Peer2Peer Finance News April 2017 by Alternative Credit Investor

SAVING STREAM ENTERS BOND MARKET

>> 4

The lender looks to attract less proactive investors PLATFORMS MULL LOWERING BORROWERS’ RATES >> 5

The quest to boost loan originations

UK Crowdfunding Association director Atuksha Poonwassie sees a golden opportunity >> 11

ISSUE 7 | APRIL 2017

IFISAS: FULL STEAM AHEAD! PLATFORMS offering the Innovative Finance ISA (IFISA) have seen a spike in inflows in recent months, as retail investors clamour to make the most of tax-free earnings before the end of the financial year. Crowd2Fund has seen 50 per cent month-on-month growth in IFISA volumes since January, with 95 per cent of its investment now going through the tax-free product. “We expect the IFISA investment to continue to increase with the new IFISA season and we’d like to see the growth rate stabilise at 30 per cent

month on month,” the firm said. LandlordInvest said that average funds deposited into its IFISA soared by a mammoth 88.7 per cent to £4,536 between 10 and 22 February 2017. And buy-to-let lender Landbay, which launched its propertybacked IFISA in February, said that it now forms a third of newly-opened Landbay accounts. Meanwhile, Crowdstacker revealed that its average IFISA investment rose by 50 per cent between December 2016 and February 2017, with the number of people

taking out IFISAs almost doubling over the period. And Lending Works said it has exceeded its target in terms of IFISA uptake, with the majority of new money now coming via the ISA product. With 6 April looming, nearly a dozen new IFISAs came on the market last month, from firms including Property Crowd and HNW Lending. Yet the majority of the sector’s largest players are not going to be authorised quickly enough to launch the IFISA during the 2016/17 tax year. “The process never

takes this long, it’s crazy,” said Gillian Roche-Saunders, partner at law firm Bates Wells Braithwaite. “However, there’s significant pressure on the Financial Conduct

Authority to get these permissions through. “I’d be really surprised if by the end of summer the largest players are not authorised or told to change their business models.”

RateSetter targets growth in SME lending sector RATESETTER is planning to ramp up its business lending, after working behind the scenes last year to boost its small-

and medium-sized enterprise (SME) technology and grow its dedicated team. The peer-to-peer platform’s main

focus was originally on consumer lending. Even now, it has a ratio of nine to 1 between consumer and small business

loan volumes. But it sees opportunities for growth within the sector, as SMEs across the country grow

increasingly hungry for working capital. “We now have all the right technology and relationship management in >> 4

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EDITOR’S LETTER

Published by Royal Crescent Publishing

WeWork, 2 Eastbourne Terrace, Paddington, London, W2 6LG info@royalcrescentpublishing.co.uk EDITORIAL Suzie Neuwirth Editor-in-Chief suzie@p2pfinancenews.co.uk +44 (0) 7966 180299 Kathryn Gaw Contributing Editor kathryn@p2pfinancenews.co.uk Anna Brunetti Chief Reporter anna@p2pfinancenews.co.uk +44 (0) 7546 995334 Marc Shoffman Senior Reporter marc@p2pfinancenews.co.uk PRODUCTION Karen Whitaker Art Director Zac Thorne Logo design COMMERCIAL sales@p2pfinancenews.co.uk SUBSCRIPTIONS AND DISTRIBUTION info@p2pfinancenews.co.uk Find our website at www.p2pfinancenews.co.uk Printed by The Manson Group ©No part of this publication may be reproduced without written permission from the publishers. Peer-to-Peer Finance News has been prepared solely for informational purposes, and is not a solicitation of an offer to buy or sell any 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.

AST month’s big fiscal event was a damp squib for the peer-to-peer finance industry. Chancellor Philip Hammond’s first – and last – Spring Budget did not include one mention of fintech, let alone P2P. The industry lambasted the Budget for failing to support small businesses and the property sector. Innovative Finance ISA rules also came under fire, as they were not changed to allow investors to diversify across a number of platforms. Luckily, Hammond can make up for it this month. The UK government and fintech trade body Innovate Finance are working together to deliver the second annual UK Fintech Week, which will take place in London from 10 to 13 April. Hammond will be joined by Bank of England Governor Mark Carney, City minister Simon Kirby and other industry voices, to focus on the issues affecting the sector, including investment, access to skills and business support to start-ups. This is perfect timing for the government to reaffirm its support for fintech, so soon after Article 50 was triggered, marking the start of Brexit proceedings. This is a sector particularly dependent on foreign direct investment; yet an EY report last year found that the UK was falling behind other countries on this front. Britain’s fintech industry employs over 61,000 people and generates more than £6.6bn in revenue – with everything to play for, this is the time for the government to pull out all the stops. SUZIE NEUWIRTH EDITOR-IN-CHIEF

NEWS

cont. from page 1

place to help SMEs access finance in the easiest possible way” said Paul Marston (pictured), who

joined the firm in January last year as managing director of commercial finance. Small businesses have shrugged off Brexit, with the weak pound creating a very strong case for boosting exports, Marston said. The firm found that in the South East region alone, at least 40 per cent of small companies are looking to grow in the next six months. “What really needs to happen now is that they grow familiar with the available alternatives to bank finance to become truly operationally efficient,” Marston said.

