-headquartered financial technology provider Misys is launching software to enable banks to provide P2P lending to their customers.

“Banks are losing market share to P2P platform providers. By embedding crowdlending into the overall credit lifecycle, a bank can maintain and expand its client base, recapture business from alternative finance marketplaces and boost lending growth,” Jean-Cedric Jollant, senior product officer at Misys, told Reuters. A number of experts predict banks will increasingly partner with fintech firms to address this innovation gap. “We will see banks move into more specialist areas,”

said Jeremy Grime, analyst at FinnCap. “I think when they do they’ll buy some of these firms. They will buy their loan book and expertise in underwriting and technology, to fix their problems.” A spokesperson from RateSetter said: “P2P lending platforms have set new standards in the financial industry, particularly when it comes to speed and service, but we don’t have a monopoly on innovation. Healthy competition between incumbents and new joiners is a good thing for consumers.”

LendingCrowd lenders show appetite for growth IFISAs PEER-TO-PEER lenders are primarily interested in growth Innovative Finance ISAs (IFISAs) rather than income IFISAs, a LendingCrowd survey has found. Eight in 10 (83 per cent) of the platform’s existing investors said that they would consider opening an IFISA and almost half (49 per cent) said that they would use the IFISA solely to grow their investment. Meanwhile, just nine per cent said that they would invest in an IFISA to supplement their income and the remaining 42 per cent would prefer a combination of the two.

In response to the survey, LendingCrowd plans to make its first IFISA offering a growth account, which automatically invests investors’ capital into a selection of P2P loans, reinvesting these gains as time goes on. The Edinburgh-based platform gained full Financial Conduct Authority authorisation last November and plans to launch its IFISA during the first quarter of 2017. “It is good to see demand among our investors,” said LendingCrowd chief executive Stuart Lunn

(pictured). “This represents our direct investors and we are pleased to see the level of potential demand. We have been doing a lot of work to build our investor products on the platform and from discussions we believe our new growth account will be an attractive solution for the intermediary”. Lunn told Peer-to-Peer Finance News that an income-only IFISA may follow, allowing investors to either withdraw their interest on a monthly basis, or re-invest it within the tax-free wrapper.

NEWS

Borrower shortage presents new challenge for platforms ATTRACTING borrowers is set to be the key challenge for the peer-to-peer finance sector in 2017, after low interest rates sent an influx of lenders to the platforms in search of yield. In December, Zopa temporarily stopped accepting new investors to its platform and set investment caps for existing customers, due to an imbalance between investors and borrowers. Meanwhile, ThinCats has recently expanded its team so that it can increase its loan capacity, as it anticipates an influx of Innovative Finance ISA (IFISA) investors before April 2017. Other major platforms have similarly told Peerto-Peer Finance News that finding new borrowers to meet investor demand is their key priority. With

the number of regulatory authorisations gathering pace, the launch of more Innovative Finance IFISAs is likely to exacerbate the imbalance further. The Bank of England slashed the base rate to a historic low of 0.25 per cent over the summer, which some people saw as an overly hasty response to the Brexit vote. Rising inflation and low interest rates mean that alreadysqueezed savers are choosing to invest more of their money. However, while many industry commentators believe the borrower shortage is a trend that will stay and grow, Neil Faulkner, chief executive of P2P research agency 4th Way, suggested that it could simply be a natural correction in the market.

“At first borrowers were highly interested because they didn’t have much to lose – they weren’t getting loans from the banks, the terms were basically the same and there was nothing putting them off approaching P2P lenders,” he said. “Meanwhile, investors were wary at first as it was a new thing, and they were a lot slower to

come in. But the balance is now evening out.” A surplus of lenders could force P2P platforms to start loosening their borrowing criteria in order to meet with demand, but this could mean taking on additional risk. “They will weaken their standards,” said Faulkner. “If it goes too far it is worrying.”

Lovefruitful founders turn to property development THE FOUNDERS of wound-down peer-topeer lender Lovefruitful are launching a new business this month, enabling people to invest in residential property developments. Rather than P2P, the new business is itself the property developer. Retail investors can back the projects – alongside leverage from banks –

and earn annual returns of 30 per cent. The company, named Fruitful, does not charge any annual or upfront fees. On completion of a project, it receives 25 per cent of the net profits, with the other 75 per cent going to the investors. Its homes are developed using a modular system in a controlled factory

environment, meaning they are constructed in under four weeks. “This means we’re able to accurately project investor returns and deliver our projects on time and on budget,” said a spokesperson via email. The minimum investment is £1,000 and people can choose their own projects or use the auto-invest function.

Lovefruitful closed its P2P mortgage platform to new investors in November 2015, which is said was because the business model “wasn’t sustainable to scale”. It has returned 82 per cent of investor capital and is working with the remaining borrowers to return the last 18 per cent by the second quarter of 2017.

