Peer2Peer Finance News August 2017 by Alternative Credit Investor

TO FLOAT OR NOT TO FLOAT?

>> 5

PLAYING BY THE RULES

>> 12

A public listing could bring challenges for P2P

What the FCA’s full review could reveal

FSB policy director Martin McTague on the future of SMEs >> 20

ISSUE 11 | AUGUST 2017

Industry split on bank referral scheme ahead of HM Treasury announcement THE TREASURY is expected to release its first public figures on the bank referral scheme in the coming weeks, with the commercial finance sector divided on the initiative’s success. The governmentbacked scheme launched last November to much fanfare, mandating nine of the UK’s high street banks to refer rejected small business borrowers to three alternative finance aggregator platforms. These aggregators – Funding Xchange, Business Finance Compared and Funding Options – then share the details of the businesses seeking loans with alternative finance providers, including peerto-peer lenders, who can provide quotes if they wish. But reports of slow uptake have dogged the scheme, with the Treasury commissioning Professor Russel Griggs to undertake a review of its efficacy in April. Peer2Peer Finance News

understands that the first statistics on referrals will be published imminently, although it is unconfirmed whether the outcome of Griggs’ review will be included in the Treasury’s announcement. It is believed that Griggs has already completed his review and the Treasury is engaging with designated banks on his recommendations.

The Treasury declined to comment. The possible benefits of the scheme for alternative lenders and business borrowers alike are clear. The British Business Bank’s Small Business Finance Markets report, released earlier this year, showed that over two thirds of smaller businesses seeking finance only ask one

lender and, if rejected for finance, many simply give up on finding investment. However, several P2P business lenders who were unwilling to speak openly about the scheme have privately criticised its implementation ahead of the Treasury’s announcement. A spokesperson from one prominent platform said that they had been >> 4

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EDITOR’S LETTER

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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

AITING AROUND FOR regulation has become the norm for peer-to-peer lenders. Waiting for full Financial Conduct Authority (FCA) authorisation; waiting for the regulator’s full feedback from its review into the sector; or – as our front page story shows – waiting for the outcome of the Treasury-commissioned review into the bank referral scheme. Regulatory progress is a slow process in every industry, not just P2P, but it does seem to be a particularly present backdrop to the sector’s evolution. Hopefully this summer will not be a season of discontent. The FCA feedback was expected to have been released by now, but Peer2Peer Finance News has heard rumours that it may not be published until September. Thorough regulation is essential to the maturation of P2P, but the pace must be testing the patience of the most understanding of platforms. With Brexit uncertainty dominating the mindset of the powers that be, it’s important that they do not forget about the industries that will be supporting the UK economy once we have left the EU.

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.

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 rejected by one of the three finance aggregators, while an agreement with another had not produced many deals. The spokesperson also questioned the role of the aggregators, arguing that they create a middleman – and extra costs – that are not needed. They said the platform had more success obtaining referrals from banks directly. And a source at another high-profile P2P business lender said that the scheme “hasn’t been a roaring success so far”. Danske Bank, one of the nine high street lenders referring business to the aggregators, also admitted that take-up has been slow. “We are committed to the scheme and are advising customers of their

options, however take-up from customers has been slow at this stage,” said a spokesperson. “We have a very high approval rate in the first place though.” Paul Goodman, chairman of the National Association of Commercial Finance Brokers, went further in his critique, saying the scheme is “doomed to fail” due to its “sausage machine-like approach” to small- and medium-sized enterprise (SME) finance. “While the key objective of the bank referral scheme - namely ‘speed-dating’ the finance needs of SMEs with finance providers - remains sound, the scheme is flawed in the detail,” he said. “There is no off-the-shelf product in the commercial finance sector - that’s

because the needs of small businesses are diverse. “Assuming that businesses have a broad enough understanding of the vast array of finance options available to them will mean a large number of SMEs will likely end up in the wrong deals.” However, several commercial finance professionals have defended the initiative’s progress so far. One source at a finance aggregator platform said that there had been “a lot of nonsense” about the scheme, but in reality it has been very successful. Much of the criticism of the scheme has come from lenders that had not even applied to be on the aggregator’s platform, the source argued.

Katrin Herrling, chief executive of Funding Xchange, said that it wasn’t fair to judge the scheme in terms of specific referral volumes at this stage. “It is the overall process that has to demonstrate it is delivering results,” she said. “That is either helping businesses access to finance or understanding how to get ready.” Mike Cherry, national chairman of the Federation of Small Businesses, said that the scheme “promises to be a real lifeline for viable small businesses that have been turned down by traditional lenders”, but underlined the need to see data on how many successful referrals have been made.

in 2014 by thenBusiness Secretary Vince Cable (pictured). Research by his department, amid falling levels of SME lending, found the largest four banks account for more than 80 per cent of UK SMEs’ main banking The idea of a bank relationships, and referral scheme the majority only was first put approach their main forward under the bank for finance, Conservative and with many giving up Liberal Democrat coalition government their search if initially

unsuccessful. The Treasury launched a consultation in March 2014, asking whether and how the government should legislate to create a mandatory process for banks to refer SMEs, with their permission, to other lenders including challenger banks and alternative finance providers. The government decided to press

ahead with this in August 2014. The referral process was part of the Small Business, Enterprise and Employment Act, which got Royal assent in March 2015. However, months of debate followed, questioning whether the referral should take place immediately after a rejection or after a borrower is given the right to appeal.