The macro conditions, combined with highstreet lenders’ shortsighted, profit-based approach and Funding Circle’s booming business last year clearly demonstrate that there is room for everyone in the SME finance space, he added. The rival platform’s success in the segment only proves that “there’s a huge market, which means we don’t have to compete head-on,” he said. “Besides, our proposition is different as we don’t use an auction house, which means we can provide

more immediate credit.” RateSetter has streamlined its online application process to ensure that SMEs can obtain finance within three hours - a strategy that was validated by the recent approval of a £100,000 loan in 41 minutes, Marston said. Part of the online form is pre-filled quickly through Companies House data. “But public data can’t tell you everything about a business, so we have also set up a regional relationship manager network so that we can really hear what their story is,” he added.

Saving Stream dips its toe into the bond market SAVING Stream is launching its first-ever bond, looking to entice less proactive fixedincome investors by providing indirect exposure to whole loans. The peer-to-peer lending platform, which channels funds to property projects, is making its first foray into the bond market by soft launching one-year and three-year notes that will yield five and six per cent returns respectively. The move provides a very attractive investment to typical bond buyers interested in less-actively managed products, Saving Stream said.

“The bond is attractive for investors who want exposure to property without the hassle of regularly having to buy and sell individual property loans,” a spokesperson told Peer to Peer Finance News. The notes will yield lower returns than direct P2P investment through the platform, but easier access to secondary market liquidity. “The structure of the bond is in contrast to some of the higher returns available on certain individual loans from the company, which are typically short-term property loans requiring

active management by the investor, and which may often include periods where funds are not invested,” the spokesperson added. Contrary to Saving Stream’s loan auctions, which can be heavily oversubscribed - sometimes by more than 200 per cent - the bond will allow clients to invest as much as they want at any given time. They will also guarantee the same secured structure as the whole loan investment, as they will be fully backed by the same real estate assets. “This means that, in the event of a default, there is

expected to be sufficient equity to allow loan funds to be recouped with the sale of the security,” the spokesperson said. The platform’s debut bond fits with its plans to adjust its interest rates in order to triple its monthly lending to between £20m and £25m. A spokesperson said that the platform plans to reduce its average investor returns, so that it can lower the rates it offers borrowers and originate more loans. This in turn would help Saving Stream continue to grow and remain profitable, the spokesperson added.

NEWS

Platforms mull lowering fees to attract new borrowers RECENT moves by peerto-peer lenders to cap new money transfers have highlighted an imbalance in demand between investors and borrowers. Historically low interest rates and rising inflation are driving consumers in search of yield towards P2P. This is a trend which is set to continue as more platforms launch the Innovative Finance ISA, giving individuals the opportunity to enjoy tax-free earnings on their investments. Many platforms are struggling to meet this rising demand, leaving

them racking their brains to find the right strategy to attract new borrowers without loosening their underwriting standards. Boosting their distribution network is likely to be the most obvious route, as Lending Works’ recent strategic partnership with an online financial service aggregator confirmed. But it might also be the least daring move firms are willing to consider. At least two wellestablished names are looking to go as far as lowering the fees they charge to borrowers.

Even the smallest difference in absolute pricing between P2P providers hugely impacts the volumes they attract from borrowers, creating a “staggering” gap between the cheapest and the thirdcheapest provider, according to an insider at one of the platforms. “We definitely have flexibility within that area,” said a spokesperson from another lender, referring to their borrower fee range. While re-jigging investors’ interest rates has become common practice among platforms, altering

borrowers’ fees is more unusual despite an increasingly competitive lending market. And it would be the clearest sign to date that P2P players are ready to step up their game to attract new borrowers. The first source pointed out that only a few firms are currently posting profits, and with minimal fees charged to their investors, borrower fees remain their core source of income. “To be honest, I don’t see how else you can keep your business sustainable in the longer term [without lowering fees to attract more borrowers],” the source said.

