99 PROBLEMS BUT THE RATINGS AIN’T ONE
>> 7
TRANSPARENCY AND DISCLOSURE
>> 20
Why investors shouldn’t rely on review sites
Has the industry gone too far?
P2PFN’s inaugural annual survey >> 15
ISSUE 12 | SEPTEMBER 2017
Lack of due diligence holding back P2P in the IFA market
THREE quarters of independent financial advisers (IFAs) would recommend peer-to-peer lending to their clients if there were greater client demand, or more independent due diligence tools at their disposal. A survey by P2P research firm Orca, exclusively provided to Peer2Peer Finance News, found that the majority of IFAs would not recommend P2P investments unless they could easily access educational materials and analysis through one trusted source. Most suggested that they would prefer this information
to arrive via a software or technology platform such as Morningstar, Bloomberg, or FE Analytics. Only 20 per cent of the IFAs surveyed said that they were currently advising P2P solutions to their clients. Of those IFAs who were not currently recommending P2P, 75 per cent said they wanted more information. One quarter of those interviewed said that they would not consider P2P for their clients despite the attractive yield and diversification merits, as it was perceived as “too risky”. IFAs have been historically cautious about recommending any investments which
are perceived to carry risk. This attitude has been reinforced by the recently-introduced Retail Distribution Review (RDR), which holds IFAs accountable for poor financial advice, even
after they have left their business or retired. As a result, P2P platforms such as Octopus Choice have made it a priority to educate IFAs on the benefits and risks involved >> 4 in P2P investing.
Zopa’s Andrews warns on post-Brexit skills shortage THE UK is facing a technology skills shortage that may worsen because of Brexit, Zopa’s co-founder and chairman has warned. Giles Andrews said that
the peer-to-peer consumer lender’s decision to open a hub in Barcelona was partly due to a concern that it would be harder to recruit top tech talent
following the UK’s departure from the EU. “Opening the Barcelona office is an acknowledgement of the challenge of recruiting
highly skilled developers in this country, and a concern that the situation might get worse because of Brexit,” he said in an exclusive interview >> 4
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EDITOR’S LETTER
03
Published by Royal Crescent Publishing
WeWork, 2 Eastbourne Terrace, Paddington, London, W2 6LG info@royalcrescentpublishing.co.uk EDITORIAL Suzie Neuwirth Editor-in-Chief suzie@p2pfinancenews.co.uk +44 (0) 7966 180299 Kathryn Gaw Contributing Editor kathryn@p2pfinancenews.co.uk Marc Shoffman Senior Reporter marc@p2pfinancenews.co.uk Andrew Saunders Features Writer 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.
A
UGUST IS TYPICALLY a quiet month for business. Bosses go on holiday, decisions get postponed, important announcements are put on ice…but once again, peer-to-peer lending is breaking the mould. There’s been plenty to keep the team at P2PFN towers - and all other P2P enthusiasts - occupied. In the middle of August, RateSetter announced that it was leaving the Peer-to-Peer Finance Association after breaching the trade body’s rules on transparency, understood to be linked to its wholesale lending “interventions”. Meanwhile, Funding Circle unveiled a host of changes, including its decision to scrap the manual lending option for investors. Earlier in the month, it announced a tie-up with Dutch insurer Aegon, which will fund loans through the peer-to-peer business lender’s platform. Not to be left out, Zopa released its full-year results, which showed a whopping 61 per cent rise in revenues thanks to a 30 per cent increase in loan origination. It also announced that it had reduced its exposure to higher-risk loans due to the UK’s worsening consumer credit outlook. If that wasn’t enough, Lawrence Wintermeyer announced he would be stepping down from the helm of fintech trade body Innovate Finance after two-and-a-half years. And as this month’s print edition shows, that’s just the tip of the iceberg. We’ve seen Ablrate and Octopus Choice roll out their Innovative Finance ISAs (p9) and Zopa’s Giles Andrews explains why this is the most exciting time for the company since its launch (p10). With so much activity in the summer, autumn has a lot to live up to…
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.
04
NEWS
cont. from page 1 “Post-RDR they need to look at the whole retail market,” said Orca cofounder Jordan Stodart. “They shouldn’t care what the client demand is. It doesn’t matter if the retail services are integrated with the technology providers. They should look to P2P because it’s a retail product. If their client is crying out for yield away from correlated asset classes then they need to look at P2P.” Orca’s data points out that more than £2bn was lent in the first half of 2017, four times the size
of the total 2016 venture capital trust (VCT) market, which is on a similar part of the risk spectrum to P2P. In the wake of RDR, IFAs have been operating under a 1-10 scoring system, where different types of investment are rated in terms of risk before being matched with an investor. P2P is not currently represented within the scoring system, so the default position is ‘off the scale’ in terms of risk. As a result, those IFAs who do recommend
P2P investments to their clients, have been forced to offer this advice “informally”. Orca surveyed 30 IFAs who collectively advise on billions of pounds-worth of assets. “The more innovative IFAs we’ve spoken to understand this dilemma and want to offer value to their clients,” said Stodart. “Often their clients have asked about P2P and, as their trusted financial adviser, they expect an opinion. “Some IFAs have indicated that they’ve
performed informal research, often free, and presented different options along with the more formal advice process. They’ve then instructed the client to invest themselves, ultimately losing assets under management but in the process mitigating their own personal business risk. “This is not good for the adviser, who has to place self-preservation above delivering client value, and for the client who is forced to invest without advice.”