NEWS

Business appetite for P2P loans has fallen, says NACFB chair UK BUSINESSES are using less peer-to-peer funding as awareness of the sector has “started to plateau”, according to the head of the National Association of Commercial Finance Brokers (NACFB). Data from the trade body found that business financing from P2P lenders and other alternative funders fell by 14.4 per cent between June 2015 and June 2016. NACFB chairman Paul Goodman told Peer-toPeer Finance News that there

has not been a noticeable uptick in this area over the past six months. “The funders in the space have been inwardly focused over the last six months as they’ve been looking to attain their FCA authorisation - which seems like the right strategy to give longevity to the sector,” he said. “All funders in the area have spent an inordinate amount of money on their marketing machines in the last couple of years, meaning that market awareness of the

Business written from 1 July 2014 to 30 June 2015

Finance sectors

Commercial Mortgages Leasing & Equipment Finance Invoice Finance Vehicle Finance Buy-to-Let Bridging Finance Development Finance New Types of Business Finance (Alternative Finance)* Total

sector has started to plateau. “That is not to say we are at saturation point - the sector needs to develop and build its marketing strategy as any other business would in a developmental phase.” While the appetite for alternative finance has waned, bridging finance saw a huge increase of 74.6 per cent year on year, while development finance rose by 49.8 per cent and invoice finance saw a 22.8 per cent increase. Goodman added that

Growth year on year (%)

while alternative finance is still a good addition to the broker’s kit bag, it should only be used if appropriate to the customer’s needs. “It seems unwise to have it as the fall-back option just because their bank has said no - as we have seen happening elsewhere in the market,” he said. “The providers are continually adapting to market conditions and developing new products, which is healthy for the market as a whole.”

Business written from 1 July 2015 to 30 June 2016

£3,448,796,117 £4,017,630,631 £946,575,198 £1,244,008,033 £3,534,932,931 £727,106,218 £1,215,295,975 £847,939,361

54.8% 10.5% 22.8% -14.4% 39.1% 74.6% 49.8% -14.4%

£5,340,216,763 £4,438,256,482 £1,162,754,980 £1,064,577,596 £4,918,219,299 £1,269,538,063 £1,821,020,278 £725,483,890

£15,982,284,464

29.8%

£20,740,067,351

*This figure represents peer-to-peer lenders, alternative funders, pension and cashflow funders

Zopa refuses to rule out future investment limits ZOPA has refused to rule out future investment caps, after money transfers were limited in both December and January. The UK’s largest peerto-peer lender temporarily stopped accepting new investors in December,

due to a “slow month” that created an imbalance between borrowers and lenders. It opened up to new investors again later that month once more borrowers joined the platform, but maintained the investment limit into

early January in case the balance shifted again. “There is often a seasonal downturn in demand for loans from high quality borrowers in December, even though our lender base continues to grow month on month,” a

company spokesperson told Peer-to-Peer Finance News. The spokesperson added that Zopa has not ruled out further platform limits in the future, if investors were to outnumber borrowers once more.

NEWS

ThinCats may ration IFISA to avoid investor surplus THINCATS may limit Innovative Finance ISA (IFISA) access to its existing customers, to avoid a rush of new money. Speaking to Peer-to-Peer Finance News, ThinCats chairman and co-founder Kevin Caley predicted an influx of new investors seeking to take advantage of competitive IFISA returns before the end of the tax year. As a result, platforms could find themselves with a surplus of investors and a shortage of borrowers, leading to lower interest rates and even investment caps. “I think that P2P platforms are going to start

rationing the number of people who can invest and access the ISA,” said Caley. “We’re thinking of saying that only existing members can have access to the ISA.” A recent acceleration in FCA approvals means that many P2P platforms should be able to offer IFISAs before the tax year ends on 5 April 2017. However, Caley warns that platforms will have to “ramp up their deal flow to meet the demand from ISAs”. “We could be talking not just twice as many new investors, but four or five times the current rate,” he said. “Currently we’re getting five to eight

people a day signing up to our platform. That could rise overnight to 500 a day. And then of course when April comes, there’s another wall of money that

will be coming in. “As an industry we’re going to have to be very careful about how we’re managing this.” For more on IFISAs, read our feature on page 16.

AXA SELLS DOWN STAKE IN GLI FINANCE AXA Investment Managers has reduced its holding in alternative financefocused investment firm GLI Finance from 7.09 per cent to 4.98 per cent, triggering a stock exchange announcement as the sale crossed the five per cent threshold. Last October, the investment arm of the French insurance giant

announced that it was restructuring its operations to create a single global alternative credit platform. Both parties declined to comment. VCS CIRCLE P2P FIRMS VENTURE capitalists are circling smaller but fully authorised P2P platforms, P2PFN has heard. Whether deals will be made depends on whether the price is right, says a source.

Market murmurs VOTE OF CONFIDENCE IN P2PGI TRADERS are not expecting P2P Global Investments’ share price to fall, despite a disappointing year for the P2P-focused fund that has seen its market value slump as it fails to meet its target returns. Just 0.8 per cent of the London-listed trust’s shares were out on loan in midJanuary, according to data from research firm Markit, most of which will be used to cover short positions. This figure was broadly flat from mid-November onwards, fluctuating by just

0.1 per cent on certain days. P2PGI recently told Peer-to-Peer Finance News that it is diversifying its investments, turning away from US loans and instead allocating to UK consumer loans, SME loans, trade finance and asset-backed loans. Despite missing out on its target returns for 2016, the fund has consistently produced positive NAV returns since its launch in 2014. P2PGI declined to comment on the shortselling activity.