Investor incentives remain popular marketing tool WHILE PLATFORMS step up their quest to attract new borrowers, many are still looking to entice investors as well, as cashback offers and new client incentives continue to play a role in their marketing strategies. Even the more established players such as RateSetter and Funding Circle are rolling over their lucrative reward schemes - the former giving new customers a £100 bonus on a minimum one-year £1,000 investment, and the latter offering its existing members a £50 promotion if they bring a friend on board by the end of March, on a minimum £2,000 investment. “We don’t currently have an end date for the campaign,”

said a spokesperson from RateSetter. “We’ve found that these are an effective way to attract investors for the long term, as the vast majority of investors who have joined as a result of the campaign (which was also running at the start of last year) have stayed on after the offer period has ended.” Cashback offers are even more popular among smaller players, who often have a greater need to attract new customers, explained Relendex’s chief executive Michael Lynn. “If you have to compete with bigger platforms, that have a market-scale business model with paid ads all over Google and price comparison websites, it’s important

to keep a different composition of marketing tools,” he said. “And until you reach a sufficient level of liquidity on your platform, you still have to account for shortterm mismatches between investors and borrowers.” The P2P platform, which specialises in secured property lending, offers a 0.5 per cent bonus to new investors. It also

pays out a 0.5 per cent sum to any investor who transfers funds within the first two working days of a new loan launch - a type of incentive that is particularly important to its auctionbased model, Lynn said. “This is key in getting the bulk of commitment in as early on as possible, to make the auction as effective and efficient as possible,” he said

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NEWS

Industry urges for standard default definition PEER-TO-PEER lenders are backing calls for a standardised definition of defaults in the sector. Although actual default rates are low, the definition of when a loan has failed is not consistent across all platforms, making it harder for investors to compare. Members of the Peer-toPeer Finance Association (P2PFA), such as Zopa and RateSetter, define a loan as being in arrears if repayments haven’t been met for more than 45 days. A loan is then declared as being in default, and recoveries started, if the amount owed becomes 120 days late. All P2P lenders have their own management processes that can see a loan ended early or extended, but many non-

though in the different ways loans are rolled up such as where interest isn’t paid right until the end.” Property lender Kuflink declares a default at three missed payments at any point in the loan period, while a Saving Stream asset-backed loan is in default if the amount owed is not paid within 180 days, which the platform calls a tolerance period. Interest will still be paid to the lender for the first 90 days of the tolerance period, but after that it will be accrued but not credited until the underlying security is sold. The final interest credit will depend on the repayment secured from the asset sale. The borrower may also get a loan extension if they are able to provide

As a young but growing “ industry, there is some variation between the default polices of the various P2P lenders

”

P2PFA members have different definitions when it comes to putting a loan into default. MoneyThing founder Ed Pearce says the business lending platform defines a default as when a borrower fails to repay for two consecutive months. “An industry definition would be useful,” he said. “There may be issues

funds to pay the interest owed within the tolerance period. “As a young but growing industry, there is some variation between the default polices of the various P2P lenders, to reflect their own business models and to strike the correct balance between certainty for their investors and tolerance

for their borrowers,” said a spokesperson for Saving Stream. “It may be that as the industry matures, certain approaches are seen to strike the correct balance and are then adopted more uniformly.” Despite the differences, the P2P rules are actually slightly more definitive than those in the mainstream banking sector. The Council of Mortgage Lenders says all banks will have different definitions and most will focus more on addressing the arrears before declaring a default. “Though arrears are related to defaults, lenders generally avoid simply conflating the two,” said a spokesperson. “Generally a customer needs to be several months behind in their payments before they are considered to have defaulted, or they may have breached another condition while still being fully paid up.”

As an example, HSBC says it declares a default at 90 days past due. In contrast, Royal Bank of Scotland (RBS) told Peerto-Peer Finance News that an arrears would generally be declared after one month of missed payment on a loan or mortgage, but its definition of a default is less prescriptive. “A default may be filed when you are at least three months in arrears, and normally by the time you are six months in arrears,” said an RBS spokesperson. “There are exceptions to this which may result in a default being recorded at a later stage, such as secured or long-term loans such as mortgages, or if the product operates in a more flexible way such as current accounts, student loans, home credit. “If an arrangement is agreed, a default would not normally be registered unless the terms of that arrangement are broken.”