NEWS

Demand grows for property loans in tranches PROPERTY developers are increasingly using peer-to-peer loans to access funding in stages rather than in one go. Platforms are reporting a change in the way developers are drawing down loans as it is cheaper for them only to pay interest on money they are actually using. Michael Lynn, founder of P2P property lender Relendex, explained that more and more developers are asking to take loans in tranches. “We do have a single development loan with separate drawdown, but developers may not want to pay interest for nonutilisation and that is incompatible with lender expectations,” he said. “Instead, we are seeing more and more borrowers asking us to create separate

loans and we just have the final loan-to-value in mind when setting the rate.” Lynn said the investor will always be told that the loan is part of a wider project. “Effectively it is a whole load of different projects falling under the same security,” he commented. “We point out that people will be sharing the security with subsequent lenders as the development completes.” Another P2P property platform, Lendy, takes a similar approach, as most of its development loans are structured in tranches. “It helps to keep projects on track and within budget,” said Liam Brooke, co-founder of Lendy. “An independent monitoring surveyor keeps track of progress and build costs of the development, and drawdowns of the tranches are based

on the reports the surveyor provides. “That way, investors can have confidence to invest in the later tranches of the loan, knowing the project is meeting its milestones.” Kuflink, which currently provides P2P bridging loans, is looking to expand into development finance and is considering using a similar structure. “This is something we may be looking at in the

future,” a spokesperson said. “As far as developers are concerned, it depends very much on the deal whether they would be looking for the option to take funds on a tranche basis or in one go.” The only issue is having lenders ready to fund loans throughout the project, but platforms are confident that high levels of investor demand will continue in the sector.

An IPO would add kudos to P2P but shouldn’t be a priority A PUBLIC listing would boost the credibility of whichever peer-to-peer lender moves first, but would also bring a host of challenges, an investment expert has warned. Talk of an initial public offering (IPO) from one of the main P2P players has returned in recent months, with Rhydian Lewis, chief executive of RateSetter, confirming that the firm was looking to list at an in-house event for investors.

Speculation surrounding an imminent listing has grown following the firm’s appointment of City heavyweight Paul Manduca as chairman, although Lewis cautioned that a stock market flotation “is some way away”. Last year Zopa cofounder Giles Andrews described a public listing as a “natural route” for the business, while James Meekings, co-founder of Funding Circle, said earlier

this year that an IPO may become a “by-product of what we do”, but emphasised there were no immediate plans. Adrian Lowcock, investment director at Architas, said that for a relatively new industry like P2P, a listing would add a certain kudos and indicate that the sector is coming of age. Lowcock added that an IPO would not only offer an opportunity to raise capital to fund further growth, it would also help bring it to

the attention of a wider range of investors. “However, being the first should not be the priority of a business as being unprepared to be floated will bring challenges to the business,” he cautioned. “The extra work required for a listed company can always run the risk of distracting management from the actual business. In addition, while the extra focus on reports and accounts brings transparency, that could result in some hard questions.”

NEWS

IFISA uptake surpasses expectations DEMAND for Innovative Finance ISAs (IFISAs) has exceeded platforms’ expectations, with investments continuing to stream in long after the end of the ISA season. Peer-to-peer lenders that received IFISA manager approval from HMRC before the end of the last tax year told Peer2Peer Finance News that interest in the taxfree wrapper has not tapered off. “We were one of the first platforms to launch an IFISA into the market before the end of the last tax year,” said Julian Cork, chief operating officer at Landbay. “We saw a significant spike in volume in March 2017, and have been

pleasantly surprised with the ongoing investment flows into our propertybacked ISA. “With cash ISA returns at such a low level, we’ve found that many investors are transferring legacy ISA products from other providers to capitalise on the current 3.75 per cent fixed rate that we offer, and of course the ISA transfer market is not dependent on tax year cut-offs.” Meanwhile, Proplend chief executive Brian Bartaby said that his property lending platform is “still seeing a steady stream of ISA money coming in” following the end of the ISA season. “We only released our ISA to existing clients

and have seen roughly a 30 per cent take-up,” said Bartaby. “We will most likely release the product to the whole of the market next month. “We have seen a combination of new subscriptions, transfers in of this year’s allowance and transfers in of previous years’ ISA monies.” Like Proplend, several platforms have opted to roll out their IFISA to a limited group of investors to start with, to avoid an influx of new money that cannot be lent out straight away. In February, Lending Works’ IFISA attracted £1.5m of new funds within just 24 hours, due to “unbelievable demand” from investors

Assetz targets M&A within two years ASSETZ Capital will start rolling out its M&A strategy within two years, its chief executive has said. Stuart Law (pictured) told Peer2Peer Finance News that the peer-to-peer business lender intends to target acquisitions to fuel its expansion, once the company reaches £1bn in lending. If Assetz Capital continues to perform as expected, this could be as early as 2019.

“Unlike the wider P2P sector, Assetz Capital has experienced strong exponential growth of over 200 per cent per annum for the past few years, and is predicted to continue this trend until at least 2019,” said Law. “While it’s unrealistic for us to expect these levels of growth to continue forever, once we reach £1bn of lending per annum we

expect an M&A strategy to offer strong growth opportunities.” Law went on to say that there has been very little deal activity in the P2P sector to date, which could be down to a lack of maturity in the market. “From the Assetz Capital perspective, we’re open to relevant M&A opportunities that will add value and offer new avenues for growth,” he

added. “However, we have yet to come across any suitable opportunities.”