REGULATION

Uncertain times

Emily Reid (left), partner and Aine McEleney (right), associate at law firm Hogan Lovells, analyse the regulatory landscape for P2P

HE PEER-TO-PEER LENDING MARKET HAS SEEN DRAMATIC GROWTH IN RECENT YEARS, with the Financial Conduct Authority (FCA) estimating that the £500m invested on crowdfunding platforms in 2013 had risen to an estimated £2.7bn over the course of 2015. The sector continues to grow and evolve at a rapid pace, but with competition in the marketplace at an all-time high and the increased likelihood of greater regulation, what do the next 12 months hold for the P2P lending industry? P2P lending has only been subject to FCA regulation since 2014. As investment continues to rise and the scale of potential customer harm rises with it, the FCA has inevitably started to turn its attention to the adequacy of the current regulatory framework. In December 2016, the FCA published its response to a call for input on whether its rules on crowdfunding need to change. Some of the FCA’s key focusses include: • whether borrower protections and disclosures are sufficient, as the FCA is concerned that platforms will face commercial pressures to consider higher-risk borrowers and may relax their creditworthiness assessments as a result; • the adequacy of systems and controls as markets grow;

• the contagion risk of a platform failure and adequacy of winddown arrangements; • and regulatory arbitrage where more complex products are wrapped up as P2P lending to benefit from lighter regulation. The FCA is clearly concerned about the long-term sustainability of a model that may, by its nature, encourage higher risk investments by lenders who don’t fully understand the risks. One particular risk to both lenders and platforms identified by the FCA is that of loan ‘mis-match’, where short-term lenders are matched by platforms to longer-term borrowers, creating a reliance on future market liquidity. Whilst we know that FCA action is almost certain and we know the broad areas of concern, at this stage we cannot say with certainty what form this action will take. The FCA

platforms, to ensure that when making assessments of risk, platforms do so objectively because they have “skin in the game”. That would, however, take those agreements outside the regulated activity in article 36H of the Financial Services and Markets Act 2000 (Regulated Activities Order) 2001, which stipulates that an agreement under which the platform itself provides credit, or assumes the rights of the lender, is not an “article 36H agreement”. It would also generally require platforms to apply for permission to enter into regulated agreements since such loans would be regulated if made to individuals. This is likely to meet with strong opposition from the industry.

[P2P] may encourage higher risk investments “ by lenders who don’t fully understand the risks” plans to consult in the New Year on initial rule changes, and is also considering consulting on a further round of changes later in 2017. One change it might consider to redress the balance between platforms and lenders is to mandate participation in investments by

Rule changes that are more likely to be introduced next year include the introduction of additional rules for ‘more complex’ business models (although it remains to be seen how the FCA will define that), limits on the amount that individuals can invest in P2P lending and possible

REGULATION

FSCS protection. Additionally, the FCA is likely to consult on changes that would eliminate the differences between CCA-regulated loans and non-commercial loans and which would introduce or extend regulated mortgage contract type protections to secured P2P loans. As relative newcomers to the lending market, P2P lenders have largely operated in a low interest environment. If interest rates did go up, an obvious concern for platforms would be the return of the increased competition from high street banks, as borrowers start to access lower risk investments (protected by statutory guarantees) for increased returns. However, the risk of rising defaults is likely to be of more immediate concern. Where borrowers hold P2P loans as well as other forms of credit, the likelihood is that as loan repayments increase across all their borrowing, borrowers will prioritise secured loan repayments where their homes are potentially at risk. This could see a steady increase in default risk on P2P loans, although platforms will generally have confidence in their sophisticated credit assessments and underwriting criteria. In its call for input, the FCA noted that there are now over 100

The next year is likely to be an important and “potentially challenging one for the P2P sector”

platforms in the market seeking authorisation. There has been some talk of the market ‘overheating’ but it remains to be seen whether that is the case or whether, based on the rapid growth of investment, there is plenty of room for everyone. That may depend on the wider economic situation and any movements in the base rate. The industry continues to evolve and expand; whereas the lender ‘peers’ used to be individuals, we have seen a steady increase in institutional lending, with ‘P2P’ now sometimes referred to as ‘I2P’. This raises concerns that institutional lenders with large reserves to invest will have first pick of borrowers, forcing individual

lenders to lend to higher risk borrowers. Given the continued uncertainty of how and when Brexit will take place, it’s unlikely there will be an upward movement in interest rates in the near future. Against this backdrop, savers will look for alternative investment models to secure higher returns and the P2P industry will no doubt look to lead the charge. On the regulatory front, P2P lenders should remain vigilant and continue to monitor FCA developments. Whatever happens, the next year is likely to be an important and potentially challenging one for the P2P sector as it adapts to potentially greater regulation, increased compliance costs and deals with the influx of competition.

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COMMENT & ANALYSIS

Responsible regulation Chris Maule, chief executive and founder of fully authorised P2P bond auction platform UK Bond Network, argues that the FCA has got its approach exactly right

INCE THE FINANCIAL CONDUCT AUTHORITY (FCA) TOOK THE REGULATORY REINS of the peer-to-peer lending and equity crowdfunding sectors in 2014, Britain quickly became a world centre for fintech innovation. The regulator’s considered, softly-softly approach to their rules ensured investor protection without curbing innovation and growth and blazed a trail for regulators across the world to follow. In December, however, the FCA published interim feedback in an ongoing review of its crowdfunding rules. The interim report is particularly timely given the Innovative Finance ISA (IFISA), launched in April 2016, is opening up P2P to a number of new investors. For the foreseeable future, I believe that take-up will primarily be among existing P2P investors, who already have good knowledge of the sector. UK Bond Network is likely to launch an IFISA, having taken up direct authorisation under the FCA in October 2016 and ISA manager status at the start of this year. Approval from the regulator is certainly a landmark for the company and follows the successful completion of the FCA’s authorisation process over several months to ensure regulatory standards – such as sound management and robust technical systems - are met.