NEWS

P2P lenders see opportunities in trade finance TRADE FINANCE is becoming a targeted area of growth for peer-to-peer lending platforms. MarketInvoice, which provides invoice financing, has signalled its intentions to expand into trade finance, while Sancus Finance, formerly Platform Black, says businesses are increasingly turning to the product for working capital. Trade finance comprises a product such as a letter of credit from a bank that guarantees a business will be paid for the goods it is sending. Now platforms such as MarketInvoice and Sancus Finance are giving P2P investors a chance to fund these deals. “Many businesses have relied on traditional bank funding and still do, but

they are increasingly searching for innovative forms of finance that help them access the finance they need when they need it,” said a spokesman for Sancus Finance, who added that trade finance was becoming an increasingly popular option for firms. Anil Stocker, chief executive and co-founder of MarketInvoice, recently told Peer-to-Peer Finance News that the company has longterm plans to enter the sector. “If we start to get into trade finance, helping people trade around the world, that automatically turns us into a global business,” he said. P2P lenders’ interest in trade finance has also been noticed by the Asset Backed Trade Association (ABTA), of which Sancus Finance is

an affiliate member. “With low interest rates from other investment opportunities and the economy still relatively benign, the increased interest in investing through P2P platforms is understandable,” said an ABTA spokesperson. “However, there are a particular set of skills that are required to successfully fund trade, both domestic and even more so internationally. The successful P2P platforms will be the ones that are able to manage the risks effectively, not those that spend the most on marketing themselves to potential investors.” Investors in the sector, such as London-listed fund P2P Global Investments, are also seeing the benefits of trade

finance as they look for more asset-backed opportunities. “Structural changes brought about by the disintermediation of the banks have resulted in exciting opportunities in small-sized private credit assets,” said Simon Champ, chief executive of the trust’s investment manager MW Eaglewood Europe. “The opportunities that began in unsecured consumer lending and smaller-sized loans are now expanding rapidly into secured lending opportunities in trade finance. “As non-bank trade finance originators increase their reach and ability to scale, we expect to see a growing number of opportunities from sophisticated non-bank invoice finance firms.”

REGULATION UPDATE

Pace of FCA approval slows as tax year draws to a close THE PACE of Financial Conduct Authority (FCA) authorisations slowed

down last month, much to the chagrin of peer-topeer lenders eager to take advantage of ISA season. Business lender Rebuilding Society and commercial property lender Proplend gained full approval from the City watchdog, around the start of March. Rebuilding Society has opened pre-registrations for its imminent Innovative Finance ISA (IFISA), but was still awaiting ISA manager status from

HMRC, as of 22 March. Proplend, which announced on 22 March that it had gained HMRC permission, is planning to launch its tax-free wrapper by the end of April. However, a number of firms who already held the correct permissions have now launched the product, including Crowd for Angels, Property Crowd, HNW Lending, CapitalRise and Basset & Gold. As of 22 March, just three out of the nine

Peer-to-Peer Finance Association members have full authorisation: Landbay, Lending Works and new member Folk2Folk. The ‘big three’, Funding Circle, Zopa and RateSetter are still waiting, alongside MarketInvoice, ThinCats and LendInvest. HMRC authorisation generally takes two or three weeks after gaining FCA permission, so it seems unlikely any of these platforms will be able to offer the IFISA before 6 April.

NEWS

ISAs may leave investors short-changed

PEER-TO-PEER investments have long been known for their superior returns to the mainstream markets but investors may have to settle for less with an Innovative Finance ISA (IFISA) in future tax years. Most of the platforms that have already launched IFISAs offer the same interest on the tax-free wrapper as their mainstream products, but P2P property lender CapitalRise has said the return on its recentlylaunched IFISA will be 0.5 per cent lower than its non-ISA version. “The forecast annual return for an ISA investment is currently

0.5 per cent lower than the return on a standard investment to cover ISA administration costs,” a statement on the CapitalRise website said. “It costs us more than double this to administer the ISA, however as a special promotion to celebrate the launch of our IFISA, CapitalRise will cover the majority of these costs and only pass on 0.5 per cent to our investors.” This is reflected in the mainstream savings and cash ISA markets, but other P2P platforms seem to be holding off from offering less so far. “It is normal in the cash ISA market that rates offered on the cash ISAs

are lower than those a normal savings account may offer by the same provider,” said Karteek Patel, chief executive of Crowstacker, which has offered an IFISA since April 2016. “At present, we bear the costs of administering an IFISA account and therefore the rates of the underlying investments are unaffected for the investor.” Filip Karadaghi, chief executive of buy-to-let platform LandlordInvest, says the costs of administering the IFISA are not material enough yet to charge a fee. “This might change going forward as we are potentially looking

to outsource our ISA administration to a thirdparty provider,” he said. However, other IFISA providers such as Landbay, which uses Goji for its administration, say they are offering the same rate, while Crowd2Fund has questioned whether there really are any extra costs. “The only direct cost we incur is our accountant as, like other ISA providers, we’re required to supply information about our IFISA accounts to HMRC each tax year,” said a Crowd2Fund spokesperson. “At Crowd2Fund we only take a one per cent annual fee on interest and capital repayments to the investor.”