with Peer2Peer Finance News. “I don’t think it makes you a radical pessimist to say that now.” The world’s older peerto-peer lending firm unveiled plans to open the Barcelona hub in June this year, heralding the Catalan capital’s “exciting and fastgrowing tech scene”. There are currently around a dozen people working there, developing technology both for Zopa’s existing platforms and for its planned digital bank. Andrews said that Barcelona’s international community and its
attractiveness to Zopa’s UK staff played a part in choosing the city over more typical European tech hubs such as Warsaw, Bucharest or Berlin. “It’s very international,” Andrews said. “There are lots of people there from all over the world, in the same way that there are in London. Also, it’s really important that these operations are very well integrated and there is more enthusiasm from the people here to spend time in Barcelona than there might have been for some of those other places.” Zopa unveiled its plans
to apply for a banking licence late last year. The banking operations will sit separately to the firm’s core P2P business, but will enable the firm to offer a wider range of services to UK consumers. In June, the platform announced that it had closed a £32m equity fundraising led by Indian conglomerate Wadhawan Global Capital (WGC) and European venture capital fund Northzone, that would be used to finance the build-out of its bank infrastructure. To read the full interview with Giles Andrews, go to page 10.
cont. from bottom story page 1
Zopa co-founder Giles Andrews
NEWS
05
Octopus Choice targets £200m of lending in two years OCTOPUS Choice is targeting £200m of cumulative lending in its first two years of operation, as it looks to build its presence in the property market. The peer-to-peer lender, which was spun out of Octopus Investments in April 2016, is planning to capitalise on the demand from yield-hungry investors in a period of historically low interest rates. The platform offers property-backed loans to investors, offering four per cent returns, which are underwritten by another lender under the Octopus umbrella, Octopus Property. It raised around £50m in its first year of trading and has now facilitated over £130m of borrowing across
nearly 200 deals. “The volatility of the stock market and low interest rates mean that a lot of people want to benefit from these investments,” said Sam Handfield-Jones, head of Octopus Choice. Several P2P platforms have acknowledged the difficulties in matching this influx of funds, but Handfield-Jones said he felt “100 per cent confident” that the platform would be able to originate enough good quality loans, “as the market is so large”. Unlike most relatively new P2P lenders, Octopus Choice can benefit from its sister company’s track record, network and expertise.
Octopus Property, which underwrites Octopus Choice’s loans, launched in 2009 and has lent over £2.6bn with a default rate of less than 0.1 per cent. Loans are secured against property at conservative loan-to-values (LTVs), currently averaging at 61 per cent. In the case of a Brexitinduced slowdown in the property market, these conservative LTVs will help protect investors, Handfield-Jones said. “If the LTV is 61 per cent, the property has to lose 39 per cent of its value before an investor loses money, which should help us weather any changes in the property market,” he said. “Furthermore, Octopus
Choice has first charge on the property.” Octopus Choice was launched in consultation with financial advisers and over 400 are already using the platform. Handfield-Jones said that the firm’s strategy going forward is “more of the same”, namely “getting the message out there” by talking to IFAs and working with service providers such as legal and compliance firms to help educate advisers about the risks. Octopus Choice launched its Innovative Finance ISA in August and is in the process of building an app aimed at both financial advisers and investors, which it is hoping to launch by the end of the year.
Non-P2P firms target IFISA market SEVERAL firms outside of the peer-to-peer lending sector are looking to enter the Innovative Finance ISA (IFISA) space. P2P administrator Goji says it is in talks with existing financial product providers such as venture capital trusts (VCTs) and enterprise investment schemes (EIS) about providing IFISAs. VCTs and EIS are already regulated and ISA-eligible so would find it relatively easy to launch an IFISA. This would follow a trail already left by P2P platforms such as Octopus Choice and Downing, which both stem
from companies with a VCT arm. Jake Wombwell-Povey, chief executive of Goji, said much of this interest is driven by recent changes in the VCT and EIS sector. The government announced in 2015 that companies older than seven years will no longer will be able to receive funding from a VCT or EIS and firms with more than 250 employees will also be excluded. Furthermore, VCT money can no longer be used to fund management buyouts, a previously popular method
among the funds. “The government has tightened up VCT rules and now some managers haven’t raised as much or any new money,” Wombwell-Povey said. “We are looking to help those offering retail lending products outside of P2P who are trying to access the IFISA market. “We will soon see more established names looking into the tax wrapper, which will make the sector more exciting.” Meanwhile, Goji is still working with several P2P providers awaiting
authorisations, while its own IFISA-eligible P2P Lending Bond has raised £7m since its launch in March, Wombwell-Povey said. He said he expects investor interest to increase towards the end of the tax year once the IFISA gets more “airtime” in ISA season.
