Peer2Peer Finance News July 2017 by Alternative Credit Investor

HOW TO LOSE A CUSTOMER IN 10 DAYS

>> 5

THE NEXT EVOLUTION

>> 12

Firms split on marketing methods

The future for P2P trusts

P2PFA chair Christine Farnish on risks and rules >> 16

ISSUE 10 | JULY 2017

THE FINANCIAL Conduct Authority (FCA) has pocketed up to £2m from full authorisation of the peer-to-peer lending sector, figures suggest. A freedom of information request by Peer2Peer Finance News shows that the City watchdog has considered 146 applications for full permission from P2P platforms since 2014 – when the FCA took over regulating the sector – with firms paying application fees of £600 to £15,000 depending on their income at the time. This reveals that the regulator has raised up to £2.1m if all firms paid £15,000, or a minimum of £87,600 if all firms paid the lowest fee of £600. The response does not detail how many applicants were approved or rejected, but firms must pay regardless of the outcome. According to the regulator, consumer credit firms applying for authorisation must pay a fee that is calculated on their income and how complex their business model is. At the lowest end of

FCA applications have cost the P2P sector up to £2m

the scale, those deemed straightforward with income of up to £50,000 pay just £600, but at the highest end, firms seen as complex with income of more than £1m pay £15,000. The FCA declined to provide a definitive figure but said the money is used to cover the time and

costs of processing and considering the applications. However, some platforms have expressed concerns that the watchdog has been able to sit on these funds while quickly authorising newer brands and keeping established lenders waiting months for a decision,

when they will potentially be losing market share. For example, Frazer Fernhead, founder of The House Crowd, which launched in 2012, said the property P2P platform applied for full authorisation in October 2015, paying around £10,000, and was still >> 4

EDITOR’S LETTER

Published by Royal Crescent Publishing

WeWork, 2 Eastbourne Terrace, Paddington, London, W2 6LG info@royalcrescentpublishing.co.uk EDITORIAL Suzie Neuwirth Editor-in-Chief suzie@p2pfinancenews.co.uk +44 (0) 7966 180299 Kathryn Gaw Contributing Editor kathryn@p2pfinancenews.co.uk Anna Brunetti Chief Reporter anna@p2pfinancenews.co.uk +44 (0) 7546 995334 Marc Shoffman Senior Reporter marc@p2pfinancenews.co.uk PRODUCTION Karen Whitaker Art Director Zac Thorne Logo design COMMERCIAL Amy St Louis Director of Sales and Marketing amy@p2pfinancenews.co.uk 07399 414 336 SUBSCRIPTIONS AND DISTRIBUTION info@p2pfinancenews.co.uk Find our website at www.p2pfinancenews.co.uk Printed by The Manson Group ©No part of this publication may be reproduced without written permission from the publishers. Peer2Peer Finance News has been prepared solely for informational purposes, and is not a solicitation of an offer to buy or sell any peer-to-peer finance product, or any other security, product, service or investment. This publication does not purport to contain all relevant information which you may need to take into account before making a decision on any finance or investment matter. The opinions expressed in this publication do not constitute investment advice and independent advice should be sought where appropriate. Neither the information in this publication, nor any opinion contained in this publication constitutes a solicitation or offer to provide any investment advice or service.

HE UK is currently navigating the most politically turbulent climate it has had to face in decades. A swathe of tragic events over the past two months has been politicised, while the snap General Election has resulted in an uncertain government as we enter two years of Brexit talks. You can read any mainstream media outlet for coverage of the challenges we face, so I’m not going to spend too long dwelling on them here. Instead, let’s focus on what the fintech sector has achieved and the opportunities that the future holds. In the middle of June, RateSetter’s Rhydian Lewis was awarded an OBE in the Queen’s birthday honours list, meaning that founders from all of the ‘big three’ platforms have now been officially recognised for their achievements. And earlier in the month, MarketInvoice, LendInvest and RateSetter made this year’s Fintech50 list, which recognises the 50 European fintechs that are transforming financial services through innovation. Funding Circle and Zopa were awarded a place in the Fintech50 Hall of Fame. With London Fintech Week 2017 taking place this month, it’s a fitting time to celebrate the progress that the sector has made and identify where future growth will come from. Opportunities are everywhere and geo-political events should not disrupt the latest wave of disruption. SUZIE NEUWIRTH EDITOR-IN-CHIEF We hope you’re enjoying reading Peer2Peer Finance News. Please contact us at info@p2pfinancenews.co.uk to make changes to your subscription preferences.

NEWS

cont. from page 1 waiting at the time of going to press. “The regulatory process hasn’t treated older companies fairly,” he said. “We have lost first-tomarket advantage. “The new companies should really have gone to the back of the queue.” Established names such as Zopa and Funding Circle had to wait around 18 months and only recently gained full authorisation, while smaller players have been able to trade and offer an Innovative Finance ISA (IFISA) for more

than a year. However, Filip Karadaghi, chief executive of LandlordInvest, which gained full authorisation in December 2016 and launched an IFISA in January 2017, highlights the advantage more established names had by being able to trade on interim permission if they had launched before April 2014. “The major firms were trading with an interim permission, whilst many firms that did not hold an interim permission or full FCA authorisation

could not trade at all,” he said. “We spent two years waiting to become fully FCA authorised, as we applied in December 2014 - by which time there was no possibility of applying for interim permission so we could not trade during that time, and arguably were unable to gain any market share.” Julian Cork, chief operating officer of Landbay, which launched in 2014 and gained full authorisation in December 2016, said

it is unfair to compare waiting times as all business models are different. “We support full regulation and the FCA’s forensic approach which ensures best practice is adopted by all platforms, large or small, old or young,” he said. The FCA said: “The application fee is not intended to cover the full costs of this work as it is not intended to be a barrier to entry and the unrecovered costs are borne by the existing fee payers.”