Social P2P venture hindered by wholesale crackdown

THE FOUNDER of ThinCats has said that the regulator’s clampdown on wholesale lending will affect projects that can be funded through his social peerto-peer lending platform Community Chest.

Kevin Caley (pictured) launched the social enterprise last year and it funded its first loan in February 2017 for £130,000. The debt facility went to a local Birmingham finance company called ART Business Loans, which supports West Midlands enterprises. Investors could take advantage of five per cent community investment tax relief (CITR) – a government scheme that encourages investment in disadvantaged communities by giving tax breaks to investors who

back local businesses and other enterprises. But Caley says the Financial Conduct Authority (FCA)’s tighter restrictions on wholesale lending mean that loans like these will no longer be possible, as the money was lent to another lender. “You will be aware of the recent FCA letter to P2P platforms saying that lending to businesses that on-lend [the funds] are no longer allowed,” said Caley. “The decision is a serious problem. “We believe that the FCA was trying to stop certain practices on other P2P

platforms and we have been caught unintentionally.” The City watchdog wrote to the chief executives of all the platforms in February to highlight that if a lending business borrows through a P2P platform and lends that money to others, it may be “accepting deposits” without the correct regulatory permissions. As a result, Community Chest will focus on projects that are eligible for social investment tax relief (SITR) instead. “SITRapplies to loans to normal trading businesses that also happen to have social benefits,” said Caley.

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COMMENT

A golden opportunity Atuksha Poonwassie, co-founder of property crowdfunding and peer-to-peer lending platform Simple Backing and director of the UK Crowdfunding Association, delves into the potential and pitfalls of the Innovative Finance ISA

IRST OF ALL, IT SHOULD BE NOTED that the introduction of Innovative Finance ISAs (IFISAs) into the marketplace is a huge endorsement of the peer-to-peer lending and crowdfunding industry. The ISA offering has not changed for many years and the introduction of this product provides a huge opportunity in the marketplace. IFISAs are the third type of ISA that exist alongside the cash ISA and the stocks and shares ISA. It lets you use your tax-free ISA allowance while investing with any fully authorised loan or investment crowdfunding platform which has the additional ISA manager permission from HMRC. Eligible products for the IFISA are loans (sometimes known as P2P loans) and debt securities (fully transferable bonds or debentures) issued through those platforms. With the IFISA, you can lend money in return for a set amount of interest based on the length of time you are prepared to leave your money invested. The IFISA presents a real opportunity that I believe will be embraced in the coming months and years. There is a general yield starvation at the moment and investors are looking for better, viable alternatives that offer higher returns. I have seen products under the IFISA umbrella offering returns ranging between three per cent

and 19 per cent. There are many other benefits. These include: • diversity of investment opportunity, such as investing in property, small businesses or renewable energy • choosing to invest in areas you want to support • better control of investments • tax benefits on subscribed allowances • unlimited transfer of funds from other ISAs • greater transparency The biggest challenge that I see is that there will not be enough investment opportunities in proportion to the funds available. However, this will change as more platforms start offering products. The adoption of the IFISA has been a little slow. Speaking to platform owners, this is partly because the interim to full authorisation process with the Financial Conduct Authority (FCA) has taken longer than expected. Many of the platforms that now have full authorisation are either offering IFISA products or are working hard to bring these to market. Others are looking to apply for ISA manager permission once they receive full authorisation. Investors also need to have a

balanced understanding. As an investor, you need to appreciate what you are investing in, as not all products will be suitable. I suggest spending time understanding the risks, researching the platforms that currently offer (or are due to launch) IFISA products and decide for yourself which platform is best suited to you. There are also IFISA restrictions that you need to be aware of. Assets are not liquid so withdrawing funds during a loan term is not possible. You cannot subscribe your annual allowance to more than one IFISA annually either.

There is a general “ yield starvation at the

moment and investors are looking for better, viable alternatives that offer higher returns

”

My general feeling is that the IFISA presents a real opportunity. It has already increased the profile and acceptance of P2P lending and crowdfunding in the UK. It provides more investment choice across varying industries and allows investors to have greater autonomy and control of their investment process.