NEWS

Belfast poised to become post-Brexit fintech hub BELFAST could become the UK’s next fintech hub thanks to the Brexit effect, insiders have predicted. Low overheads, a steady stream of tech graduates and access to the European Union have been cited as some of the reasons behind Northern Ireland’s recent fintech boom, which has seen a number of P2P platforms and service providers set up in Belfast. P2P research firm Orca, P2P-facing broker Clearpath Finance, crowdfunding platform CoFunder and SME lender Linked Finance have all chosen to base their headquarters in Belfast, while US-based fintech firm Hanweck has also chosen to have its European headquarters in the city. Earlier this year, a KPMG report suggested that Ireland’s burgeoning fintech sector could “significantly benefit” from Brexit. Anna Scally, a partner at KPMG Ireland, said that both Ireland and Northern Ireland are “wellpositioned to serve as a springboard to the vast European market.” “We spotted a number of possibilities in Belfast,” said Rob Cooper, cofounder of Automate Tech, an automation company which has its

headquarters in Belfast. “It has a land border with Ireland and into the EU, and there is a lot of American business into Dublin. “Belfast has two airports, easy access, good infrastructure in terms of the investment in the city. Good quality universities, all the things you would want. And the overheads are somewhat significantly less than you’d find in London.” In the aftermath of the referendum, a number of fintech firms have begun to look beyond London, with Berlin, Frankfurt, Luxembourg and Dublin proving to be the most popular choices. Earlier this year, the PPRO Group announced plans to leave London for Luxembourg, while WB21, BrickVest and Swissbank moved from London to Berlin late last year. However, Belfast has

the advantage of being an English-speaking country with easy access to both the UK and the EU, and a raft of emerging tech talent. Jordan Stodart, cofounder of Orca, said that a “big consequence” of Brexit is the free flow of talent from EU companies to the UK. “Considering the part ‘tech’ plays in fintech, Belfast could become a pivotal city for fintech as the quality of tech graduates, and their value for money, is quite considerable,” he said. “If the fintech capital of the world, London, can’t attract EU-wide talent due to Brexit, then Belfast could really become a top hunting ground for fintech workers.” Stodart relocated from Scotland to Northern Ireland to set up Orca, and he is optimistic

about the potential of the province. “I think there are two primary factors attracting fintech companies to Belfast,” he said. “Firstly, it’s a very cost-effective city to run a business, particularly a start-up where keeping it lean is important. And secondly, the tech talent in Belfast is second to none.” “We were surprised at how much is happening in Belfast,” added Cooper. “It’s unrealistic to think that it could compete with London or the Northern Hub, but if you look at the geopolitical risk and the fact that the DUP have agreed what would be a substantial investment into Belfast, plus the fact that it might be the only member of the UK with a soft border to the EU, this opens up a number of possibilities.”

NEWS

Platforms use traditional approach to woo borrowers

PEER-TO-PEER lending platforms are choosing more traditional marketing methods in an attempt to attract more borrowers. Lenders such as Funding Circle and Zopa have been sending direct mail letters to potential borrowers who may be interested in a loan, in an approach more associated with the banking sector. A letter from Zopa, seen by Peer2Peer Finance News, advertises loans of between £7,500 to £15,000 at three

per cent APR, describing its brand as “Simple loans. That’s what we do.” A spokesperson for the platform, which is in the process of applying for a banking licence, declined to comment on how many of these letters had been sent and to whom. “We strive to attract the best quality borrowers,” a spokesperson said. “We use a variety of marketing channels to increase awareness of our easy to understand

products, excellent experience, and competitive rates - direct mail is just one example of that.” Funding Circle also uses direct marketing, insisting it is commonly used among all sectors. “Even though it’s relatively traditional, you can do a lot of cool stuff with data and machine learning to improve the way you target prospect customers which I reckon platforms are doing – we certainly are,” said a spokesperson. Jordan Stodart, cofounder of P2P analysis firm Orca, said this was a sign that P2P platforms have had to get more creative. “Acquiring borrowers is currently a key focus for major P2P platforms,” he said. “Banks have begun

What is the greatest threat to P2P?

lending out money again, at attractive rates in some cases, which has increased competition between P2P lending and traditional bank lending. “This has presumably meant P2P platforms have had to get a little more creative with their marketing tactics, and can’t rely on advertising an attractive proposition (for borrowers) on a comparison website as readily as they perhaps once did. “This shouldn’t be cause for concern, as P2P not only offers competitive rates but offers an efficient way of accessing capital, something banks have historically been poor at. Not just this, but P2P borrowers have typically had superior experiences when receiving loans via P2P.” READER POLL

Over regulation

Investor/borrower mis-match

Consolidation

Lack of awareness

Other*

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

* A Labour government; economic downturn; Brexit; high losses resulting in a drop in investor confidence; platform failures/bad behaviour Compiled by P2PFN in July 2017 using Survey Monkey

COMMENT & ANALYSIS

Winter isn’t coming David Bradley-Ward, chief executive of Ablrate, explains why peer-to-peer lenders should wake up to the benefits of blockchain

started writing an article with a Game of Thrones theme and wanted the title to be ‘Winter is Coming’ but I ran out of writing talent when trying to ram my subject into the theme. That is because GoT is dark and I happen to think the future is bright. As a lender you could easily get caught up in the thoughts that the golden age of online lending is coming to end. We know something is up when aggregators, funds and ‘experts’ spring up from everywhere to tell you where to lend your funds and how dangerous it is if you don’t use their particular services. This trajectory could see online lending end up being the fund management industry with shiny websites, lower rates for lenders, more layers of middlemen etc… everything it was supposed not to be. The eternal optimist in me, however, sees a different future, a future where technology continues to level the playing field for direct lenders/ investors. The catalyst for that, I believe, will be the blockchain technologies that are being worked on all over the world. For me, it is not so much about digital currency, I am still suspicious of that, but more about smart ledgers and smart contracts. For example, Ablrate already has a rudimentary ‘smart contracts’ system where contracts are updated automatically as people buy and sell loans on the platform. All platforms, of course, have a ledger system, but

what we have tried to do is make it cross from digital to physical, where lenders can download all the agreements. It is a hop, skip and a jump for blockchain technology to be applied to that ledger system. When you start applying the same technology to security and embracing big data for lending decisions, things start to get interesting. Online lending should be a tool that removes the friction between lender and borrower, and blockchain technology can help that. With seamless (and instant) registration of ownership of assets, capital can safely flow to borrowers more quickly and, perhaps more temporarily, creating asset-backed cashflow lending products. What