London Fintech Week founder: It’s a great time to be in fintech

THE FOUNDER of London Fintech Week has said that it is “a great time to be in fintech” and that the sector should not be discouraged by Brexit uncertainty. Luis Carranza (pictured)

told Peer2Peer Finance News that the fintech sector has grown exponentially since he launched the annual event four years ago and that the UK still has plenty to offer. “There’s a lot of uncertainty in some areas of finance due to Brexit, but the UK still has one of the best ecosystems and international investors are interested in companies that are born in the UK,” he said. “I think Brexit may force

more innovation. Sure, some companies will move, but as long as there’s a strong ecosystem, London and the UK are still a great place to do business.” The digital strategy expert said that the fintech firms had grown bigger since the first-ever London Fintech Week, but warned that the capital could not rest on its laurels. “TransferWise, Zopa and several others are now huge companies,” he said. “Every bank, consultancy and large tech firm has a fintech offering or head of fintech. “The investments are bigger and globally China is becoming a leader.

London still dominates, but other cities are challenging the UK, including Singapore, New York and Silicon Valley.” London Fintech Week 2017 takes place between 7 and 14 July, comprising a series of conferences, exhibitions, workshops, hackathons, meetups and parties. The main event takes place at the Grange Tower Bridge Hotel and is set to attract 600-1,000 conference delegates per day from over 50 countries. Peer2Peer Finance News is partnering with London Fintech Week, so follow us on Twitter @p2pfinancenews for regular updates.

NEWS

Opinion split on best marketing techniques PEER-TO-PEER platforms may be pitching themselves as an alternative to mainstream banks but many are relying on traditional methods when it comes to advertising. In recent weeks property P2P platform Lendy has announced sponsorship of the Cowes Week sailing regatta, while business lender Ablrate has been announced as a sponsor of the PGA EuroPro Tour’s £100,000 ShootOut competition. This marks a move into areas where big financial brands typically operate and suggests a trend of platforms relying on mainstream

methods to attract investors and borrowers. Other firms such as RateSetter have used adverts on the London Underground and Crowdstacker has run adverts in print publications, while Zopa and Funding Circle have used TV campaigns. But Frazer Fernhead, founder and chief executive of The House Crowd, prefers to invest in digital marketing. “The mass market isn’t ready for this yet,” he said. “There is not enough awareness so we find word of mouth is better. Our clients are happy to recommend us.”

Business P2P lender Folk2Folk also believes word of mouth cannot be underestimated. “Borrowers and lenders that have a great experience tend to be your best marketers as their recommendations to friends, family and business network are so valuable,” said Mat Gazeley, spokesperson for Folk2Folk. Branding and public relations experts say a mix of traditional and digital methods is best. Joshua Van Raalte, chief executive of PR agency Brazil, which looks after P2P clients such as Assetz Capital, says different tools are needed for

young social-media-savvy investors, compared to older customers who may be more comfortable with traditional media, while PR and third-party endorsements are useful to attract borrowers. “In terms of influence, word of mouth is without doubt the best, however the trick is how to perpetuate that through marketing,” he said. “We use a combination of social and traditional marketing techniques for our P2P clients, and it is the soft approach that works best. “Investors and borrowers generally do not like being overtly marketed to.”

SMEs face employment uncertainty as Brexit talks begin A “GRADUAL transition” into the post-Brexit immigration system is needed to ensure that small businesses can plan ahead, the head of the Federation of Small Businesses (FSB) has said. Mark Cherry, chairman of the trade body, has argued that UK-based SMEs risk facing a talent drain, particularly in emerging industries such as fintech, unless the government can offer some clarity on the country’s relationship with the EU after exiting the bloc. “The question which

needs to be answered first is what the government plans to do,” Cherry told Peer2Peer Finance News. “Ministers should give an immediate guarantee that non-UK EU workers already in the UK – and those who come between now and when Brexit actually happens – will be allowed to stay here. “There should also be a gradual transition of at least three years post-Brexit for any new immigration system. It’s only once those details become clearer that small businesses can plan ahead.”

According to FSB research, one in five small business employers currently employ staff from EU countries, and nearly 60 per cent of them said that they were worried about access to workers with the right skills after we leave the EU. “With a growing tech sector, including fintech, the demand for these kind of workers – in what is, after all, a global industry – will increase, and the UK’s small firms trying to grow in that sector should be supported, not prevented from finding the talent

they need,” said Cherry. Brexit negotiations began on 19 June and are set to focus on key issues such as cross-border immigration and working visas. The FSB has called for a new, easy-to-use visa system that would offer particular support to SMEs with existing EU staff. “Small business growth will be harmed if firms are unable to hire people with the right talent,” added Cherry. “Many small firms don’t have the resources to recruit abroad, so any new system must take that into account.”

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NEWS

Controlled roll-out of IFISAs set to continue THE GRADUAL roll-out of Innovative Finance ISAs (IFISAs) to a limited group of the platform’s investors is a trend that is likely to continue, due to the industry-wide imbalance between lenders and borrowers. Last month, Zopa launched its tax-free wrapper solely to existing investors and at the end of May, Proplend unveiled its IFISA to around 500 preregistered customers. Both platforms have indicated that they wish to open up the product to a larger group of investors in the future. “Naturally the investor/ borrower balance is shifting, as investors become more comfortable

with the industry,” said Neil Faulkner, managing director of independent P2P research and ratings firm 4th Way. “The platforms will have seen what happened at Lending Works, where the cap on new investor money was filled within just one day. “They want to control inflows so that investor money is not left sitting there, which sounds quite sensible to me.” Lending Works saw £1.5m of new money invested in its tax-free wrapper within 24 hours of February’s launch, leading the platform to close the product temporarily to new investors. Its IFISA attracted

almost £9m in its first three months, with founding chief executive Nick Harding saying that take-up had been stronger than expected, particularly as the firm had not started advertising to new customers yet. Zopa has said that it will open its IFISA to new investors once the platform has met the demands of existing customers, with no indicated timeframe in place. “Zopa has a serious issue with limiting the amount of investors,” said Faulkner. “Its interest rates are so low now that I don’t think they can go much lower, or they wouldn’t be much higher than putting your money into a savings account. “They’ve already taken

steps to address this, by closing to new investors. They need to let the borrower balance go up before letting more investors in.” Going forward, Faulkner predicts that many platforms will follow the likes of Zopa and Proplend with a graduated roll-out. “Platforms will worry about investor money rushing in, which it will if they open the IFISA to everyone,” he said. “They will then have to lower rates or investors will have money waiting around to be lent out. “There’s a lot more space for P2P to grow on the borrower side, but it doesn’t happen straight away, it takes time.”