The FCA is increasingly concerned about the speed of change in the investment-based and loan-based sectors and about the potential for arbitrage with other financial services such as asset management. Concerned that communication standards do not measure up, for example in financial promotions, the regulator is consulting on tougher rules on the content and timing of disclosures. Plans will be considered to curb cross-investment too, where a platform raises funds on another’s site, to avoid situations where one failing platform can bring down others. However there is less worry over aggregators, which allow investment in loans originated on other platforms. The FCA also believes that the procedures that firms must have in

In my view, the key issues are investor suitability and clarity of information. The two are of paramount importance and should work in tandem to ensure that investors are provided with enough balanced information, in sufficient detail, to make an informed investment decision. This includes full disclosure of the platform risks not only for new investors, but also on an ongoing basis and the disclosure of the specific risks of each new investment opportunity. The FCA’s balanced approach so far has been exactly right – seeking maximum protection for investors while encouraging activity and engagement among all stakeholders. We know that authorisation is a big spur for responsible behaviour –

know that authorisation is a big spur “for We responsible behaviour – that’s why it’s so actively sought by platforms such as ours” place in the event of failure should be improved, to reduce the risks to investors if winding-down plans do not operate as expected. Consultations taking place early this year are part of an ongoing review of rules to address some more immediate FCA concerns.

that’s why it’s so actively sought by platforms such as ours. While it is important to recognise that no regulatory system is fool-proof, recent work to build international fintech relationships with other leading regulators is further evidence of the proactive mindset of the FCA.

PROFILE

The next steps First they got the FCA approval, then they got ISA manager status. But the IFISA is just part of Landbay’s plans for growth this year, as chief executive John Goodall tells Peer-to-Peer Finance News… ONGRATULATIONS ARE IN ORDER FOR LANDBAY, which gained full approval from the Financial Conduct Authority (FCA) in the week before Christmas 2016 after a rigorous 14-month application process. At the time of writing, less than two dozen platforms are fully FCA authorised, making it a covetable achievement. “As the whole industry has found, it’s gone on far longer than people anticipated,” John Goodall, co-founder and chief executive of Landbay, tells Peer-to-Peer Finance News. “We, like most other platforms, applied in September or October 2015 and like most platforms we anticipated that we would be authorised in time for the 2016/17 ISA season. Even as late as March 2016, we felt that was likely and we would get authorised the next month.” But it was not to be, and the buy-to-let lender’s

application process dragged on for another nine months. Other established platforms have been waiting even longer, while a number of newer, smaller players have leapfrogged the queue. “The conversations had been ongoing; questions, changes, people moving on from the FCA…By November we felt had no more questions to answer. And then it happened pretty quickly,” Goodall continues. “Once we got to the week before Christmas, we assumed it would get carried over to the New Year so it was a good little boost to get approved when we did.” Luckily, HMRC authorisation as an ISA manager was far more swift, following just a few weeks later. Now that Landbay has both FCA and HMRC approval, it can offer its own Innovative Finance ISA (IFISA) – the taxfree wrapper around P2P

investments that has been dominating the industry’s collective mindset since former Chancellor George Osborne first mooted the concept back in July 2015. Landbay expects to launch its IFISA in the first half of February. Will it be the ‘game-changer’ that the industry has been hoping for? “This year it’s important we become a mainstream buy-to-let lender in terms of how borrowers see us,” says Goodall. “We’re looking to grow the retail side of the business, mainly through our partnership with [online estate agent] Zoopla and the IFISA. “In the short term I don’t think there will be a huge wave of new

investors coming on to platforms, but I think P2P will get promoted more strongly in the press and on comparison sites. I think the industry will get greater exposure because of the ISA, which will bring it into the mainstream.” ISAs aside, FCA authorisation brings with it a host of new advantages and opportunities. Having the regulator’s stamp of approval could help to attract institutional investors, potential partners and customers who may not have considered the company before. “We’ve felt it already, even without an IFISA, that being authorised has

PROFILE

had positive benefits on the number of people signing up to the site and the number of people investing,” explains Goodall. “It’s almost a tick, that you’ve passed that level of due diligence”. Even Landbay’s relationship with mortgage brokers has improved as a result of the FCA approval. Goodall thinks that because they are regulated themselves, they feel more comfortable dealing with a regulated, authorised entity. Osborne’s departure from the Treasury last July created a period of uncertainty for P2P, as the IFISA lost its godfather and no one knew how his successor Philip Hammond would feel about the industry. The previous government was broadly acknowledged to be an enthusiastic supporter of the fintech sector and Goodall does not feel the same level of support from the current administration. “Take the IFISA for example, that was driven through by George Osborne,” he says. “For P2P that’s a material step change. And if you look at some of David Cameron’s trade missions to promote fintech, he was bringing people like