Everyone wants to sit “ on fintech’s equivalent of

the Iron Throne, but the industry should be looking to work together to make a system like this happen

”

about the opening up of a transaction to multiple lenders across multiple platforms? With a digital ledger, digital asset allocation and ownership, that could be easily done when you solve settlement issues. If you add in big data to help lenders make the decisions based on their risk profile and continued data for making buy and sell

decisions throughout the term, perhaps automated to certain criteria, then online lending could become something totally awesome. The current system of giving the bank all the upside profit in lending in return for no risk, easy access to your money and a drizzle of interest, is dying. Increasingly the lending decisions of banks are not really based on lending expertise, but are based on data and well-worn offline procedures for securing that lending. If blockchain can take care of the security elements, while digital ledgers and open transactions can take care of diversification and big data can assist in lenders’ decisions, why would you look to funds, middlemen and banks to invest your money when you have the same tools? Everyone wants to sit on fintech’s equivalent of the Iron Throne, but the industry should be looking to work together to make a system like this happen. However, I fear protecting a niche will be more important. It’s best for everyone if they heed the wise words of Ser Davos Seaworth, who gets the best line of the GoT season seven trailer: “If we don’t put aside our enmities and bound together, we will die,” he warns, “and then it won’t matter whose skeleton sits on the Iron Throne.”

FEATURE

Playing by the rules The peer-to-peer lending industry is waiting with baited breath for the regulator’s full report from its review into the sector. Will its outcome herald a new era for P2P, or just new hurdles to overcome?

T IS OFTEN SAID that a week is a long time in politics and the same can be said for peer-to-peer lending regulation. It is just over a year since the Financial Conduct Authority (FCA) first announced a call for input on the P2P sector as part of a post-implementation review that it promised when the industry came under its regulatory scope in 2014. We had a glimpse of the FCA’s thinking with an interim statement in December that showed that the City watchdog is worried that consumers aren’t aware of the risks, with suggestions that investment limits may be introduced and some concerns about provision funds. At the time of the call for input in July 2016

the Peer-to-Peer Finance Association’s members had a cumulative loan book of £5.8bn. Since then, originations have grown to £8.4bn as of the end of the first quarter of 2017 and this corner of the alternative finance market has moved from technology entrepreneurs to ISA managers and even, in the case of Zopa, a future bank. It’s a long way from the Office of Fair Trading (OFT) regulation in the days before 2014. P2P firms that had launched before April 2014 were given interim permissions when regulation transferred to the FCA and have had to apply for full authorisation. “Comparing the two is like chalk and cheese,” says Julian Cork, chief

The FCA “should try to

adopt a firm but flexible approach to make sure the regime doesn’t become out of date too quickly

”

operating officer of P2P property lender Landbay. “The OFT was focused on making sure you were fully registered as a company and people knowing you were on their list. “There wasn’t the full detailed due diligence. “As soon as the FCA created the regulatory regime there was a lot of work to do.” Landbay gained authorisation in December last year but the process took 15 months. “There was a lot of talking to our case manager and interpretations of evolving rules,” Cork adds. “Regulation has created a bigger barrier for entry but it was the right thing to do in terms of making sure the market balances innovation and growth with consumer protection.”

A BRIEF HISTORY OF PEER-TO-PEER LENDING 2005 - 2010

AUGUST 2011

The first major UK peer-to-peer platforms, Zopa, RateSetter and Funding Circle launch, operating under Office of Fair Trading consumer credit licences.

Zopa, RateSetter and Funding Circle set up self-regulatory body the Peer-to-Peer Finance Association, setting rules on loans and default disclosure, amid concerns of “shoddy operators” in the sector. The “big three” also call for the thenFinancial Services Authority to regulate platforms.

FEATURE

Other platforms who worked under the OFT regime, such as Zopa and Funding Circle, have only received full FCA authorisation in recent months, while others such as The House Crowd, formed in 2012, are still waiting. So, is the FCA up to the challenge of regulating the industry and will its full review, due to be published over the summer, be out of date before it reaches the printer? Emily Reid, partner at law firm Hogan Lovells, says the FCA could easily translate protections across to borrowers in similar ways to retail banks, but there is no direct comparison for lenders. “The focus will therefore continue to be on whether retail lenders are adequately protected and what more needs to be done,” Reid asserts. “The introduction of the Innovative Finance ISA (IFISA) has increased the tempo, especially as most of the bigger platforms have now received full permission and are able to market the IFISA to their

JANUARY 2012

APRIL 2014

Government announces regulation of consumer credit will move from the Office of Fair Trading to the newly-created City watchdog, the Financial Conduct Authority. This includes any credit lenders, ranging from payday loan providers to P2P platforms.

P2P regulation transfers to the FCA, setting capital buffers for platforms and giving investors access to the Financial Ombudsman Service for complaints but no Financial Services Compensation Scheme (FSCS) protection.