REGULATION UPDATE

Funding Circle joins the FCA approvals club

AFTER a long wait, the Financial Conduct Authority (FCA) approvals have been coming thick and fast. Funding

Circle finally won full authorisation from the City regulator at the end of May, just two weeks after fellow ‘big three’ member Zopa won its licence. Funding Circle recently overtook Zopa to become the largest peer-topeer lender in terms of cumulative lending volumes, but it did not win the race to launch its Innovative Finance ISA (IFISA). Zopa launched its tax-free wrapper in the

middle of last month to existing investors, while Funding Circle is yet to unveil its own product, as of 21 June. Meanwhile, business lender ArchOver had cause to celebrate, as it also won full FCA authorisation at the end of May, as did Irish lender Linked Finance. And a number of already-authorised firms launched their tax-free wrappers in June alongside Zopa, including Proplend,

Relendex and Ablrate. Finally, the FCA will be witnessing a changing of the guard next year. Chairman John GriffithJones (pictured) has announced plans to step down in April 2018, when his current five-year term expires. He took office in 2013, making him the first FCA chairman to work closely with the P2P sector. The Treasury will now start the process of recruiting his replacement.

NEWS

All systems go at Zopa after receiving regulatory approval THE WORLD’S oldest peer-to-peer lender saw a flurry of activity last month, completing a fresh fundraising round, launching its Innovative Finance ISA (IFISA) and expanding its operations outside of the UK for the very first time. Zopa has not looked back since gaining full Financial Conduct Authority authorisation in May, marking the end of an arduous 18-month application process with the City watchdog. At the start of June, the consumer lender announced that it had

closed a £32m investment round led by Indian conglomerate Wadhawan Global Capital (WGC) and European venture capital fund Northzone. WGC’s chairman Kapil Wadhawan will join Zopa’s board to help lead its transition into a doubleoperation model with a separate banking arm. The funds raised will be used to develop Zopa’s bank infrastructure, as it readies to apply for a bank licence later this year. To support its bank plans, Zopa has opened a new hub in Barcelona, Spain. Developers working

on the bank technology infrastructure will be split between London and Barcelona. They will work on developing payment gateways, credit card processing, and deposit systems for the “next generation” banking arm. The platform’s expansion into an EU country coincides with the start of Brexit negotiations, although a Zopa spokesperson denied that the decision was motivated by the UK’s upcoming exit from the 28-member bloc. Plans to launch a bank do not mean that Zopa’s

core P2P operations have taken a back seat – the platform unveiled its IFISA in the middle of June, albeit solely to existing investors. The launch marked the debut foray of a ‘big three’ player into the IFISA market, after receiving “an incredible amount of interest” from lenders. This month, Zopa will start allowing existing clients to sell their loans and move the proceeds into a IFISA account free of the usual loan-sale fee of one per cent, although it will reintroduce the fee from August onwards.

Bruce Davis: P2P is tapping into underserved market PEER-TO-PEER lending still has a key role to play in an underserved market, providing business loans ranging between £0.5m and £20m, Bruce Davis (pictured) has said. The UK Crowdfunding Association director, who co-founded ethical platform Abundance and P2P giant Zopa, said that lending within that bracket “is still a pretty vibrant market” and that the segment continues to be underserved by banks. “Banks often have fixed terms which are too high for smaller loans and it might take them a while for them to reject the borrower. At Abundance I think we

are competitive in terms of price and now in terms of being able to say that were able to raise the money. “We’ve gone from bonds of £1m when we started, to bonds of £3m.” Davis also said that the company that bought the government’s Green Deal assets has so far raised £2.3m from 1,000 investors on the Abundance platform. The Green Deal Finance Company (GDFC) was bought by City investors Greenstone Finance in January. It launched a threeyear bond on Abundance’s platform in May, where investors can commit a

minimum of £5 and receive annual interest of 12 per cent. It is looking to raise a total of £5m. Davis said that the deal was important for Abundance “as a consumer brand” and that he was hopeful they would see these kind of offers again. The Green Deal was launched in 2013 to provide finance to property owners looking to install energyefficiency measures. But the government pulled the plug on funding in 2015, saying uptake had been lower than expected. “The Green Deal wasn’t very focused to begin with,” said Davis. “What held it

back was the time it took to approve loans, which has now been cut from 30 days to three days. That will be transformative.”

NEWS

Consumers and SMEs struggle with rising inflation RISING inflation is putting pressure on both consumers and small- and mediumsized enterprises (SMEs), eroding the value of savings, while increasing the running costs of the average UK business. A combination of currency depreciation and Brexit uncertainty saw the Consumer Price Index (CPI) rise to a four-year high of 2.9 per cent in May 2017 - well above the government’s target of two per cent. For the average consumer, this means that the price of food, utilities and clothing has just gone up, while their savings are worth a little bit less than they were before. At the time of writing, not one cash ISA savings account was offering more than 1.7 per cent in interest, while some Innovative Finance ISAs (IFISAs) were targeting as much as 12 per cent per year.