NEWS
07
Review sites may be misleading, say P2P platforms PEER-TO-PEER lenders are warning that investors should not rely too heavily on review sites. In recent years several different review sites have emerged, such as Trustpilot, Feefo and Google Reviews, making it hard for consumers to compare platforms in one place. Ashlee Dutton, marketing manager at ArchOver, which has four out of five stars on Trustpilot, thinks it is better to partner with just one. “It could become confusing if a site was showing too many review site partners,” Dutton said. “It could be seen as a negative if you use too many, as it may seem as
though you’re trying to make up for a low score or bad rating on one service. If you use a trusted review site that lenders and investors are familiar with then there isn’t a need for so many. “You don’t want to spam your lenders and investors with requests for a review.” Most other P2P lenders can be found on Trustpilot. A spokesman for Abundance, which has four out of five stars, said while ratings are important, users should also check how many reviews have actually been left. “It is important for these review sites to have significant critical mass – both themselves to attract
visitors, but also in terms of the number of reviews they have of a business; just a few reviews could be very misleading,” a spokesperson said. But not all P2P platforms can be found on the same review websites, making it harder to compare. For example, Landbay does not have a profile on Trustpilot but can be found
on Feefo with a rating of five out of five stars. Julian Cork, chief operating officer for Landbay, said the sites are a useful resource for investors, but warned that they are not akin to professional financial advice. “Reviews should be just one factor in an investors’ decision when selecting the right investment for their risk/return profile,” he said.
Bonds grow in popularity due to IFISA wrapper THE PEER-TO-PEER sector may be more associated with loans but its investors are becoming equally attracted to bonds. Crowd bonds, such as those offered by Abundance and Downing, are already popular among investors and these platforms have reported a boost in activity since the product was made eligible for the Innovative Finance ISA (IFISA) in November 2016. Downing launched two regular access £10m crowd bonds, offering initial interest rates of three per
cent per year, in July. Julia Groves, Downing partner and head of crowdfunding, said investors are attracted by the extra due diligence associated with bonds and the Financial Services Compensation Scheme (FSCS) investment protection, as these are MIFID-regulated products. “Crowd bond platforms offer fewer but larger investments, bringing greater single investment risk but allowing the platform to carry out more in-depth due diligence
due to the larger size of investments,” she said. “P2P platforms do carry out credit assessments on each loan, in many cases with ‘ratings’ given based on perceived risk. But crucially, in contrast to crowd bond platforms, there’s no obligation to disclose to consumers why, or how, this rating was given, and every platform has their own criteria.” Providers more typically associated with P2P have also issued their own bonds. Jake WombwellPovey, chief executive
of Goji, which provides administration for several P2P platforms and offers its own Lending Bond offering a five per cent return, says these types of assets are more understandable for financial advisers. “Bonds are attractive as they enable you to decouple the investor from the borrowing,” said Wombwell-Povey Additionally, LendInvest raised £50m last month in an oversubscribed bond listing that was open to retail investors.
08
NEWS
Accountants emerge as potential “kingmakers” for P2P business lending
ACCOUNTANTS could have a much larger role to play as introducers between small- and mediumsized enterprises (SMEs), investors and peer-to-peer lending platforms, industry insiders have claimed. A number of P2P lenders and accountants have told Peer2Peer Finance News that accountants could emerge as the “kingmakers” for SMEfocused P2P platforms by referring potential borrowers towards alternative finance. This follows recent research by P2P invoice finance platform MarketInvoice which found that 56 per cent of business leaders consider their accountants to be their most important external advisers when considering business finance options. “Partner introductions are a very important part of our business,”
said Darvish Heshejin, head of partnerships at MarketInvoice. “Around 20-30 per cent of our inward referrals come from accountants. “Accountants are increasingly becoming the advisors for their clients. We’ve seen more accountants advise their clients on funding decisions. That means they need to be aware of the wider availability of options on the markets.” While there is no formal introduction policy in place between accountants and P2P platforms, many lenders have chosen to work directly with smaller accountancy firms, educating them on the risks and opportunities involved with P2P lending. According to one accountant, a lack of mainstream funding is forcing accountants to look at alternatives as a way of proving their value to
their clients. “One of the key issues in any growing business will always be the funding of working capital,” said Bobby Lane, partner at accountancy firm Shelley Stock Hutter. “The type of facilities available have changed dramatically over the last decade and many business owners do not know what to do or where to turn. They are now looking to their professional advisers more than ever to translate the jargon and identify the appropriate type of funding to support their plans.” This represents a huge opportunity for P2P lenders to get on the radar of accountancy firms across the country. Lenders can then leverage the existing relationship between the accountant and the client, and build on that trust. The accountant may also
leaders. If they say that they need the invoice finance stuff, they will take it. “If we’re going to be a success, we need to get accountants on board.” Accountants are not regulated by the Financial Conduct Authority (FCA) and therefore cannot provide financial advice. However, they are able to suggest funding options for their small business clients. As P2P lending becomes more mainstream, some believe that accountants may even be able to suggest alternative investment opportunities for cash-rich businesses which are trying to diversify their funds. “Accountants often work closely with SMEs, advising both the individual and the entity, which puts them in a strong position for broaching discussions around P2P,” said an Octopus spokesperson.
If we’re going to be a “success, we need to get accountants on board” be able to process the documentation on behalf of their client, speeding up the whole funding process. “It is the accountants who are the kingmakers for our invoice financing products,” said Heshejin. “They are the ones whose referral will give the nod to business
“They are well placed to recognize the need for more attractive returns but less volatility than equities. “P2P can be a great solution for excess cash on a corporate’s balance sheet, so it’s a hot tip for accountants advising corporates.”