FEATURE

we have seen with banks, “[theAsFCA] cannot prevent bad practice all the time ” customers. “Apart from retail lender protections, the FCA may well decide to focus on ensuring business continuity in the event of a platform or servicer failure, on systems and controls around client money and on any areas of perceived or actual conflict of interest that work to the detriment of the retail lenders.” The industry saw some signs of the FCA’s teeth when it wrote to platform bosses in February to stop

wholesale lending where it is in breach of regulations. So what other aspects of the sector could the FCA focus on? One area of concern in the FCA’s interim statement was provision funds. “Certain features introduce risks to investors that are not adequately disclosed and may not be sufficiently understood by investors,” the report said. “For example, the use of provision funds may obscure the underlying risk

to investors, which may result in investors believing that platforms are providing an implicit guarantee of the loans they facilitate.” Stephen Findlay, chief executive of P2P investment manager BondMason, is a vocal opponent of these types of perceived safety nets. He argued in a report earlier this year that provision funds “do little (nothing) to improve returns for well-diversified investors” and provide an “illusion of protection.” “I’m not sure the FCA is comfortable with the regulatory position or nature of permissions required to operate a new provision fund,” he told Peer2Peer Finance News. “I can see these being phased out, perhaps replaced with insurance contacts instead. “ Provision funds have been used by some of the best-known platforms. Zopa is currently in the process of retiring its SafeGuard Fund, something a spokesperson said is unrelated to the FCA review. “The FCA has created a purpose-built regulatory

framework for P2P business,” a spokesperson for Zopa says. “This framework is based on the different activities that P2P lenders perform. “It has ensured that customers get the appropriate information and rights while providing regulatory clarity for the platforms. “We believe that the certainty afforded by the framework has played a significant role in both improving practices across the industry and supporting sustainable growth.” Another platform, RateSetter, also has its own provision fund, but there is no sign of it being scrapped. A spokesperson declined to comment. The P2P sector also has its own ideas of what it would like to see in the report. Cork says the final report will create an opportunity to mandate best practices on loan book transparency, something members of the P2PFA, such as Landbay, have done. “Doing that more widely across the whole industry could help in letting people understand the

JULY 2015

APRIL 2016

JULY 2016

Then-Chancellor George Osborne confirms plans to create an Innovative Finance ISA (IFISA), a tax-free wrapper around P2P investments, in his Summer Budget.

First IFISAs launched by platforms such as Crowdstacker and Abundance.

The FCA issues call for input as part of postimplementation review of its regulation of the P2P sector.

FEATURE

risk as determined by the underlying rate and the returns,” he explains. “They will be able to see the margin and understand the risk.” Findlay goes further, suggesting a specific chief credit officer role for each platform. “Their role will be to be responsible for the performance of the loan book and returns and they should have to demonstrate requisite experience before they can take such a job,” he says. “They should also be required to report the actual performance versus the expected performance each year, either reporting publicly, or to the regulator, or to an appropriate industry body.” Findlay also says clearer messaging would be helpful, as would a worked example of the fee model over the life of a loan for each platform so clients can understand where fees arise, and how the platforms are remunerated. But Reid says there are so many different business models that it would be hard for the City watchdog

to be too prescriptive. “Every platform has a different focus, so coming up with a set of rules that works across the board will be challenging,” she says. “Because change is so rapid, the FCA should try to adopt a firm but flexible approach to make sure the regime doesn’t become out of date too quickly.” Getting the right balance for the actual business and protecting customers is also top of the list for the platforms. Frazer Fernhead, founder of P2P property platform The House Crowd, warns the regulator must let the consumer make their own choices. He cites one example of the FCA’s policy on internet marketing where he questions the need for a risk statement on pay-perclick adverts on Google, which take up space and cost more, when the link will go through to a page saying the same thing. “The FCA provides an important function, and being FCA regulated helps companies build consumer trust,” he says. “However, as we have

seen with banks, it cannot prevent bad practice all the time. “P2P by its very nature is self-regulating, as everything is transparent and subject to online reviews. I would urge the FCA to adopt a lighter regulatory approach, giving people the choice between heavily regulated industries with lower returns and ones perceived as higher risk but with better returns. Let consumers decide for themselves.” Similarly, Bruce Davis, co-founder of renewable energy P2P platform Abundance, says the FCA must recognise how willingly the industry has accepted regulation. “This sector supports regulation, we are not given credit for that,” Davis says. “We are seen as outsiders, but we are not the new kids on the block anymore. “Our data is at a level the banks would give their high teeth for.” Others believe that rather than the full FCA report being the end of the review, it could just be the beginning.

“It would be a mistake to view the development of regulation for marketplace lending or crowdfunding as a completed exercise,” Karteek Patel, chief executive of Crowdstacker, adds. “The industry is constantly innovating and [it is important to] make sure regulation is keeping pace with the innovation. “New issues will inevitably arise all the time so our approach is to focus on consumer protection and try and stay several steps ahead. “We believe that one of the areas the FCA will focus on will be to improve transparency so that investors can better assess risks and returns. We, for example, make investors carry out a test so they better understand the key risks.” The FCA declined to comment on when the review will be released, so P2P platforms will have to wait to see whether the new era of regulation will welcome them into financial services or keep them on the outside.

DECEMBER 2016

FEBRUARY 2017

MAY 2017

FCA issues interim feedback statement that expresses concern about how risks of P2P lending are disclosed to consumers.

Lending Works and Landbay become first P2PFA members to launch an IFISA. FCA writes to P2P lenders warning them against wholesale lending, saying it may be in breach of the rules.

Zopa and Funding Circle gain full FCA authorisation.

SUMMER 2017 Industry awaits outcome of the postimplementation review.