“This increase in inflation ratchets up yet more pressure on ordinary savers and investors,” said RateSetter chief executive Rhydian Lewis. “It’s almost impossible to earn a positive return on money in a savings account when inflation is taken into account, so it’s no wonder that more people are looking at other options.” Meanwhile, the UK’s estimated 5.4 million SMEs will see inflationary pressures translate into higher bills and diminished buying power, as well as an increasingly uncertain longterm outlook. “The news will certainly put pressure on Britain’s small businesses,” Anil Stocker, chief executive of MarketInvoice told Peer2Peer Finance News. “Inflation is at its highest level since June 2013. “Various monitors suggest that the operating

costs, such as employment and utility bills, for UK businesses are hitting an all-time peak. This will stretch businesses even more. This coupled with Brexit negotiations and an uncertain pound could well signal more trouble ahead.” Earlier this year, Barclays research found 59 per cent of the UK’s small businesses had not prepared for inflationary pressures. Yet in the year ending 31 March 2017, SME operating costs

had risen by 3.2 per cent. However, despite a predicted surge of interest in SME funding, P2P lenders do not expect to increase borrowing rates significantly. “It’s doubtful that the Bank of England will act on this temporary inflation rise and so we expect rates to remain modest,” Stuart Law, chief executive of Assetz Capital told Peer2Peer Finance News. “It’s unlikely that this will affect the cost of funding for SMEs.”

Funding Options founder sees limit to P2P growth THERE is a limit to how much peer-topeer lending platforms can grow, according to Funding Options founder Conrad Ford. The head of the online small- and medium-sized enterprise (SME) finance aggregator told Peer2Peer Finance News that there are lots of “smallish, niche opportunities” for P2P firms but that they would

not be able to graduate to originating larger facilities. “I’m not convinced P2P works for bigger loans,” he said. “That’s a market that is full of direct lenders and I’m not convinced that P2P has much to add there. “For bigger loans, the platforms would need a banking licence to lower the cost of funds.”

Ford cited the example of commercial property, where he said that P2P could not compete with the rates offered by conventional banks. “Perhaps they could compete on flexibility or risk appetite, but not on price,” he said. Speaking on a broader level, Ford said that “organic is the only way” that P2P lenders can

grow, unless they were already successful in another type of funding such as bridging loans and switched across into P2P. “Going into larger loans without the experience is a dangerous thing to do,” he said, citing Funding Circle as a good example of how platforms should steadily increase their loan sizes instead.

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COMMENT & ANALYSIS

Navigating a complex market Stephen Findlay, chief executive of peer-to-peer investment manager BondMason, explains why lending is the new investing

espite being around for many years, direct lending, which also encompasses peer-to-peer lending, has only recently been recognised as a mainstream asset class. The reasons why this market is growing is that investors are able to target attractive returns with lower volatility; downside protection from secured lending; liquidity with access to funds when you want and a diversified portfolio across a range of both lenders and loan types. Sounds easy enough, but the fly in the ointment is that to do it well requires time and commitment. The key to navigating the large and complex direct lending market and to make the most out of your investment portfolio is through making informed decisions. There are several fundamental things to consider if you are thinking about direct lending as an addition to your investment portfolio. Your objectives: Be clear about your objectives and your appetite for risk. Why are you investing? Is it for capital growth or are you looking to invest for income? Think how comfortable you are with risk. Do you consider yourself a more adventurous investor or are you focused on preserving your capital? Timing: Investing in direct lending can be more effective if you keep your money invested for at least 12 months. Investing is always subject to ups and downs and of course returns aren’t guaranteed. By investing over a longer period, you can give yourself more

time to build a diversified portfolio and your returns should benefit from a smoothing of performance. Managing risks: It’s crucial to understand the potential pitfalls of your investment. Your capital is at risk and your money is not covered by the Financial Services Compensation Scheme. Understanding such pitfalls will help you mitigate against them properly. Diversification: Diversification is also an effective tactic. Spreading your funds across different lending partners and different loan types can help you better manage that risk. Equally, when you are choosing your lending platforms check that the team behind the platform has a solid investment or lending background

crucial to understand “theIt’spotential pitfalls of your investment” and that the platform is aligned with your interests as an investor. Loan opportunities: This brings us neatly to the best loan opportunities. A good rule of thumb is to use the RADAR principle: reason, assets, duration, amount, repayment. Looking at all these in turn will help to ensure you are selecting the best loan opportunities available. Auto-bid tools can help save time as you don’t have to manually select loans. Investing for capital growth or income: The concept of

compounding applies to direct lending in the same way as other investments. As returns accumulate and loans are paid back, you’ll have cash building in your account monthly which is available to withdraw or invest. By re-investing this cash into additional loans, you can continue to build your portfolio. Alternatively, interest earned can be withdrawn and be used to supplement your income. With some platforms, this can be a manual process or may be available on an automated basis either monthly or quarterly. Taking control: Finally, it’s good to stay proactive. As the direct lending market continues to evolve it is important to keep up to date with the platforms, new operators entering the market and any changes in performance. Doing this yourself is a suitable option if you have the time available. However, managing a diverse portfolio can be time consuming because of the wide range of loans available and different considerations which need to be made. You may want to think about using a managed direct lending platform as an alternative or as an addition. As I’ve said, direct lending and P2P lending offer attractive investment options. The key is to make informed decisions around investing in this asset class. In this way, you are preparing yourself fully and mitigating as much as possible against risk

FEATURE

The next evolution

Peer-to-peer focused investment trusts have had mixed fortunes since their fruition, with some adapting their business models as a result. With many P2P platforms showing stratospheric growth, are the sector’s funds falling behind?