NEWS
09
Base rate hike in doubt, leaving savers at a loss DESPITE an unexpected rash of good economic news, the governor of the Bank of England has knocked down speculation of an imminent rate hike, spelling more bad news for savers. Governor Mark Carney (pictured) suggested that the base rate would not rise again until at least 2018, thanks to the long-term effects of low wage growth and the rising rate of inflation. “We think we are in the teeth of this right now so, over the course of the next quarters, it will continue to feel like this but as we move into the new year, we’ll see inflation start to come down and household income start to go up,” said Carney.
For the second month in a row, the rate of inflation was held at 2.6 per cent in July, despite speculation that it was set to rise. By contrast, in July 2016 inflation was 0.6 per cent. During the last meeting of the Monetary Policy Committee, members discussed their concerns over rising prices and slow wage growth, and predicted that inflation would peak at three per cent in October, before coming back down again. As a result of the low base rate, savers have been unable to make any income in real terms from high street banks. At the time of writing, the lowest-paying cash ISA was just 0.01 per
cent, compared with a range of Innovative Finance ISAs offering returns of up to 12 per cent. “It is clear that an alarming number of people are not saving at all, but in addition, even those that are diligently putting money away are being short changed by holding their money in close-tozero return cash accounts,” said Rhydian Lewis, chief executive of RateSetter. “Moving surplus cash into investments like peer-topeer loans, and accepting some risk in exchange for the prospect of better returns, could have added tens of billions of pounds to people’s wallets and purses over the last five years.”
Until inflation falls and the economy shows signs of stabilising in the long term, a base rate hike is likely to remain at arm’s length. For savers, the only returns are to be found beyond the banks: in stocks, shares, property, and alternative finance.
REGULATION UPDATE
ThinCats among FCA approvals, while Octopus and Ablrate roll out IFISAs DESPITE expectations of a summer lull, the industry has seen a number of regulatory approvals and Innovative Finance ISA (IFISA) launches. GLI Finance-owned FundingKnight won full authorisation in midJuly, just one year after the platform went into administration and was rescued by the Aim-listed investment firm. In early August, ThinCats gained full authorisation, after almost two years of waiting. One week later, a RateSetter spokesperson
tweeted that the firm was at “an advanced stage with the FCA.” However, it was reported that the FCA was struggling to deal with the complexities of some P2P approval cases. The City watchdog’s annual report for 2016 showed 99.3 per cent of consumer credit businesses with interim permissions had been transferred to full authorisation. “These applications are more complex cases which take us longer to determine and include commercial
debt management firms and P2P platforms,” the report said. As of 22 August 2017, the FCA was still considering a number of P2P applications, but some – including RateSetter’s – were believed to be in the final stages of approval. Meanwhile, the popularity of the tax-free wrapper around P2P investments continues apace. At the time of writing, ThinCats and MoneyThing were both preparing for their IFISA launches, while those already offering the
product were reporting huge demand. At the beginning of August, several platforms told Peer2Peer Finance News that IFISA uptake had exceeded their expectations, even after the end of the socalled ISA season. Both Ablrate and Octopus rolled out their IFISA offerings at the start of August. Ablrate said that its wrapper attracted almost 100 investors within two days of its launch, while Octopus Choice’s IFISA gained more than 100 investors in its first week.
10
PROFILE
New frontiers
There’s no-one better placed to discuss the rise of peer-to-peer lending than Zopa co-founder Giles Andrews. The industry veteran talks to Andrew Saunders about regulation, Brexit and why this is the most exciting time for Zopa…
“I
T’S THE MOST EXCITING THING we’ve done since the day we launched the business. I say that tiresomely often to the team.” It may be 12 years since the world’s oldest peer-to-peer lender Zopa made its first loan, but co-founder, former chief executive and now chairman Giles Andrews is full of the energy and enthusiasm of a start-up entrepreneur. What’s getting him so fired up? Zopa’s plan to launch a bank – admittedly a bold project given the stringent, costly and time-consuming tests involved. But also perhaps a counter-intuitive move for the business which set the whole P2P ball rolling in the first place. Isn’t the point of the sector precisely that the companies involved in it are NOT banks? Andrews is having none of it – the original aim was to disrupt finance by doing things better
than they had been done before, he says, and this latest move is simply the next step on that journey. “It will be a radically simple bank,” he says. “We will be offering term deposits, which are very simple and make the treasury function easier, but we won’t have a current account. We don’t think that is the right way in.” Current accounts are regarded by the traditional banks as the gateway product, he says, but what that means in practice is that no-one makes much money from them and thus that customers suffer from the hard sell as a result. Witness the PPI scandal, with costs at £40bn and counting. “We don’t want to do that, we want the product you buy when you first join the bank to generate a profitable relationship in and of itself, so there will be no pressure to sell you other things,” he explains. The firm announced
its application to the Prudential Regulation Authority (PRA) for a banking licence in November 2016 and although the duration of the process is uncertain, Andrews seems confident both of the outcome and of the progress made so far. “We don’t know how long it will take,” he admits. “But we are a good way along and have done the vast majority of the thinking and documentation.” Zopa’s experience of working with the Financial Conduct Authority (FCA), both when drafting the regulations that now apply to P2P and during the authorisation process, has helped prepare it for this latest bout of regulatory tennis, he says. “I am not saying