INVESTOR PROFILE

Calculated risk Former pharmaceuticals professional Phil Sloan, based in the Peak District, invests in over a dozen peer-to-peer lending platforms. He talks to Peer-to-Peer Finance News about when, how and why he became an enthusiastic advocate of the sector…

HIL SLOAN’S FIRST FORAY INTO the world of investing was not his most successful. He put money into technology-focused unit trusts at the time of the tech boom in the UK – the golden goose that got everyone excited before the market crashed in 2001. “I enjoyed the rise and suffered the fall,” he tells Peer-to-Peer Finance News. “Even so, that experience didn’t put me off. I moved on to investing in individual shares and over the years, I put as much as I could into stocks and shares ISAs and built up a reasonable-sized portfolio. “Now I’m semi-retired and live off the income from my stocks and shares portfolio. I’m invested in income stocks primarily.” With historically low interest rates making it unattractive to keep savings in a bank account, Sloan started to look

elsewhere for higher returns. P2P was not a totally new concept for him as he had already invested in the sector’s funds through his stocks and shares portfolio, such as P2P Global Investments. “I hadn’t started directly lending via P2P platforms until early summer last year,” he says. “It was really just a case of interest rates getting too low. I thought, ‘this is crazy, I’m not going to have money tied up in building societies earning less than one per cent, I’ve got to do better than this’.” Reaffirming one of the industry’s worst fears, Sloan explains that critical press coverage around P2P had initially deterred him. “I think I would have been involved in the industry quite a bit earlier if it hadn’t been for some of the negative media coverage,” he asserts. “You’d listen on the

radio and hear what Lord Turner said, 12 months ago now, and it was pretty damning. “I guess I was forced into it really, by low rates. I was happy enough earning around three per cent, but when it dropped below two per cent, it made me rethink. I thought well, some people obviously see the merit in the industry, so maybe it is a way of making money.” Sloan initially opted for passive investments in some of the industry’s largest names such as RateSetter and Zopa, before taking a more hands-on approach to his portfolio. Marketing and cashback offers drove his first investment

choices, but now Sloan is more interested in doing his own research into individual loans. “As I continued to do my research, I started to find other websites and platforms that were offering better rates,” he says. “The other thing I was conscious of, aside from risk against loans and defaults, was the risk of platforms getting into trouble. So I decided to spread myself fairly thinly across quite a few platforms.” Sloan invests in over a dozen P2P platforms to diversify his risks and is always open to new opportunities within the sector.

INVESTOR PROFILE

His favourite platforms are MoneyThing and Collateral. He still has some investments with RateSetter and Zopa, but the former pharmaceuticals professional says his main priority going forward – aside from diversity - is that the loans are secured. “I’ve also gone into BondMason recently, because they’ve got invoice financing as well, so they’ve got a wide spectrum,” he says. “Again, that is more passive investing, but they are offering security against that and better rates than some of the other platforms.” Sloan defines himself as a “relatively cautious” P2P investor, opting for good security and low loan-to-value over the highest returns. He prefers investing directly through the platforms rather than via the sectorfocused investment trusts nowadays – as long as he does his research. “Being relatively new to the area, I’m aware there are things I could trip up on,” he comments. “I use one or two other resources. One of the reasons I’ve subscribed to Peer-to-Peer Finance News online is so I can read as much as I can about the

sector on a daily basis. “I also use the P2P Independent Forum [an online message board for P2P investors] because there are lots of really experienced people who’ve been doing this for years. You can learn a lot just from reading the posts.” P2P lending plays an important part in Sloan’s portfolio now, accounting for around 20 per cent of his monthly income. The majority of his portfolio is still weighted towards stocks and shares and he owns two properties. “It’s difficult to compare

If things run smoothly, “ you’re getting a regular income without the stock market share price volatility

”

the risk of P2P lending compared to stocks and shares, but I’m comfortable with the amount of funds I’ve put towards P2P,” he asserts. “Logic says the higher interest is on offer, the more risk is involved, but I think the rates are pretty

good at the moment for the risk involved. “One of the reasons I wanted to get away from having all my eggs in the stock market basket was because of the risk of a crash. I saw that in the early days, when my tech investments halved in the