HE PEER-TOPEER SECTOR has changed dramatically in recent years, from the rates on offer to the types of lending, but these shifts have also forced mainstream funds investing in the sector to alter their strategy. So is it possible to profit from investing in P2P through an investment trust? In 2014, the UK’s first P2P-focused investment trust P2P Global Investments launched to much fanfare, offering a way for investors to take advantage of the burgeoning sector without having to risk their money on the actual platforms, while being able to diversify into various types of loans. But just short of its three-year anniversary, P2PGI is yet to reach the six to eight per cent yield first offered to investors and manager MW Eaglewood is set to merge with Pollen Street Capital, after facing pressure from

the board to boost the fund’s performance. Pollen Street will become the majority shareholder of the combined group, with assets of around £2bn, while MW Eaglewood backer Marshall Wace will retain a substantial holding. P2PGI had previously stated that it was shifting away from US consumer loans towards more assetbacked and trade finance, but the Pollen Street merger will also give the investment trust access to specialist finance outside of P2P. The portfolio will have greater exposure to sterling-denominated assets and maintain exposure to “a tighter group of marketplace lending platforms”, P2PGI said when the deal was announced in May. P2PGI is by no means alone, as other alternative finance-focused investment trusts have also altered their strategy due to the changing market. Victory Park Capital

The line “ between a P2P

loan originator and platform that originates loans, as well as balance sheet originators, has become more blurred

”

(VPC) Specialty Lending Investments, which launched in March 2015, said in November last year that it was winding down its P2P portfolio in favour of balance sheet loans where returns are better. This comes as many P2P platforms, particularly in the consumer lending space, have reduced their lender interest rates to compete for borrowers in the market. s of March 2017, 32 per cent of the VPC portfolio was allocated to marketplace lending, down from 40 per cent in November 2016, while the amount in balance sheet loans increased from 48 per cent to 49 per cent over the same period. VPC’s newsletter for the first quarter of 2017 suggests the strategy of winding down marketplace loans and investing in balance sheet lending would continue. These are the two biggest investment trusts focusing on the sector, with P2PGI managing

FEATURE

£813m of assets and VPC looking after £352m. Both regularly post positive net asset value (NAV) returns and issue dividends, yet regularly trade at double digit discount to values – at 9.4 per cent and 11.8 respectively at the start of June – suggesting investors are still unsure. Simon Champ, MW Eaglewood’s chief executive officer, insists there is no issue with investing in the sector and P2PGI is simply responding to the way the industry is changing, as P2P is no longer just about simple consumer or business loans. “When we first had the idea of creating an institutional vehicle to give investors the ability to invest into disintermediated credit in 2014 the industry was quite narrow,” he told Peer2Peer Finance News. “We started life with four platforms in our portfolio. Today the P2P world has changed enormously. It has matured and given birth to many other types of originator. “The line between a P2P loan originator and platform that originates loans, as well as balance sheet originators, has become more blurred.” The downside of P2PGI’s initial pure P2P focus was seen when

The sector remains relatively “ untested and hasn’t gone through a full business and economic cycle ” its share price fell seven per cent in May 2016 as investors panicked over its exposure to Lending Club, after questions over the platform’s lending practices resulted in the high-profile departure of its founder and chief executive

Renaud Laplanche. Champ insists the merger with Pollen Street would help manage the evolution of the sector. Analysts have responded with interest to the new management arrangements, especially as Pollen

Street already runs the Honeycomb Investment Trust, which focuses on UK specialist consumer and business lending. “The review of management arrangements followed a period of disappointing

FEATURE

The permanent nature of the “ capital is ideally suited to investing in an illiquid financial asset ” performance from P2PGI and the changes are perhaps more radical than we were expecting,” says Ewan Lovett-Turner, analyst for Numis. “The high exposure to US consumer loans in P2PGI had been a concern to us and it had been a drag on returns due to disappointing loan performance and complications due to currency hedging. “MW Eaglewood

had already started reducing exposure to the US consumer and we welcome the continued wind down of this area of the portfolio.” Lovett-Turner thinks Pollen Street brings good experience, but adds: “It remains a relatively new vehicle and we believe the next six months will be important period for to determine how the Honeycomb portfolio performs as it’s

loans mature. “We expect the P2PGI portfolio to look significantly different in 18-24 months’ time and believe it will be important for the manager to maintain portfolio disclosures so that investors can understand their evolving exposure.” While investment trusts such as VPC Specialty Lending and P2PGI have been altering their strategy, another player

Ranger Direct Lending, launched in May 2015, has been doing well from a predominantly US focus. Both VPC and P2PGI have around 60 per cent of assets in America with the rest in other countries such as the UK, Europe and Australia, but Ranger Direct invests primarily in US small business lending and is denominated in dollars, which has helped it avoid the travails of the Brexit vote. Ranger Direct’s ordinary share class has seen its NAV return 33 per cent since launch up to the beginning of June 2017. In the 12 months to the start of June 2016 it has returned 17.3 per cent This compares with 2.36 per cent over the same 12-month period and 14.68 per cent at P2PGI since May 2014, while VPC’s NAV returned 2.58 during the 12 months to the start of June and 7.98 per cent since March 2015. But the Ranger fund is also on a high discount to NAV of 24.9 per cent, which gives it the same problem plaguing VPC and P2PGI. Champ says the high discounts are due to negative sentiment that makes investors panic, rather than an issue with the fundamentals. “There are fragilities for investment trusts,” he says.