Rhydian [Lewis, chief executive of RateSetter] and Giles [Andrews, chairman of Zopa] on them. Looking at the New Year’s Honours list a year ago, Samir [Desai], Giles [Andrews] and Christine Farnish all got accolades, so there was definitely recognition of the sector. “So I’m not saying the government’s anti,” reiterates Goodall, “but I don’t think it was just Osborne. Sajid Javid, Cameron…there were a number of prominent senior cabinet ministers at the very top who were hugely pro fintech. At the Innovate Finance conference last year,

David Cameron sent a personal video message and I think Osborne showed up for some of it. We haven’t had that same level of engagement. “Part of it is that the government has more obvious priorities,” he adds, referring to the ongoing Brexit negotiations. “So I’m not saying that the government is anti, it’s just not as outwardly pro and supportive as the previous one.” Landbay had to amend a key element of its business model before the City watchdog would give it the green light. The platform had to stop pre-funding its loans with an institutional partner – which sped up

how quickly it could lend out investors’ money – in order to comply with the 36h regulations that P2P lenders must fall under. It was “clearing out” these pre-funded loans that contributed to Landbay’s lending coming to a near-standstill over the summer, but Goodall says that it will not create a material time lag going forward. “From February onwards it will be a few days or a few weeks in some cases, so in the grand scheme of things it’s not going to have a material impact on people’s returns,” he says. “In some ways it makes

PROFILE

GOODALL ON… …FUNDING CIRCLE’S RECENT $100M EQUITY INVESTMENT “It shows that their investors are very confident. $100m (£81.3m) is not to be sniffed at. Last year, with the Lending Club scandal and the credit performance of Prosper, a lot of the news about P2P has not been positive. I don’t think there was any major fundraising last year for the platforms so it’s quite a good sign that investors are backing the sector again.”

…BUY-TO-LET IN CENTRAL LONDON

“It’s very hard to let in central London as yields are very low. Even though rents are high in London, property prices are far higher than they should be relative to the rent. As a landlord, if you want income from rent relative to your investment it’s not the best place to do it. “If you look further out, zone three and outwards, that changes somewhat, outside of certain prime areas like Richmond upon Thames and Hampstead. As soon as you get into areas where you can buy properties for less than £750,000, the yield improves and it’s more similar to the rest of the South East.”

…BUBBLES

“We’re in a situation with loose monetary policy where there are supposedly asset price bubbles everywhere, whether it be consumer debt, property, the bond market, or the stock market. I think all these things are linked together, as interest rates are so low people are looking for yield. “Property prices have definitely slowed down and yields are still relatively low. Rents have not risen anywhere near the pace that property prices have done, so actually for landlords it’s less profitable than it used to be, particularly with the changes that have come in. “There’s a fundamental housing shortage in the UK and even in 2008/9 when house prices came down by 18 per cent in the space of a year they recovered very quickly. If it was a genuine bubble they would have gone down and stayed down.”

I’m not saying that the “ government is anti fintech, it’s

just not as outwardly pro and supportive as the previous one

”

it easier actually, as it’s a slightly cleaner model and reduces a little bit of complexity for the business.” The other factor was of course a three per cent increase to stamp duty on second homes, which came into effect on 1 April 2016. This led to an extremely busy first quarter of 2016 as people rushed to get deals done ahead of the change, but slowed down the buy-to-let market during the latter part of the year. Goodall expects lending in the sector to pick up again and forecasts flat to five per cent growth in 2017. The tax changes could actually provide an opportunity for Landbay, argues Goodall, as people are now setting up limited companies to purchase buy-to-let properties, in order to circumvent the tax change. “A lot of the big banks don’t accept limited companies, so we see a massive opportunity for us where buy-to-let business

will move away from the high street banks towards the specialist lenders,” he says. “So the market opportunity for us with these changes are quite strong.” Buy-to-let is not the only sector feeling the weight of change. P2P is bracing itself for a regulatory crackdown, after the FCA’s hardhitting interim feedback statement in December. “I suspect the FCA probably started the authorisation process not knowing a huge amount about the industry or the platforms and how they operated,” says Goodall. “And obviously now they know quite a lot because they have had a deep look at many of the platforms. “Most of the feedback seems to be around transparency and marketing promotions and how you speak to your customers, as opposed to operational things. I think the Peer-to-

PROFILE

Peer Finance Association (P2PFA) has adopted bestin-class practice in terms of communication and transparency. It doesn’t mean it won’t tighten up but I think with the P2PFA we’re probably not too far away from where the FCA will end up.” Goodall echoes a commonly-raised point among the industry, that it is very hard comparing risks among the various P2P platforms when they all have such different business models. “P2P is not in my view an asset class,” he says. “Fundamentally you’re making a decision – am I investing in mortgages? Am I investing in business loans? Am I investing in consumer unsecured? Am I investing in development finance? All of those have phenomenally different risk profiles and the returns on offer are quite broad. “So the danger is that if we end up in a situation where there’s a ‘smoking kills you’ type warning for P2P, saying it is all risky, it doesn’t necessarily help the consumer choose between the different types of assets.” Landbay has not been profitable since its launch in 2013 and Goodall does not expect the company to break even

until 2018. He attributes this to investment into technology, which the company brought inhouse in 2015. “We’ve made a big investment in that and you don’t reap the rewards of that for quite a while,” he says. “It takes quite a while for that to feed through in terms of functionality of the platform.” Goodall hopes Landbay will be lending out £1bn annually in three or four years’ time – big aspirations, considering the platform lent out £22.5m last year. Institutional investment is crucial in scaling up the business. “The mortgage industry we’re in is worth £35bn a year,” he says. “Banks are always going to be material, but we have an opportunity because of the size of the market and the changes within it to become a lender that lends over £1bn a year. So we think over a three or four year plan that is achievable. “We want to get a mix of funding. We think the retail bit is always going to be an important component of it, but I don’t think we can get to that scale solely on retail money.” The platform is solely funded by retail investors