that being regulated as a bank by the PRA is not materially more rigorous than regulation as a P2P lender by the FCA, but we had started that journey already. We had created a compliance function, for example. So it is less daunting for us than it would be for a complete start-up.” The move is also surely a reflection on increasing competition in the P2P sector, with dozens of rivals where previously there were but a handful. Turning yourself into a bank has the great advantage of being pretty hard to copy. “I don’t think we’ll be the only one but I don’t see a rush to it,” asserts Andrews. “You need a certain scale to make the regulatory journey affordable. It’s not a trivial undertaking
PROFILE
and the fact that [the FCA] know we have a profitable business and the credibility to raise further funds... it’s just not an option for many, it’s not something we could have done five years ago.” Zopa stands for ‘Zone of Possible Agreement’, a negotiating term describing the pricing window where a potential deal can be made that works for both parties. Having come up with the idea for an ‘eBay for money’, co-founders James Alexander, David Nicholson and Richard Duvall – who all came from internet bank
Egg – quickly brought Andrews on board for his fundraising acumen. After starting his career with car dealership Lookers, he had become something of a start-up angel investor and had learned how to shake the magic money tree. They wanted to raise £30m, he said they’d have to make do with £5m. Despite – or perhaps because of – such thrift, it worked. They got their first funding from Benchmark Europe (now Balderton Capital), whose US parent also backed eBay, and Wellington Capital. Zopa opened for business in 2005,
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The sector will continue to flourish, “although there will be headwinds – lending is a cyclical business” broke even in 2011 and in January this year Zopa became the first P2P lender to pass the £2bn lending mark, having made a total of 300,000 loans matched between 246,000 borrowers and 75,000 investors. The platform originates unsecured consumer loans for purchases such
as new cars and home improvements. The platform’s default rate in 2017 to date stands at 0.08 per cent. The highest default rate the platform has recorded so far was 4.21 per cent in 2008, in the aftermath of the financial crisis. Zopa is now lending at about £80m a month,
12
PROFILE
GILES ANDREWS CAREER MILESTONES 1987 – Graduates from Oxford University with an MA in Experimental Psychology. Joins car dealership Lookers. 1992 – Co-founder and director, car sales start-up Caverdale Group 1997 – MBA, Insead 2004 – Co-founder and CFO, Zopa 2007 – CEO, Zopa 2011 – Founder chairman, Peer-to-Peer Finance Association 2015 – Chairman, Zopa 2017 – Chairman, MarketInvoice
Opening the Barcelona “ office is an acknowledgement
of the challenge of recruiting highly skilled developers in this country.
”
more than it did in the whole of its first five years in business. There’s plenty more to come, says Andrews. “We will do a billion pounds this year, we’re far enough in to be confident of that.” But – there’s always a but isn’t there? – success comes with a few strings attached. In a world of near-zero interest rates, there is too much money chasing too few loan opportunities. An imbalance between supply and demand means that Zopa’s platform is currently closed to new retail investors. How will it go about finding more suitable borrowers? One thing it won’t do, says Andrews, is lower its lending standards. “There are always constraints on business, those are the things that the marketers try to overcome,” he states. “That’s part of the rationale of starting a bank, to allow us to expand.” It has also done partnership deals with the likes of Uber, to finance car loans, mobile phone provider Unshackled and money management app Pariti. Would he like to see a time when there are no restrictions on new money? “If we can do it in a way that is consistent with our lending standards and that will provide the long-term returns that people are looking for,” he says. “We’d
love to have matched supply and demand but it is challenging to deliver.” The ultimate aim in becoming a bank, he says, is to be able to offer its customers credit cards – a market that is larger than P2P lending but tricky to finance without balance sheet operations. “The credit card in your pocket could have no balance on it, or it could be up to the credit limit. The card provider has to make that money available to you whether you have spent it or not.” But that will have to wait until the bank is open and has taken sufficient deposits to fund the operation. Another constraint Zopa faces, common to many technology businesses these days, is finding affordable, capable developers to work on its platforms. It’s a situation which Andrews fears may be made worse as a consequence of Brexitrelated restrictions on immigration, and so the business has taken the defensive step of opening a tech centre in Barcelona. ‘It’s always been a constraint, talk to any tech business in London,” he affirms. “Opening the Barcelona office is an acknowledgement of the challenge of recruiting highly skilled developers in this country, and a concern that the situation might get worse because
PROFILE
of Brexit. I don’t think it makes you a radical pessimist to say that now.” There is currently a team of about a dozen people in the Spanish office, working partly on the existing platforms and partly on new ones for the bank. But why Barcelona, and not one of the more usual European tech hubs like Warsaw, Bucharest or Berlin? “Because it’s very international,” Andrews explains. “There are lots of people there from all over the world, in the same way that there are in London. Also, it’s really important that these operations are very well integrated and there is more enthusiasm from the people here to spend time in Barcelona than there might have been for some of those other places.”