FEATURE

“They can be blown around off course by winds of sentiment. “Sometimes your NAV growth can be reasonable, yet you look at the share price and you would think there had been a disaster. Sometimes that is just sentiment. “That can be an issue with closed-end vehicles where the only exit is to sell shares.” ther funds are showing that you can invest in P2P without trading at such big discounts. The Funding Circle SME Income Fund (FCIF) was launched in November 2015 and is set up purely to invest in the loans of its own P2P platform. That strategy seems to be working so far, as it is on a relatively small premium to NAV of 3.4 per cent and has seen a 6.93 per cent return in NAV since launch. “The FCIF provides equity investors seeking yield exposure to a diverse portfolio of small business loans in the UK, US, Germany and the Netherlands,” explains Sachin Patel, chief capital officer at Funding Circle and non-executive director of FCIF. “The fund, which is the first and only singleplatform fund, has been one of the best-

performing investment companies in the direct lending sector and targets a dividend yield of between six and seven per cent. It is unique in not charging a management or performance fee.” Its dividend yield, currently at 5.8 per cent, is just under the debt sector average of six per cent. Ranger Direct and VPC’s dividend yield, at 11.3 per cent and 7.3 per cent respectively, beat the average. P2PGI was on a dividend yield of 4.7 per cent as of the start of June. Any investor would be happy with this sort of return on a stock or fund portfolio, yet mainstream advisers and fund managers still feel the sector is too niche. Adrian Lowcock, of investment manager Architas, says higher risk and more adventurous investors are most likely to be interested in these types of funds but says there are good reasons to be hesitant. “Given the growth and success P2P has had, it is easy to assume that the established financial market players are negative on the asset class because they are threatened by it,” he says. “However, there is more to it than that. The sector remains relatively untested and hasn’t gone

through a full business and economic cycle. “Investors just don’t know how it would fare during a recession or downturn. In addition, the sector has also risen during a very unusual financial period when banks were struggling to lend, interest rates were very low and financial stimulus has given rise to huge amount of liquidity.” Jason Hollands, of Tilney Bestinvest, which provides advisory and DIY investment services, says the sector works in theory but he feels it is just too niche and untested. Ben Conway, of Hawskmoor Fund Managers, has been deterred from investing in this sector for similar reasons despite recognising that the investment trust structure is well-suited to accessing the sector. “The permanent nature of the capital is ideally suited to investing in an illiquid financial asset,” he says. “Moreover, the presence of an independent board of directors should give investors extra protection and safe-guard, to some extent, corporate governance in what is a nascent industry. “However, ‘caveat emptor’ very much applies here. “The sector is new and different business models

abound. Some companies are led by entrepreneurs fairly new to the industry and others by more experienced lending professionals. “Most importantly, we haven’t yet seen how any of the P2P trusts’ portfolios have fared during an impairment cycle. “Due to these unknowns, our stance, to date, has been to avoid the P2P trusts altogether.” Conway says they would never “blindly invest” just because the yield is attractive and there needs to be a margin of safety which P2P trusts are yet to provide. Advisers may be hesitant but, as Champ explains, investment trusts like P2PGI are opening up “small ticket, unsecured consumer and SME lending” opportunities that were previously only available to the banks. “We are giving equity investors access to an asset class they didn’t have before,” he asserts. “It was a party only big banks were invited to. “It just needs structure.” This may not be where P2PGI or others thought they would be three years ago, but no-one could have predicted how the whole sector would evolve back then. Just as the P2P sector regularly changes, it is likely the evolution of the P2P investment trust will continue.

PROFILE

Taking the lead

Ex-regulator Christine Farnish isn’t scared of a little competition – in fact, she relishes it. The chair of the Peer-to-Peer Finance Association talks about risk, red tape and why this is such an exciting time for the peer-to-peer finance industry

“I

LIKE COMPLEX PROBLEMS, especially some of these longer-term problems that there aren’t simple answers to,” asserts Christine Farnish, chair of the Peer-to-Peer Finance Association (P2PFA). The former financial services professional and regulator isn’t talking about peer-to-peer lending in this instance, but her tenure as chief executive of the National Association of Pension Funds (NAPF) between 2002 and 2006. “The previous job I enjoyed most was when I was at the NAPF, because it was nice being in charge of something and we were going through turmoil at that time,” she says. “The pension system was pretty much on the front page of newspapers every day of the week. “There was a problem with funding, with regulation, with the shift from defined benefits to defined contributions, and it was a very complex area. It was hard for ordinary

people to get their head around and understand. “We got stuck into a lot of these complex issues and there weren’t any easy answers but I think we came out in a better place and became stronger…it was a very interesting time.” It is immediately clear from talking to Farnish that she is not scared of a little controversy and that she is keen to champion effective competition for consumers – qualities that hold her in good stead for her role as head of the P2P sector’s self-regulated trade body. The P2PFA now has nine members – RateSetter, Funding Circle, Zopa, Lending Works, LendInvest, MarketInvoice, Landbay, ThinCats and new entrant Folk2Folk – which collectively make up around 80 per cent of the UK’s P2P lending market. “The thing that attracted me specifically about the P2PFA was that I’ve always believed in competition in markets, wherever you can possibly have it,” she explains.

“It’s in my blood. I was schooled in that when I worked for the [telecoms watchdog] Oftel in the 1990s, before I went to [the former City regulator] the Financial Services Authority. “There isn’t enough competition in financial services markets for my taste. What I really liked about P2P lending was there was this new, innovative set of businesses wanting to come in, challenge the status quo and actually provide better deals for consumers by disintermediating the market. “It was clean, transparent, it wanted to do the right thing, it wanted to get a better deal for customers – all of those things I found

hugely attractive.” Farnish felt that P2P platforms, with their entrepreneur founders, were very smart at setting up their businesses but less familiar with how to deal with politicians and regulators. “They knew about the technology, they knew about the skills and risks involved,” she says. “What they didn’t understand was either how government works or how regulation works, so I felt I could actually help with those things a little bit.” A key moment in the UK P2P sector’s history was when the Financial Conduct Authority (FCA) took over regulating the sector from the Office of Fair Trading (OFT) in 2014. It said at the time that it would undertake a full review of the rules in 2016.

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Farnish says the shift from the “light-touch” OFT to the City watchdog was “absolutely the right thing” for the sector, but notes the challenges that the FCA faced – and still faces - in overseeing a relatively new industry. “I think there’s a learning curve that the FCA has gone up and there’s probably some work to do,” she says. “This market’s not going to stand still. It’s going to continue to evolve and change, like other disruptive technology-

platform markets. “I’m now on the board of [energy regulator] Ofgem and we’re seeing some similarities with what’s happening with the new disruptive suppliers and forms of generation coming into the energy market. “It really does challenge the way you think as a regulator. So the FCA is on a journey, as indeed we all are, and I think they’ve done a good job so far, I really do. They’re taking the time to get it right and they’re really starting to think through the issues.”