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The road to regulatory approval Keith Maner, compliance and technical manager at compliance specialists Thistle Initiatives, delves into the key issues surrounding Financial Conduct Authority authorisation for peer-to-peer lenders

eer-to-peer lending is one of a number of regulated consumer credit activities requiring firms to have full FCA permission. In line with its declared intentions to encourage competition in the retail markets, and to facilitate the path to authorisation for UK fintech businesses, the FCA has invested many resources in explaining the process to potential applicants. Thistle Initiatives has a wealth of knowledge and experience in assisting P2P providers in becoming directly authorised with the FCA or in becoming an Appointed Representative of its associated principal firm, Resolution Compliance. To date, Thistle has a 100 per cent track record in obtaining authorisation for firms in respect of P2P lending with a variety of business models, from property to traditional consumer and business lending. We have been involved with almost twenty applicants for P2P and fintech authorisation over the past three years. Key authorisation points to be aware of: • At the point of authorisation, the FCA states that a firm must be ‘ready, willing and organised’ – namely, that it must have in place all elements of the business to carry out the regulated activities requested within the Part 4A permission. The FCA recognises that firms may be unwilling to commit resources until they gain

certainty that the firm will gain authorisation. For example, there is a cost in capitalising in order to meet the capital requirements. So, in this instance, the FCA will need to know in advance how the firm intends to meet the capital requirements, but could permit the firm to capitalise just prior to authorisation. • A recent focus of the FCA has been around applicants’ IT platforms not being ready or sufficiently tested before authorisation, especially if the firm has built or operates its own IT platform. Ideally, the platform should undergo a penetration test (which focuses on cyber security, amongst other aspects), by way of a simulated attack on the platform looking for security weaknesses and access to the data. This test enables the FCA to assess whether the firm’s platform has sufficient defences in place to safeguard client data and funds. • The FCA has wide concerns around whether sufficient oversight is in place to reduce consumer detriment and whether sufficient and clear risk warnings are provided to lenders. • Concerning consumer detriment, P2P is not covered by the Financial Services Compensation Scheme; however, many P2P firms (such as one Thistle is currently supporting, which is coming from an established business abroad), build

in a ‘contingency fund’. This fund aims to pay out on any defaulted loans. So, there is a fine balance to be met between building a contingency fund (which could potentially be regarded as a collective scheme, opening up another Pandora’s box) against over-charging borrowers. • The FCA needs to be satisfied that the structure does not constitute a collective investment scheme or alternative investment fund under the Alternative Investment Fund Managers Directive. • Systems and controls in relation to organising payments and repayments in conjunction with a third-party provider or custodian, if applicable, must be satisfactory. • Ascertaining the applicant’s experience in credit assessment and debt management is fundamental. • The FCA says that “firms must, among other things, take reasonable steps to ensure that personal recommendations are suitable for their client. As set out in our Policy Statement (PS16/8), this requirement will extend to personal recommendations in relation to P2P agreements from 6 April 2016.”

FEATURE

From disruptors to dealmakers

Done properly, M&A is the ultimate growth strategy, offering access to new segments, markets and technologies at the shake of a hand. But is the build or buy model even applicable in the rapidly changing world of peer-to-peer lending?

HE MOST SIGNIFICANT M&A deals don’t always manage to grab the headlines. The business pages are packed with analyses of multi-billiondollar mergers or failed acquisitions, and the socalled 50 per cent failure rate is ominously cited any time there is a new deal on the horizon. But look behind the headlines and there

is another narrative emerging. A narrative where savvy, forwardthinking companies use mergers and acquisitions to grow and strengthen their business. And 12 years after Zopa burst onto the scene, the peerto-peer lending sector is ready to enter the fray. Bit by bit, M&A is starting to shape the future of P2P. But in keeping with the sector’s

disruptive reputation, it is not exactly taking the usual route. For years now, there has been near-constant speculation that the P2P sector is on the verge of consolidation, and rumours have swirled about big bank buy-outs and potential mergers within the industry. Last year, Jason Purcell, chief executive of First Capital investment bank,

predicted that there would be a “flurry” of M&A activity over the next few years. “In the early days, the financial services industry ignored what was going on with technology, but now they’re looking at it with more interest,” he told Peer2Peer Finance News. “I absolutely expect to see more banks experiment with this

FEATURE

To date there’s been very little M&A activity in the “ P2P sector, but it’s difficult to say whether this is because it’s still too early in the marketplace, or because the right opportunities haven’t come up yet

”

space, either by building their own platforms, investing in platforms or lending through platforms. “I think there will be more acquisitions over the next three or four years as the firms get bigger and the banks react and buy them.” Yet there has been a noticeable absence of any large-scale deals thus far. “To date there’s been very little M&A activity in the P2P sector, but it’s difficult to say whether this is because it’s still too early in the marketplace, or because the right opportunities haven’t come up yet,” says Stuart Law, chief executive of Assetz Capital. “From the Assetz Capital perspective, we’re open to relevant M&A opportunities that will add value and offer new avenues for growth, however we have yet to come across any suitable opportunities.” This view has been echoed across the alternative finance space, by fintech professionals who believe that an M&A boom is long overdue.

And who can blame them. There has been a raft of reports suggesting that dealmakers are on the prowl. Research from the law firm Simmons & Simmons found that three quarters of banks and asset managers worldwide are looking to boost their collaboration with fintech companies to become digitally competitive, and 31 per cent plan to buy a fintech company over the next 12 to 18 months. Meanwhile, Deloitte has reported that global M&A activity in disruptive innovation sectors such as fintech soared to $291bn (£239bn) in 2016 – a four-fold increase over the previous four years. In the first five months of this year alone, advisory firm Livingstone has recorded 19 mergers and acquisitions across asset, property and personal finance, worth over £3bn in deal value. However, none of these deals involved P2P platforms. The research suggests that the money – and the appetite - is there for M&A deals in alternative

finance. So why haven’t there been more deals in the P2P sector? It may be down to innovation. here are two ways to grow a business – ‘build’ or ‘buy’. To ‘build’ requires an abundance of innovation which allows companies to set themselves apart by offering something completely new to consumers. To grow by ‘buying’ simply requires a company to acquire the technology or knowledge that it needs by acquisition. The majority of companies will start out by building on an

innovative foundation, before turning to M&A as a way to maintain growth after this initial innovation ceases to be unique. There is little doubt that P2P lending was hugely innovative when Zopa launched in 2005. But since then, the sector has grown and diversified to an extraordinary rate. Over the past few years, we have seen the launch of the first property-backed platform, the first Sharia-compliant platform, and the first securitisation deals. There are now more than 100 platforms operating in the UK, and by the end of 2016, the Peer-to-Peer