I don’t think we can get to “ that scale solely on retail money” at the moment, but Goodall predicts the balance could swing towards institutional money this year. “It’s something we’ve worked quite hard on over the last six to nine months,” he says. “We’d

expect to deploy quite a lot of institutional capital over the course of the year. We think that’s good for retail investors, to show that we’ve gone through that process with institutions. So for us it’s quite a key year to really grow.”

FEATURE

Where is the IFISA revolution? It’s the tax-free wrapper that was supposed to bring P2P lending into the mainstream – but almost a year after the official launch, the IFISA market is small and confused. What is behind the hold up? And how will P2P platforms cope when the floodgates finally open?

HE INNOVATIVE FINANCE ISA (IFISA) REVOLUTION SHOULD BE WELL AND TRULY UNDERWAY BY NOW. First announced in July 2015, it was supposed to bring the peer-to-peer lending sector into the mainstream by allowing retail investors to make tax-free investments in P2P. But as the end of the current tax year approaches, IFISAs are not exactly a household name. Despite a recent surge of approvals, only a couple of dozen companies are authorised to offer IFISAs and some of these are yet to launch the product. In fact, a Peer-to-Peer Finance News investigation found that several of these

firms did not even realise that they held IFISA authorisation, nor what their IFISA status meant. Meanwhile, more than 70 P2P lenders are still awaiting Financial Conduct Authority (FCA) authorisation, so that they can finally offer the IFISA products that they have been advertising for the past year. However, this is not as easy as it may seem. “FCA authorisation is a rigorous process that you have to go through,” says Stuart Lunn, chief executive of Scottish P2P platform LendingCrowd. “I think it’s been made more difficult by the fact that business models have evolved and a number of them are not seemingly as close to the P2P legislation

“ FCA

authorisation is a rigorous process

”

IFISA TIMELINE JULY 2015

NOVEMBER 2015

Then-Chancellor George Osborne announces plans for an Innovative Finance ISA, which will allow UK citizens to make tax-free investments through peer-to-peer lending.

Osborne uses his Autumn Statement to announce the inclusion of debt securities in IFISAs.

as had been envisaged. “I think that’s why the FCA has taken its time to get under the hood and check out the changes that are taking place. It’s frustrating but I’d rather it was being done properly.” LendingCrowd won FCA authorisation on 1 November 2016 and received IFISA manager approval from HMRC two months later. The firm now plans to launch its IFISA in mid-February after a brief trial period. Since December 2016, Landbay, Octopus Choice, Folk2Folk, LandlordInvest, CapitalStackers and The Money Platform have all been granted full FCA authorisation, sparking a flurry of IFISA manager applications as these firms

FEATURE

seek to take advantage of ‘ISA season’ in early April. This year, the ISA allowance is £15,240, rising to £20,000 for 2017/18. With the average cash ISA offering less than one per cent and stocks and shares ISAs suffering from severe market volatility, P2P ISA investments could be an attractive prospect for risk-aware investors. In fact, some platforms are

gearing up for a flood of new investors. “Currently we’re getting five to eight people a day signing up to our platform,” says Kevin Caley, chairman and cofounder of ThinCats. “That could rise overnight to 500 a day. And then of course when April comes, there’s another wall of money that will be coming in. “As an industry we’re

going to have to be very careful about how we’re managing this.” hinCats is considering placing a cap on the number of people who can invest and access the ISA and it has already begun ramping up its loan book to meet future demand. Caley’s concerns are not without foundation. Crowdstacker recently revealed that it

is taking three quarters of its investments through its IFISA every month and other platforms are similarly steeling themselves for a flood of IFISA money. “We’ll be launching our ISA before the end of the tax year so we would expect a combination of both people who maybe have invested in P2P before but also people who don’t invest in P2P to use their ISA allowance as well,” says John Goodall, chief executive of Landbay. “Obviously the net returns in the ISA are far better than they would be outside the ISA and based on that we would expect it to have an impact on the number of people who look at it.” Lunn adds that the lucrative independent financial adviser (IFA) market will be the next big test for the industry. Financial advisers are traditionally conservative and they have been slow to buy into the P2P sector,

APRIL 2016

JULY 2016

The IFISA is officially launched and the ISA allowance rises to £15,240 per person.

Osborne is replaced by Philip Hammond in the post-Brexit government, raising questions about whether the new Treasury will still support the IFISA.

FEATURE

making sure that we don’t have an onslaught of “ It’sinvestors on day one that we can’t deal with ” but as IFISAs become more accessible, IFAs will have to start paying attention. “In terms of the scale up, the IFA market in general hasn’t really started to come into this marketplace and I think it’s going to be another two to three years before

we start to see the full effect of that,” says Lunn. “Our concern at the moment is really making sure that the processes are as they should be and we don’t make any mistakes. “It’s making sure that we don’t have an onslaught of investors on day one that we can’t deal with.”