I think there’s a learning curve “ that the FCA has gone up and there’s probably some work to do” Farnish is diplomatic in her comments about the City regulator, but like the rest of the industry, she was hoping for a faster authorisation process. Some of the sector’s bestknown firms had to wait an arduous 18 months for approval, while others are

still waiting. “There are 3,000 people working in the FCA and there are a lot of members of various teams involved in this,” she asserts. “If I had any advice to give the FCA, I would say looking back, it might have been helpful for them to

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CHRISTINE FARNISH EXPLAINS THE P2PFA’S THREE MAIN AIMS PROMOTE HIGH STANDARDS “If you can have high standards in four fifths of the market, that makes a huge difference and even the platforms who aren’t our members will probably feel they need to compete.”

INFORM AND EDUCATE “That’s a work in progress. There’s terrible misunderstanding about different forms of innovative finance, alternative finance and crowdfunding. “The terms and language are really important when you’ve got something new, which is unfamiliar to most people and works differently from what we’re all used to.”

ENSURE THE SECTOR IS WELL REGULATED “The P2PFA has always wanted statutory regulation and we also think there is a role for self-regulation. “Statutory regulation is really important because you’ll never be able to build consumer trust if you have dodgy players in the market. “So it’s really important that the regulator is there making sure that standards of conduct are appropriate and weeding out the poor players.”

have set up a dedicated team from day one, because I think they would have made more progress, they would have had a stronger understanding of how the market works and how it’s developing and they would have had that in real time.” he order, as well as the pace, of authorisation has come under fire from some industry onlookers, as many smaller platforms gained approval much more quickly than the largest and most established players. Farnish attributes this to two reasons, one being that the FCA started off by looking at platforms that launched after it had taken over regulation of the sector from the OFT. “The other reason is that the FCA has always felt - whether this is right or wrong is an open question - that large equals riskier,” she says. “I think you could challenge that mindset quite reasonably because often large means better organised, more skilled and better systems, so you can see how it’s not necessarily the right way to look at all the players.” The FCA published its interim feedback from its review into debt and equity crowdfunding last December, which indicated that it would implement tougher rules on the sector. Interestingly, while many

in the industry found the interim feedback more hardline than expected, Farnish does not think it went far enough. “There was nothing in there that surprised us,” she states. “If anything, I think we might have expected the FCA to go a bit further in some areas. “For example, our P2PFA guidelines say that member platforms can’t discriminate between retail and institutional investors. I think that’s a very important bit of consumer protection that wasn’t mentioned in the FCA document. “We’re also very clear that platforms are transparent about their loan books and use a standard way of calculating default losses so that it’s done in a comparable, fair way. Again, that wasn’t in the document, so we think there’s more to be done, but there’s time to do it and the FCA is working in partnership with the likes of us to get some of this in place.” The P2P industry appears to have finally shaken off its bad press of 2016, when several high-profile figures expressed concerns about the potential risks for consumers. Secret lobbying by traditional financial institutions was to blame for some of this negative media coverage, according

PROFILE

to Farnish. “P2P lending’s out of the news because it’s all going very well and there aren’t shock-horror stories to write about,” she says. “I suspect some of the former bad press we were getting was actually inspired, under the surface, by phone calls from some of the very large, traditional incumbent institutions in the financial services market who want to slow the whole thing down. “That would give them time to invest properly in their customer service and systems and offer small businesses and consumers better deals than they do at the moment. “That’s the way competition works; that’s perfectly normal, that’s what you’d expect.” Improving financial awareness and understanding of P2P is a key focus for Farnish, but she thinks there is still some way to go. “If you did an opinion poll, you’d still find the majority of people have never heard of P2P lending, so there’s still a big job to do,” she says. “Innovative Finance ISAs are really going to help with that because they’re going to put P2P into the mainstream in a way that hasn’t happened yet. “It’s good for consumers as it gives them a new choice of what to do with

their money that gives them a very fair return, they won’t be exposed to the inflation risk and it’s less risky than stocks and shares.” What does the future hold for P2P? Farnish wryly comments that “crystal balls are always dangerous” but reiterates the commonly-held view that the IFISA will boost awareness and uptake of P2P investments. Farnish says that another downturn in the credit cycle is “as inevitable as night following day” and that the P2P sector will only continue to be successful if platforms do two things: communicate clearly with investors about the risks and be prudent

about who they lend to. “Who knows what the future holds for our economy? The General Election made things even less certain than they were before,” she says. “The importance of prudence and caution

Despite an unknown outlook for the wider economy, Farnish thinks it is an exciting time for P2P. “I think the mindset, skillset and culture of the people who set up these platforms and their vision is an extremely consumer-centric

Competition is working very “ well in this sector and hopefully it will continue to do so”

in terms of the way the platforms run themselves is more important now, because an uncertain environment means things could happen in a negative way at a macroeconomic level, which could result in higher loss levels.”

one that won’t go away,” she says. “They are absolutely the sort of people who innovate. They don’t stand still. If something can be done better next week, or done differently next week, they will do it.”

FEATURE

Taxing times Tax guidelines on peer-to-peer investments are full of grey areas. Are platforms and investors at risk of putting a foot wrong?