PROFILE

M&A DEALS IN P2P • December 2014 – RateSetter acquires the loan book of GraduRates, a peer-to-peer platform which offered loans for postgraduate study. • January 2015 – Prosper Marketplace buys American Healthcare Lending – a network which gives healthcare providers the chance to offer loans to patients for medical procedures for $21m (£16.1m) • October 2015 – Funding Circle buys German SME loan provider Zencap for an undisclosed amount. • May 2017 – RateSetter acquires two of its former wholesale partners, motor finance providers Vehicle Stocking and Vehicle Credit. Around the same time, RateSetter announced that it had taken an equity stake in its former wholesale partner George Banco. • July 2017 – VC firm Rocket Internet sells its majority stake in German P2P platform Lendico to Arrowgrass, a London-based hedge fund.

I think there will be more “acquisitions over the next

three or four years as the firms get bigger and the banks react and buy them

”

It may well be that potential “investors have been wary of

investing until it was clear that a target platform was going to receive its authorisation

”

Finance Association was reporting that its (then eight) members alone had cumulatively lent more than £7bn. Meanwhile, partnerships between banks and platforms have become more and more commonplace, and the arrival of the Innovative Finance ISA (IFISA) and the bank referral scheme have helped to move P2P closer to the mainstream. But a number of leading P2P professionals, including RateSetter chief executive Rhydian Lewis, have rejected the idea of bankdriven M&A. After all, if the future of P2P involves bank-driven acquisitions, there is a risk that just 12 years after its arrival, P2P could be absorbed into the very mainstream it set out to disrupt. P2P M&A certainly seems to be on the radar of the platforms, but it is still unclear exactly how – and when - it will take shape. Assetz Capital’s Law says that he expects to start rolling out an

M&A strategy as soon as the company hits £1bn in lending. Given that the platform passed the £300m milestone earlier this year, and has experienced strong exponential growth of over 200 per cent, this could be as early as 2019. RateSetter is one of the only platforms to have already dipped its toe into the world of M&A. When it acquired GraduRates’ loan book in late 2014, it was a largely opportunistic bet. GraduRates was performing well, but it was offering a very niche product and the owners had decided to run down the platform’s operations responsibly ahead of Financial Conduct Authority regulation. “We spoke to GraduRates and agreed to take on its customers, making sure that the platform’s borrowers and investors were kept fully aware of what was going on every step of the way and also making sure they remained in

FEATURE

exactly the same position,” said Luke O’Mahoney, a spokesperson for RateSetter. “At the time, we noted that this was a sign of the P2P lending industry maturing, showing that it was possible for a platform to wind down in an orderly manner. “Our acquisition of the loan book went smoothly, and these loans are continuing to be repaid on our platforms.” ore recently, RateSetter bought two of its former wholesale lending partners that had gone into financial difficulty and acquired a stake in another. The platform wound down that segment of its business last December, after the regulator expressed concerns about P2P firms lending to other lenders. Last month, RateSetter told investors that it had also taken ownership of Adpod, a beleaguered advertising company that borrowed £12m from one of the former wholesale partners in 2015 and still owes £8.5m. RateSetter has said it will absorb any losses from its own coffers as opposed to using the provision fund. The company gave all of its investors the opportunity to sell out free of charge, due to these “interventions”. “These three interventions all stem from

RateSetter’s wholesale lending which we discontinued in December 2016 and we do not intend to intervene like this again,” said Peter Behrens, chief operating officer and co-founder at RateSetter. RateSetter’s wholesale interventions seem unlikely to be indicative of a wider industry trend, so while these small deals are worth watching, the more important question is whether a big, gamechanging M&A deal is just around the corner. A number of smaller platforms have indicated to Peer2Peer Finance News that they would be open to offers from larger

platforms or banks, but there does not seem to be any sense of urgency. One investor recently expressed their interest to Peer2Peer Finance News in the possibility of acquiring a smaller platform with FCA authorisation in order to leapfrog the lengthy application process, but so far no deals of this type have been inked. “I suspect the long wait for authorisations to come through has had an impact,” says one M&Afocused lawyer. “It may well be that potential investors have been wary of investing until it was clear that a target platform

was going to receive its authorisation. I suspect most platforms are also likely to want to wait until any impact from being able to offer IFISAs has fed through into their revenues, and hence their valuation.” If this is the case, it’s unlikely that we would see any headlinegrabbing M&A activity until after the next tax year, when IFISA-ready platforms have built up a track record. Until then, M&A simply offers another opportunity for P2P lenders to demonstrate their inimitable brand of innovation.