However, these issues only exist in a world where P2P platforms are fully authorised and IFISA approved. When asked why some companies were authorised ahead of the more established platforms, the FCA refused to comment,

simply stating: “We are currently reviewing applications from 71 firms for the P2P permission. This includes firms that have interim permission, firms wanting to vary their permissions and new firms applying for authorisation for the first time, which happens on

IFISA TIMELINE CONT. AUGUST 2016

NOVEMBER 2016

Four months after the IFISA launch, just 12 companies are authorised to offer them.

17 companies are now authorised to offer IFISA products, but industry bigwigs Zopa, RateSetter and Funding Circle are not among them.

FEATURE

an on-going basis.” he lengthy application process may be partly down to the fact that the regulator is still getting to grips with the huge variety of platforms on the market, which focus on everything from SME finance, to property loans, to consumer lending. The process has been described as “rigorous” by most of the lenders, as the FCA has been forced to deal with each application on a case by case basis. “It’s an industry which quite sensibly and quite understandably is rapidly evolving and innovating,” FCA chief executive Andrew Bailey told Peer-to-Peer Finance News. “Some of the ways in which we’ve seen that innovation develop are quite sensible and others do create issues for us.” It could also be down to how the platforms’ business models fit into the FCA’s criteria for P2P. In its interim feedback statement in December, the FCA questioned

whether some P2P platforms were more like banks or collective investment schemes, due to practices such as “maturity mismatch” and auto-bid functions. The FCA is keen to ensure that all platforms comply with its own strict definition of P2P lending, meaning money which is lent to one person or business from another. Any deviation from this, whether that means deposit holding, liquidity imbalances, or savings accounts, must be thoroughly investigated. “What we’re trying to do is balance innovation against ensuring firms are transparent about what model they’re operating in,” said Bailey. “It’s about a sensible interpretation of rules that are fair to investors, fair to borrowers, and transparent.” However, once FCA approval has been received, IFISA authorisation is practically a formality. HMRC will only award

ISA manager status to FCA-approved firms, a fact which goes some way towards explaining why some asset managers and investment managers have managed to gain IFISA access before dedicated P2P lenders. Meanwhile, P2P platforms are relative newcomers with everything to prove. Despite these delays, all signs still point towards

JANUARY 2017

APRIL 2017

Crowdstacker reveals that three quarters of its investment is now coming through its IFISA product. More platforms receive full FCA authorisation, including Octopus Choice and Landbay, but the ‘big three’ are still waiting as of mid-January.

The ISA allowance will rise to £20,000 per person.

a positive future for the IFISA. A series of informal surveys has shown that there is a clear demand for the ISA wrapper among existing P2P investors and the FCA is clearly working hard to process a complex backlog of applications. The IFISA revolution is within touching distance, but there are still just a few more hurdles to clear.

FEATURE

Strictly business

Peer-to-peer lending is often associated purely with consumer lending and borrowing, but the enormous potential of the business lending market could spell huge growth for the industry. Just as long as platforms are prepared to do a bit of hard work...

ONSUMER LENDING GETS AN AWFUL LOT OF ATTENTION IN THE PEER-TO-PEER WORLD - after all, the very concept of P2P lending was introduced as a way for individuals to lend to and borrow from each other. But as

the sector matures, it is becoming more and more apparent that the real growth opportunities lie within business lending. One business loan can have the same value as 10 (or more) consumer loans but with one tenth of the effort, and the interest rates can be tantalisingly

high. In most cases, these businesses are turning to P2P lending after exhausting the traditional routes to funding – private investment and banks – so the investors can set their preferred rate of interest. While these interest rates may put off some businesses, they are

– understandably – incredibly attractive to investors. Most P2P platforms perform their own rigorous security checks on the businesses and the vast majority of P2P business loans are asset-backed, making them an attractive prospect for lenders even before they consider the potential returns. “The interest rates have stayed relatively high for businesses,” says Kevin Caley, chairman and founder of ThinCats. “We put the loans up and ask our investors what interest they would like. And our lenders have got a

FEATURE

Peer-to-peer is now an established “ alternative finance option and will always have its place, but businesses shouldn’t automatically turn to P2P if they are rejected for a loan by their bank

”

bit greedy.” But while the investor appetite is undeniable, attracting the businesses is another story. Last November, the UK government launched the bank referral scheme, which encourages banks to refer businesses to P2P platforms as an alternative source of funding. The scheme is still in its infancy, and platforms have not yet seen a big knock-on effect, but it has been lauded for bringing P2P business lending into the mainstream. “The bank referral scheme has definitely raised awareness of the sector,” says Paul Goodman, chairman of the National Association of Commercial Finance Brokers (NACFB). “Business owners who have sat on the fence when it comes to P2P lending may feel more assured if they are referred to a P2P lender through the bank referral scheme.