AXES ARE A FRAGMENTED issue in the peer-to-peer space. It is investors’ own responsibility to declare earnings with HMRC which could appear as a fairly common scenario within the financial sector. However, the vast diversity of P2P business models, along with the recent introduction of the Innovative Finance ISA (IFISA) further fragmenting platforms’ approaches, have turned

such a simple premise into a multitude of scenarios, and an equal number of exploitable loopholes, according to a number of sources. One grey area stems from the tax regulator’s relatively flexible wording on when a loan becomes irrecoverable – and therefore when losses on that asset can be offset against interest gained on other P2P loans. The HMRC clarified in March last year that,

provided relief conditions are met, “investors may [not only claim tax relief] but also set these bad debts against interest received on other P2P loans”. It also added that, starting from 6 April 2016, tax relief for defaulted P2P loans against income from other P2P loans on the same platform will be given automatically, so investors do not need to make a claim in a tax return. If investors are not due

interest from loans on the same platform, they have the option to offset losses against loans bought through other platforms, it added. With these clarifications, the tax regulator helped dissipate some ambiguity, but the definition it provided around a loan becoming irrecoverable “when there is no reasonable prospect of the recovery of the loan” could engender different behaviours among

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The main point goes back to the fact that declaring “ interest income comes down to the individual P2P investor ” investors. HMRC states that whether a loan has become irrecoverable should be judged on a case-by-case basis. While a platform would usually decide when a loan has become irrecoverable, the regulator conceded that the lender can step in with its own judgment if information is lacking. In certain cases, the investor could get even greater leeway, based on HMRC wording: “When the borrower has entered legal recovery procedures such as liquidation, administration, receivership or bankruptcy, the loan may be treated as becoming irrecoverable as if such action was not available.” Investors could then claim relief that same tax year, but would have to declare any future credit recovery as interest in future tax years. “The main point goes back to the fact that declaring interest income comes down to the individual P2P investor,” says Andrew Holgate, chief credit officer and cofounder of Assetz Capital. “Is there a loophole here

that could enable tax evasion to take place? There is an element that HMRC could be missing out.” There could be a disparity between investors who have put funds into secured loans and those holding unsecured loan investments, as HMRC allows the former to treat their loans “as becoming irrecoverable as if the security did not exist.” But what further complicates the picture is the fact that platforms are, strictly speaking, barred from providing tax advice to their customers, according to Proplend’s chief executive Brian Bartaby. “Platforms can certainly help by providing clear tax statements and links to impartial, authoritative sources of tax information like HMRC,” Bartaby says. “But it’s equally important to reinforce the point that we aren’t authorised to offer advice.” Platforms are still required to report to HMRC on their investors’ regular accounts once a year, and within 60 days from the end of the tax

year on IFISA accounts. Last year, discrepancies between such information and clients’ own tax return filings resulted in the regulator sending out interest ‘nudge’ letters to P2P investors “who appeared to have underdeclared untaxed interest”. “Obligations for platforms are currently quite limited,” explains Holgate. “But from our point of view, there has always been, and always will be, a need to engage with HMRC, and there should be an effort to work with them to ensure no client is evading taxes.” CapitalStackers’ managing director Steve Robson adds that,

at present, platforms’ obligations are more centred around the Financial Conduct Authority’s ‘treating customers fairly’ rules, which include making it clear to investors where they stand on tax. Neil Faulkner from P2P analysis firm 4th Way agrees that platforms should go the extra mile to boost tax awareness. “It would be good customer service for platforms to go above and beyond by giving a clear set of instructions on how to declare taxable income to the taxman,” Faulkner says. However, a platform’s spokesperson warned that some P2P providers

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Get it wrong and customers “could be in breach of the rules or lose their allowances” went too far with advising investors, potentially swaying their decisions and stretching the interpretation of regulatory wording. hat risk has become more evident since platforms began to roll out IFISA products, providing different guidelines on their websites’ dedicated ISA sections. According to Treasury rules, invested funds cannot be transferred directly from a client’s regular account into the tax-free wrapper. Moreover, HMRC states that an investor is not allowed to sell a loan contract to themselves, by selling it on a secondary exchange and then buying it back, the platform’s spokesperson pointed out. However, the lack of further specifications has enabled platforms to adopt diverging approaches. This in turn risks creating a competitive advantage for those that allow investors to “requalify” their investments through the secondary market, the source warned. “That risks creating a

bed and breakfast type of account, and in the real world there is not enough liquidity in the P2P market to create that.” Platforms such a Zopa and Landbay have said that investors can sell their loan parts through the secondary market and then deposit money into their new ISA account. However, Proplend took a different approach and did not publish specific instructions to that regard. “We do still get questions from customers about whether they can transfer existing P2P loans into the ISA to earn the income completely tax free – we feel comfortably within our rights to confirm no,” says Bartaby. “HMRC is quite clear on this point too: you can’t transfer any P2P loans you’ve already made or crowdfunding debentures you already hold into a IFISA. “We have taken steps to stop individuals buying loans into their ISA that they already hold outside of their ISA.” Overall, the novelty of IFISAs and the flexibility

engrained in current regulatory guidelines have generated a number of approaches that may need to be streamlined in the future. “The rules for IFISAs are straightforward for most people, most of the time, but there are an awful lot of ‘long-tail’ situations that can trip customers up,” comments Faulkner. “Get it wrong and customers could be in breach of the rules or lose their allowances.” Subtleties exist in the rules around new contributions, transfers of existing contributions, or opening new accounts in

point is a little ‘buried’ and the fact that people are having to go look for it suggests it could be clearer. “If investors get this wrong, there could be tax implications where limits have been exceeded.” Faulkner also thinks that rules are still unclear on capital gains or losses on P2P secondary markets, and on how secondary market buyers are required to compensate original lenders for unpaid due interest. And the downsides of such ambiguity may ultimately backfire against investors. “I probably wouldn’t try

the same or different tax years, Faulkner adds. “There’s definitely some uncertainty around the restriction on only being allowed to subscribe to one ISA of each type each tax year,” asserts Bartaby. “Clarification on this

to be so clever in trying to find a loophole,” says the platform’s spokesperson. “HMRC might not allow ignorance as a defence, even if the ignorance is caused by a lack of its own guidance,” adds Faulkner.