Having spent eight years as the chief executive, in 2015 he handed the hot seat over to Jaidev Janardana and became chairman. Making that switch from running the company to running the board is notoriously tricky. How has he found it? “I was incredibly fortunate in being able to recruit someone in Jaidev who could become my successor,” he says. “He joined as chief operating officer, but [the succession to chief executive] was clearly in both our minds. “But having found that person you have to step away, which can be difficult. But we both got lucky in that we built a relationship of trust very quickly. You can’t take that for granted - without that trust I would have found it impossible to step away.” He’s also taken on
the role of chairman at invoice finance platform MarketInvoice, leading to some speculation that a tie-up could be on the cards. He deftly deflects the question, saying only that “it’s a reflection of the fact that I spend less time here. It’s another fintech platform, although not P2P, on a journey but younger than us so they haven’t got so far. It’s a part-time role around chairing the board and mentoring the founders. You’ll have to ask them if I am helping or not.” How does he think Zopa will fare, especially in view of the gathering clouds of gloomy data around consumer finances? “The sector will continue to flourish, although there will be headwinds – lending is a cyclical business,” he says. “There
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is no question that some pockets of consumer lending have deteriorated a bit – sub-prime car finance and sub-prime credit cards – but they are not the kinds of things we do.” (In the weeks following the interview, Zopa announced that it had reduced its exposure to higher-risk loans due to the UK’s worsening consumer credit outlook, suggesting the cycle might be turning already.) So who’s going to be the first £3bn lender, I ask as our time draws to a close – consumer lender Zopa or small business lender Funding Circle? “It’s a friendly rivalry because we don’t compete,” he grins. “They are doing more a month right now, but I think you’d probably get better odds on us.”
ANNUAL SURVEY
15
Annual survey
Peer2Peer Finance News interviews platform executives and
investors about their views and outlook for the industry Analysis by Marc Shoffman
P2P EXECUTIVE SURVEY
How confident are you about the UK’s economic outlook over the next 12 months? 100%
80%
60%
40%
20%
0% Extremely confident
Slightly confident
Neither confident nor unconfident
Slightly unconfident
Extremely unconfident
T
HE FIRST PEER2PEER FINANCE NEWS annual survey comes at a transformative time for the industry. With platforms experiencing rapid growth, a flurry of Innovative Finance ISA (IFISA) launches and an ongoing regulatory review, the past 12 months have been action-packed to say the least. By interviewing c-level
executives from peer-topeer lending firms and retail investors, P2PFN hopes to shed a light on the current attitudes, challenges and outlook for the sector. Fear of platform defaults has been highlighted as the main concern among industry executives and investors, while it appears yield rather than IFISAs are the main reason for the recent influx of funds.
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ANNUAL SURVEY
How confident are you about the growth of your business over the next 12 months?
Do you expect the credit market to tighten over the next 12 months?
Extremely confident Unsure
Slightly confident
22.22%
Neither confident nor unconfident Slightly confident
No
27.78%
Yes
50%
Extremely unconfident 0%
20%
40%
60%
80%
100%
What are the main challenges facing the P2P industry? Economic downtown
A
Platform failures
Finding suitable borrowers
Other*
0%
20%
40%
60%
80%
100%
* New, restrictive regulations; lack of education/awareness; low rates
ssessing the main hurdles facing the P2P industry, the biggest concern among executives was platform failures, cited by a third of respondents. Concerns were also raised about increasing defaults on platforms, while a quarter were worried about finding suitable borrowers and 11 per cent feared an economic downturn. Investors held similar worries, with 69.8 per cent saying they would be put off investing in P2P if there were a platform default. An economic downturn
was the second most popular reason for not investing in P2P, cited by 16.9 per cent of investors. Platforms were less concerned about the current political and economic uncertainty, with two thirds confident about the UK’s outlook over the next year, of which 5.56 per cent are extremely confident and 61.1 per cent slightly confident. Just 16 per cent were slightly unconfident. Brexit may have attracted a lot of attention, but 55 per cent of respondents from platforms were indifferent
ANNUAL SURVEY
How supportive do you think the UK government is of P2P lending? Extremely supportive
Slightly supportive
Slightly unsupportive Extremely unsupportive 20%
40%
60%
80%
100%
How supportive do you think the UK media is of P2P lending? Extremely unsupportive Slightly unsupportive
33.33%
5.56% Slightly supportive
33.33%
Neither supportive nor unsupportive
Do you have any other comments about the future of the P2P industry or the UK economy that you would like to share? “Technology will be the defining factor in the next five years, even more so than economic factors. The industry is wandering away from its beginnings, as an industry that adds efficiencies in the finance supply chain. Advancements in credit solutions, settlements and deal flow control will sort the wheat from the chaff over the coming period.”
Neither supportive nor unsupportive
0%
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“The government, regulator and media remain broadly supportive, but greater pressure on the industry and individual platforms is critical to investor protection and the future growth of the sector.” “The P2P sector needs to do a better job of engaging with the public and stakeholders. It is still new, still mis- or not understood, and still untested, to a degree.” “The current weakening in economic conditions will begin to expose some models and platforms quite quickly.”
27.78%
“The P2P sector needs to do a better job of engaging with the public.”
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ANNUAL SURVEY
How has Brexit impacted your outlook for your business?