“But it’s important that businesses directed through the scheme are given the right advice and are advised about a range of funding options, including P2P, that are most suitable for their business needs.” he government initiative has already been adopted by RBS, Lloyds, HSBC, Barclays, Santander, Clydesdale and Yorkshire Bank, Bank of Ireland, Danske Bank and First Trust Bank. These banks are encouraged to pass on the details of small businesses they have rejected for finance to three aggregator platforms (Funding Xchange, Business Finance Compared and Funding Options), who then share the details with alternative finance providers including P2P lenders. At the same time, NatWest announced its own referral scheme, partnering with P2P platforms Funding Circle

and Assetz Capital. While P2P lenders have welcomed the opportunity to gain access to thousands of businesses, they are approaching these bank referrals with caution. “We’re supportive of the scheme in principle, as we know that there are many good businesses out there who are being turned away by banks for the wrong reasons,” says Paul Marston, managing director, commercial finance at RateSetter. “RateSetter is involved in the scheme, but we’re looking for very specific kinds of business: ones that might not fit arbitrary criteria but are still creditworthy. Our assessment is primarily based on whether a business can afford the repayments across all of its commitments – and with people on the ground across the UK we can make detailed assessments.” In fact, bank referrals have been happening on

a more informal basis for the past few years. Most platforms are already working with accountants and brokers to secure new business clients, while ThinCats has been operating its own smallscale bank referral scheme for years. “What we have found is individual bank managers get approached by people who want to borrow money and because of restrictions on the bank they have to say no,” says Caley. “If those people come to us, we can offer them more security and the bank doesn’t have to lose the customer’s banking business.” By building up personal relationships with bank managers and making regular calls to the bank branches, Caley says that ThinCats has already received a few high-value business referrals. Meanwhile, other platforms rely on a variety of techniques to attract new loans: from

FEATURE

large-scale advertising campaigns, to word-ofmouth recommendations, to close relationships with accountants and advisers. This has led to a significant uptick in the number of business loans being offered either through business-only platforms, or alongside consumer loans. “It’s all about raising awareness and explaining our proposition,” says Marston. “Naturally we do all we can to spread the word in the business community – that takes the form of advertising, being at the right conferences, winning awards and simply talking to as many businesses as we can, as well as sharing customer success stories.” hese success stories will play an important role in convincing businesses that P2P funding is a viable alternative to banks. According to NACFB data, there has actually been a slowdown in P2P borrowing over the past year, although Goodman adds that “that’s not altogether surprising as the P2P sector has grown at such a staggering pace.” There is still a lack of understanding among many SME owners about P2P and what it entails, which Goodman believes will only grow as the

sector expands. “It’s important that P2P lenders continue to educate the market and are transparent about their business processes, particularly when it comes to their underwriting criteria,” he says. “P2P is now an established alternative finance option and will always have its place, but businesses shouldn’t automatically turn to P2P if they are rejected for a loan by their bank.” At the moment, there is a clear imbalance between investors and borrowers, with ThinCats’ platform running a surplus of £7m from investors keen to take advantage of the high interest rates available. “When we put a loan up now it goes pretty quickly,” says Caley. “That indicates that there’s a movement towards more realistic interest rates. If our interest rates start coming down then more businesses should start coming to us and we should get more deals.” In preparation for these new deals, ThinCats has been expanding its team – from nine employees last year to more than 30 in 2017 – and mulling a Zopa-style cap on new investors to avoid overcapacity. The recent acceleration of Innovative Finance ISA

authorisations means many platforms are anticipating a flood of new investors before the end of the current tax year, so the race is on to bring in new borrowers. However, this brings with it another element of risk. “There are two ways to increase capacity,” says Caley. “Increase the deal size or increase the number of deals. “Lenders are either going to have to lower their standards or do something to make those loans more viable. I hope they aren’t going to do

that because it will make the industry look bad.” There is certainly huge potential for growth, if it is done properly. Business banking is worth approximately £100bn annually and last year alternative finance index OFF3R valued the entire P2P sector at a comparatively tiny £2.6bn. If just two per cent of the UK’s business loans were diverted towards P2P lenders, the sector would nearly double in size. “The biggest barrier we face is awareness and it’s easy to see why,” says

FEATURE

THE SUCCESS STORIES Liverpool Gin Since creating the recipe for Liverpool Gin in 2014, founders Mark Hensby and John O’Dowd have built up a strong reputation in the luxury market, and last year they decided to expand. However, in order to do this, they needed to free themselves from an expensive invoice finance arrangement and bank loan. The banks weren’t interested, so they turned to ThinCats for a loan worth £150,000 over five years. As a result, the firm has been able to increase its output from 20,000 to 30,000 bottles per year, and is now stocked in Harvey Nichols.

“

Central Site Accommodation

The interest rates have stayed relatively high for businesses...our lenders have got a bit greedy Marston. “Small business owners are used to going to banks for finance and the business finance market is less transparent than the consumer finance market.” This is a challenge that P2P platforms must embrace if they are to take full advantage of the lucrative business lending market. There is

”

no question that the loans are out there, but platforms need to work hard to prove that they can handle the extra capacity and offer a reliable service. P2P lending only works when there is an equal balance of investors and borrowers. The investors are already there – time to start courting the businesses.

Last year, offsite construction company Central Site Accommodation borrowed £600,000 through RateSetter, primarily to move from its previous factory to a new site in Nuneaton. The loan helped the company to consolidate existing bank debt, and the new factory has allowed it to take on new, larger projects, helping the business to scale up and take on high profile clients including local authorities.

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