PROFILE

Small is beautiful

Small businesses are the lifeblood of the UK economy – and of many peer-to-peer lenders. The Federation of Small Businesses’ policy director Martin McTague talks to Peer2Peer Finance News about the funding gap, Brexit and “corporate bullying”…

T’S NOT THE EASIEST time to launch a small business. With Brexit negotiations barely underway and a recently reshuffled cabinet, the political and economic continuity that small- and medium-sized enterprises (SMEs) need to thrive and grow has been put under threat in the UK. Yet Martin McTague, policy director at the Federation of Small Businesses (FSB), says that politically, their voice has never been any stronger than it is right now. “Small businesses employ over 60 per cent of the workforce in the UK and contribute nearly half of GDP, so I think it’s universally accepted that we are vitally important to the success of the economy,” he tells Peer2Peer Finance News. “I feel people in political circles do understand and value the importance of the FSB, but it’s essential that we keep focused on the things that are most important to our members,

because we’re entering some pretty choppy waters over the next few years.” The FSB was established more than 40 years ago as a single-issue campaigning group, in response to the increase in national insurance contributions. Now it has a broader remit, aiming to ensure that the environment in which small businesses operate is as good as possible. The trade body has 186 branches across the UK and around 170,000 members. McTague was elected to his current role at the FSB in March 2016, having volunteered at the organisation for 15 years, and has a wealth of business experience to offer. He started his own company 28 years ago and now currently owns and manages three businesses, offering public policy, engineering and IT consultancy services. Access to finance is indisputably a pivotal part of SME growth. Despite Brexit woes, the FSB’s research that shows the

availability of finance for small businesses is almost at an all-time high, although McTaguee thinks the efficiency of the process from the incumbent lenders still leaves room for improvement. “We’re getting very good feedback about the availability, while the conversion rate from applications to success is also at a very high level,” he explains. “But the perennial problem is – and I’m sure peer-to-peer lenders would understand this better than anybody - that big banks still are very slow at processing credit applications. They can be quite beaurocratic. “The other area I think is misunderstood is the suitability of debt or equity finance. Some firms will be at a completely different stage in their development

cycle and they don’t seem to recognise the importance of applying for the right kind of finance at the right time.” He thinks that the British Business Bank has “a big role to play” in educating SMEs about different types of credit, as well as the FSB itself and resources like Peer2Peer Finance News. “Most small businesses launch using a bit of friends’ money and credit cards,” he adds. “The level of financial sophistication for many companies is pretty low.” McTague says he definitely expects P2P lending to small businesses to grow and become more mainstream. One particular issue that McTague singles out – which P2P platforms such as MarketInvoice or ArchOver could help to address - is late payments from larger, corporate clients. “A lot of them indulge in

PROFILE

what I can only describe as corporate bullying, where they pose very one-sided conditions in contracts and delay payments,” he asserts. “They effectively sit on our members’ money and use that to fund their own businesses. That’s been a consistent problem.” A combination of government policy changes and increased education about working capital finance options would help to address the problem, he says. “The government should and is starting to do more on poor payment practices,” he comments. “They’re looking at the

governance arrangements in bigger companies to make sure there is at least somebody that’s speaking up for the supply chain and making sure big corporates treat them properly. “There is also the small business commissioner who is going to be responsible for trying to improve payment practice but I think there is definitely a role for invoice discounters and credit finance institutions. “I think in the past, a lot of people have been reluctant to use them because they were expensive. A more competitive environment,

I think it’s possible to negotiate a “ Brexit deal that will protect the interests of small businesses in the UK” driven by P2P, will improve that situation I’m sure.” The FSB may have a strong voice, but it also has strong headwinds to face, McTague warns. “At the moment I would say most SMEs haven’t seen a direct impact from Brexit,” he comments. “We survey our members every quarter and confidence

levels are still holding up well but there are some worrying signs further down the track and we’re expecting some of those issues to hit our members in the coming months.” McTague expects Brexit to “dominate everything for the next couple of years”, which could be to the detriment of small businesses.

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“There’s very little bandwidth left in government to deal with anything other than Brexit and that will mean a lot of domestic priorities get put on the back burner for the foreseeable future,” he asserts. “I think that is a bad thing but I don’t think there’s any way we can avoid trying to make sure the Brexit deal is as good as it possibly can be and that’s going to take a super-human effort in government.” It is clear that McTague sees the UK’s post-Brexit relationship with the EU as fundamental to the future of SMEs. The export opportunities and funding that the bloc provides are the lifeline of many small businesses in the UK, he explains. “I’m an optimist when it comes to Brexit talks,” he says. “I think it’s possible to negotiate a deal that will protect the interests of small businesses in the UK. The FSB has contributed a lot to government thinking and provided them with a lot of evidence about how small businesses trade in the EU. “This includes how Brexit could impact them in terms of funding – this is perhaps a misunderstood area. How they’re reliant on EU labour and what the priorities for reform should be when EU rules are reincorporated into the UK statute book. “These are all big issues and if we get them wrong,

it could have a major negative impact but equally, there are some opportunities for us.” McTague’s ideal Brexit deal would be something close to the existing trading arrangements for small companies. “A large percentage of small businesses start exporting in the EU before they go for more complex markets so for me, a really good deal would be one that allowed them to continue to operate in that environment in as frictionless a way as possible,” he explains. “The ideal outcome would mean that they could still hire the right talent without massive obstacles and that the government would sort out some of the gaps in funding that are going to be left when EU structural funds go.” McTague warns that this

funding gap could have a particularly detrimental impact on “the creakier areas” of the country, which he names as the North East, Wales and the South West. “In North East England for example, I know that the failure to sort this out is causing serious financial hardship to some firms,” he affirms. “The funding arrangements have just ground to a halt.” He also expresses concerns about the FSB’s members in Northern Ireland, who he thinks could be seriously affected by border issues, and firms that employ mid-skills employees and technicians, which are sectors dominated by EU labour. “They’re going to find it extremely difficult to find that labour in the UK because we have quite a severe skills shortage in

those areas,” he says. With Brexit headwinds looming on the horizon, the FSB’s role in lobbying on behalf of small businesses is more important than ever – something that McTague takes very seriously. “Many people who decide to set up businesses are taking enormous risk with what will sometimes be family assets,” he says. “They’re working incredibly long hours, sometimes very poorly paid. “They don’t have the normal perks that most people associate with a working life such as holidays and sick pay, or pension provision. So, they are in a very vulnerable position and we want the government which recognises they are massively committed to the economy to make sure they nurture them rather than squeeze them.”