How supportive do you think the UK regulator is of P2P lending? Extremely supportive
Feel more confident
Slightly supportive
Feel less confident
Neither supportive nor unsupportive
Indifferent
Slightly unsupportive
Other*
0%
Extremely unsupportive
20%
40%
60%
80%
100%
* Responses include “too early to say”
0%
20%
40%
about its impact. Despite two thirds of executives feeling confident in the economy, half of respondents expected credit markets to tighten in the next 12 months, while 27 per cent felt they wouldn’t and 22 per cent were uncertain. Platforms also called for greater awareness for the public and small businesses to help the industry grow, particularly around differences in propositions, such as between secured and unsecured lending. Some of this awareness may be down to the way
60%
80%
100%
the sector is portrayed in the press, the survey suggests. The majority of platforms believe the government and regulator are supportive of P2P lending, but there was more concern about the UK media’s attitude, with 33.3 per cent feeling coverage was slightly unsupportive. Another 33 per cent felt the press was slightly supportive while five per cent felt it was extremely unsupportive. When investors were asked about why they choose P2P, 83 per cent of respondents said they were looking for yield, while 15 per cent used
the sector to diversify their portfolio. Just 1.8 per cent were attracted to the tax-free earnings of an IFISA. Despite the hunt for yield, investors were also more likely to invest if there was a safety net such as a provision fund. The high returns in the sector have previously been an upside of taking the risk of not having the protection of the Financial Services Compensation Scheme (FSCS), but 57 per cent said they were more likely to invest if there was a safety net. Another 37 per cent said it didn’t impact their
decision, while five per cent were less likely to use a platform offering this service. Superior interest rates have long been a unique selling point of the sector and, as the survey shows, continue to be highly regarded. If the Bank of England does raise rates significantly, the pressure will be on the industry to show it can still attract investors. However, the bullish outlook of most P2P executives should give some reassurance that this an industry that will go from strength to strength, no matter what hurdles come its way.
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ANNUAL SURVEY
P2P RETAIL INVESTOR SURVEY
What are your main reasons for investing P2P?
Would anything put you off investing in P2P?
Tax-free earnings through an IFISA
Diversification
15.09%
1.89%
Tighter regulation of the sector
11.32%
Economic slowdown
16.98%
Yield
83.02%
Does a platform investing alongside you or providing a safety net such as a provision fund make you more likely to invest?
Bank of England rate hike
Platform default
1.89%
69.81%
“ The current weakening
More likely
in economic conditions will begin to expose some models and platforms quite quickly
Less likely
”
It doesn’t impact my investment decision 0%
20%
40%
60%
80%
100%
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FEATURE
Crystal clear
Transparency is pivotal to peer-to-peer lending. But can you have too much of a good thing? Andrew Saunders investigates…
P
EER-TO-PEER LENDING HAS been built on a promise of transparency: question any platform founder and chances are that the the desire to be more open and accountable than banks will not be far from the top of their list of why they wanted to get into P2P in the first place.
“Transparency is a good thing for investors,” says one such founder, Karteek Patel of business lender Crowdstacker. “This industry is founded on trying to do things better than they have been done in the past, by providing a better customer and investor experience. That’s a key
driver that is pushing the whole industry in the same direction.” Add to that the launch of the Innovative Finance ISA and fears over an increasingly challenging economic climate, and the pressure on transparency is only going one way. The Financial Conduct Authority’s
interim feedback from its review into the sector last December expressed concerns over transparency. The City watchdog was worried about the way that some platforms market themselves to consumers, leading to speculation that regulations might be tightened up. The
FEATURE
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challenge for this sector as it grows is to turn data “ The into products that are useful and easy to interrogate ”
full report is yet to be published but the auguries are clear – it’s time to get your disclosure ducks in a row. Agreement on something in principle is not the same as agreement on how it should be tackled in practice, however, and this is where the picture gets more complicated. What data should be disclosed, when and to whom? How useful is it to investors? Can you ever have too much transparency? As the sector expands and seeks to take on both a more mainstream face and more mainstream customers, how it responds to these questions will be an important test in the eyes both of investors and wider public opinion. “At its heart P2P is very simple but as models evolve, data transparency provides evidence of how they perform,” says Robert Pettigrew, director of self-regulated trade body the Peer-to-Peer Finance Association (P2PFA). “It puts them under scrutiny to a degree not
faced by other financial services sectors.” Its members, which include Zopa and Funding Circle, notched up £8.45bn of cumulative lending by the end of the first quarter of this year. Platforms must commit to publishing their full loan books, including details of actual defaults and those that are expected, as part of the joining process. The association also provides standard definitions of arrears, defaults and capital losses to help investors compare performance more readily across platforms. Transparency has also been great for the industry, says Pettigrew – the fact that P2P platforms willingly submit to the kind of public scrutiny that would send most traditional banks into meltdown has allowed this young and innovative sector to operate under a relatively light regulatory regime. But as the industry matures, quality and accessibility are becoming at least as important as
quantity when it comes to data, he adds. “I am from a political background, and in that world the best way to hide something is to conceal it in a massive data dump,” he says. “Then you can say ‘I was open but you didn’t find it’. “The challenge for this sector as it grows is to turn data into products that are useful and easy to interrogate, so that investors can make better decisions.” For Crowdstacker’s Patel, whose firm is not currently a member of the P2PFA, the key point to get across is risk. He and his team go to great lengths to ensure that would-be investors are fully apprised of the fact that they are buying an investment product, with the associated risk/reward trade-off that entails. “There is more risk in P2P and therefore more return than for example on a savings account,” he asserts. “We don’t hide the risks. In fact we have an interactive risk test on our application form, which asks questions