INVESTOR PROFILE

course of a few months. “It’s important you haven’t got that risk in P2P. If things run smoothly, you’re getting a regular income without the stock market share price volatility.” Going forward, Sloan is eagerly waiting for his favourite platforms to launch the Innovative Finance ISA (IFISA) so he can take advantage of taxfree earnings on his P2P investments. He says he is planning to transfer money from an old cash ISA into an IFISA once the likes of MoneyThing offer the product. “Long term, the more I can move into taxfree wrappers, the better really,” he adds. Sloan believes the sector’s spate of negative media coverage last year was undeserved. “It’s like investing in the stock market,” he says. “If you went straight out there and hadn’t done your research, you could get into trouble and buy shares that are over-valued. “Similarly, in P2P, I’m invested across quite a few different platforms, but having read what I’ve read, there are certain platforms that I wouldn’t touch with a barge pole. “Care is needed but I feel there’s a bias at times with the press.” Sloan is wholeheartedly committed to P2P and

is keen to continue with his diversified investment strategy. He would not even be deterred if a high-profile platform fell into bankruptcy. “It might make me re-evaluate where I put my money I guess, but it wouldn’t put me off,” he says. “I feel quite comfortable with the industry now; I feel it’s got a long-term place in my overall investments.”

would have been involved “inI the industry earlier if it hadn’t been for the negative media coverage

”

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Covering all bases

Insurance has never had much of a place in the P2P sector, but credit insurance promises to deliver that elusive prize: high returns without the risk. Is the P2P sector ready to upend its business model?

NSURANCE IS THE ENEMY OF RISK. It steps in when things go wrong and offers a safety net for life’s worries. But it has never really had a place in the world of peer-to-peer lending. However, this may be about to change, as a series of platforms start to consider the potential of credit insurance as a way of mitigating the risk that characterises the sector. Despite its strong track record, P2P lending is still seen as an alternative investment. At its core, the P2P model relies on borrowers being able to pay back their loans with interest. However, as every bank and private lender in history can attest, sometimes those loans do not get repaid. Depending on who you ask and the sort of loan that you are funding, the default rate can be anywhere between one per cent and five per cent. Most platforms get around this issue by spreading investments across a series of loans and performing

rigorous credit checks on all borrowers, but the risk of default is almost impossible to avoid. Credit insurance offers a solution of sorts, by helping to minimise any losses which might cause a P2P borrower to default on their loans. However, it is not without its critics. “There’s nothing that we’ve done in all of our research that suggests that people are looking to mitigate risk in that way,” says Bruce Davis, chief executive of Abundance. “They would rather invest in a range of different risks and pursue diversification. I’ve never really understood the economics of the insurance offer – who is it insuring anyway? We all have an insurance policy on our savings which we pay for as the taxpayer. That’s one of the reasons why we have almost zero return on our savings.” Not every platform agrees with Davis on this issue. In fact, some platforms have already taken steps to minimise

“fundA isprovision almost like credit insurance that you are administering yourself

”

and even eradicate risk on their investment portfolios, by making credit insurance a key part of their business model. Every P2P lender already has some form of insurance, whether it is professional indemnity, public liability or director’s insurance. But credit insurance is different. While the platform might negotiate a favourable rate for its users, it does not buy the insurance itself, leaving its borrowers to purchase it before they can apply for a loan. “Strictly speaking, we don’t have any insurance,” explains Angus Dent, chief executive of ArchOver. “What our clients are doing is taking out a credit insurance policy to cover the payment of their debtors. So if the loan isn’t repaid, either because they are unable to pay or because they are being unreasonable about causing ‘undue delay’, then the credit insurer will step in and pay that invoice.” Under its “secured and insured” model, ArchOver

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requires all its borrowers to sign up for credit insurance via the insurer Coface, at a standard rate of 0.149 per cent of the borrowing company’s turnover. If they don’t accept the insurance cost, they can’t access “secured and insured” funding. The only exception to this is if all the borrower’s clients are government or quasi-government offices, because, as Dent says, “if the government stops paying its debts we all have bigger problems to worry about!” According to Dent, the most common reason that companies do not repay loans is because their customers have not paid them. The addition of

credit insurance provides peace of mind for both the borrower and lender alike, as it means that the loan will always be repaid one way or another. This is an understandably attractive prospect – to be able to offer lenders P2P-style interest rates, but with a zero per cent risk of default. It is therefore no surprise to learn that more and more platforms are investigating the possibilities of becoming insured. Lisa Humphries is a director at Credit Risk Solutions, an insurance broker which specialises in credit insurance. She says that demand from P2P lenders has been increasing in recent years,

although she will not reveal which firms are in current negotiations to obtain credit cover. “Around four or five years ago it was something that the sector looked at and decided that the cost didn’t necessarily work for them,” she says. “However, what’s changed is the cost of the credit insurance is now cheaper. “Some of the P2P lenders have had bad debt and realise that had credit insurance been in place, the bad debt wouldn’t have happened. Now a lot of them insist that the debtor balances are credit insured and it’s something that particularly in the last two years – they’ve started to be insistent on.”