to make sure that you understand that your capital is at risk.” Multiple failures of this test can lead to potential investors being locked out of the platform, he adds. “It’s not a P2PFA requirement but we think it is a good approach; people need to understand the risk.” Crowdstacker facilitates a small number of relatively large loans to small- and medium-sized enterprises (SMEs) – the maximum loan size it offers is £50m – and the investor decides which projects to back, rather than the platform. The firm has only funded four loans since its 2014 inception, the largest so far being just over £15m – offering a return of up to 5.4 per cent – to another lender, Amicus. That model means that qualitative information – the type of business being loaned to and the track record and competence of the management team, for example - is as important as quantitative data, says Patel. “If your loan decisions are purely data
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FEATURE
wants to provide transparency “ Everybody but the data has to be relevant ” driven, then providing loan data is enough. But we do a small number of heavily curated loans, so there is more to disclosure for us.” So while he supports disclosure in principle, the idea of a standard set of data that everyone should have to publish could be more troublesome. “One area we might struggle with is expected default rates, for example,” he says. “It’s too generic. Our default rate is zero but we don’t publish that because we
don’t want people to make decisions based on that.” This highlights perhaps the biggest issue when it comes to transparency – the fact that P2P is a single term used to describe a very broad range of often substantially different business models. “It’s a very wide sector with unsecured loans to consumers at one end and very heavily secured loans at the other,” says Jane Dumeresque, chief executive of Folk2Folk, a Cornwall-headquartered
lender specialising in loans to local businesses secured against property. Coming up with a single set of disclosure standards that are fair, appropriate and useful for all these business models is a challenge. “Everybody wants to provide transparency but the data has to be relevant,” she says. “We also have to protect the privacy of the borrower under data protection rules.” So if a borrower fails to make a payment on time, how does Folk2Folk tackle
the need to treat both the investor and borrower fairly? Immediate disclosure could prompt other creditors to come knocking, causing a potential cashflow problem and jeopardising the loan and perhaps even the viability of the borrower’s business. On the other hand, investors are also understandably keen to know if a loan looks like it might be going bad. “We have a three-day window between the money being collected by us and going out to the lender,” she explains. “If there is a problem we will sort it in that window. If we can’t, then we tell the lender.” n the whole P2P providers have done a good job on transparency, says Neil Faulkner, founder of independent sector analysis firm 4th Way. “With P2P you get much more information about loans than you do from the manager of an equity fund, for example.” But there is more to do, especially when it comes to comparing offerings across different platforms. The launch of the Innovative Finance ISA has even seen P2P products appearing alongside savings accounts on some consumer money websites, he points out. The kind of customers who use those sites are used to much simpler metrics which are not yet widely
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FEATURE
available for P2P. “Too many investors assume that P2P is a safe as a savings account, but it is not,” he asserts. “The industry does need to make a unified standard for comparison, but collaborating with your peers in order to standardise is not front of mind for many platforms, which are still in the growth phase of the cycle.” Faulkner even goes so far as to advocate that P2P lenders should bite the bullet and disclose their spread (that’s the difference between what they get from the borrower and pay to the lender). To many finance professionals the spread is their deepest, darkest and most commercially sensitive secret, and even openminded P2P types might quail at the thought of such radical transparency. “Platforms don’t like to talk about the spread,” he says. “They worry that revealing it could allow competitors to undercut them or copy their models. But I think they are wrong.” Well, it would certainly help silence those critics who suggest that as the sector matures it will tend to become more like the institutions it set out to disrupt. “The first one to do it might lose out in the short term but in the longer term they would win,” adds Faulkner. “It would be a real shock to find that the
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aggregate effect of more transparency was negative.” It’s one thing to say you are transparent, but the proof is how you act when things go wrong. This was a test recently faced by Ratesetter over bad debts in its now-discontinued wholesale lending division.
Ratesetter’s head of policy and communications John Battersby. “They were three unusual sets of circumstances and the numbers involved would not get the banks excited, but we felt it was important to be very clear in our communications.” The firm also stated that
make those promises, but we do offer a decent risk/ return ratio and are safer than the stock market generally.” Ultimately, while greater standardisation of disclosure should make investors’ lives easier, the variety of the platforms available and the products
In July, the platform announced that it had made “interventions” when a number of its former wholesale lending partners had fallen into financial difficulty, by absorbing their losses onto its balance sheet. “We made a couple of large loans, they went bad and we felt it was important to let investors know directly how we had acted to protect their interests,” says
any investor who wished to withdraw their money from the platform as a result of the news could do so, fee free, for a limited time. The platform’s overall expected default rate remains unchanged at 2.9 per cent. It’s a reminder, he says, of the differences between a bank and a P2P lender – the flipside to the greater levels of transparency is the presence of risk. “Banks promise to be safe and to offer liquidity. We do not
they offer will always mean that they require more due diligence than a traditional savings product. Caveat emptor remains good advice, says Pettigrew. “Of course, I would say this but why should anyone operating in the market be shy of adhering to [the P2PFA’s] operating principles? If there isn’t a certain level of transparency, you have to ask what they might be concealing, and why.”