hile ArchOver has been using credit insurance for years, it is still a surprisingly underused tool in the P2P sector at large. Lending Works was the first P2P platform to make insurance a key part of its business model, introducing the “Lending Works shield” in late 2014. The shield insures against borrower default risk, fraud and cybercrime, and it is funded by a combination of reserve funds and insurance policies. And last year, Money & Co’s Nicola Horlick told Peer-to-Peer Finance News that she plans to launch an insurance product that investors can buy alongside the Innovative Finance ISA (IFISA). The stillto-be-launched product would most likely be done through an investmentlinked life policy, and would cover investors against a loss of up to 25 per cent on their portfolio. “We’d rather do that than have an insurance-type fund like Zopa,” she said at the time. “I have issues with that, as if you take two per cent of the return and stick it into a pool and the losses are actually less than two per cent, over time a large amount of money is left sitting in that pool. “The question is who

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owns that reserve? It’s a bit like an orphaned asset.” ArchOver’s Dent adds that “a provision fund is almost like credit insurance that you are administering yourself,” and this sentiment is echoed by Davis, who accuses them of “diluting returns”. “Provision funds are a form of mitigating risk and diluting returns,” he says. “As long as people understand that they are diluting their returns then that’s fine. But people should not expect that a provision fund has no effect on their return.” The issue of cost value is at the heart of the insurance debate. Cheerleaders such as Dent argue that the small initial cost of the credit

insurance brings the overall cost of borrowing down and protects against big losses. But Davis believes that by over-insuring P2P investments, lenders are eroding away their returns in the face of a relatively small risk. “The future of the market is that we are offering a real investment to people,” says Davis. “This seems contrary to the policy of insurance as it falls into the trap that banks are in, where they have been regulated to the point where they can barely invest their own money in anything useful. “Arguably we began because the banks were becoming these insured entities. We don’t want the P2P market to become like

the banks.” Credit insurance is not necessarily suitable for all P2P lenders and it may not be cost effective when it comes to smaller loans, as the success of the product relies on the platform’s ability to keep costs as low as possible. This means that for platforms dealing predominantly with consumer loans, a self-administered reserve fund or provision fund may make more sense. However, Humphries argues that formal insurance is an inevitability, at least when it comes to small business lending. “P2P lenders are in competition with all the

banks and finance houses and however you dress it up they all have some form of credit insurance or bad debt protection that they charge for,” says Humphries. The credit insurance market is huge and well established, but that does not mean that it is a catch-all solution for the P2P sector. Used correctly, and priced competitively, it could help to attract more cautious investors and more robust borrowers, bringing P2P lending closer towards the mainstream. Only time will tell whether insurance will be the making of, or the weakening of, the P2P brand.

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Arguably we began because the banks were becoming these insured “entities. We don’t want the P2P market to become like the banks ” WHAT TYPES OF INSURANCE ARE AVAILABLE TO P2P PLATFORMS? • Public liability This covers the cost of any claim made against your business by members of the public. Coverage will vary, depending on the risk profile of the company and its exposure to the public, but in the world of P2P, cover is probably limited to any personal injury or damage to property that occurs on the company’s premises. • Credit insurance Taken out by the borrower rather than the platform, credit insurance protects businesses against any commercial (or political) risks that are beyond their control. For instance, if one or more of a firm’s clients enters into an insolvency or protracted default, the credit insurance will minimise any losses to the insured firm. • Professional indemnity This covers the cost of compensating clients for loss or damage which was the result of negligent services or advice provided by a business or an individual. Financial advisers are required by law to take out professional indemnity insurance, but many P2P lenders choose to take it out as an added layer of protection.

• Employer’s liability insurance Every employer is legally obliged to have employer’s liability insurance, and there is a £2,500 daily fine for firms which are without it. It covers the cost of compensating employees who become injured or ill through work. • Directors’ and officers’ insurance Also called ‘D&O’ insurance, it covers the cost of any compensation claims made against the company’s directors or key managers for alleged wrongdoing. This can include, but is not limited to, breach of trust, misleading statements, and wrongful trading. It is worth noting that any claims are paid out to the company, not to the individual involved. • Provision funds While not technically an insurance product, provision funds are a form of insurance for a platform’s clients. A reserve fund is created to cover any possible defaults, so that clients do not lose their capital. This allows retail-focused P2P platforms to maintain their track records and offers reassurance to clients in the absence of formal insurance policies.

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Hot property

Peer-to-peer property lenders have experienced stellar growth in recent years, but will tax and regulatory changes stop the sector in its tracks?

ROPERTY LENDING MAKES up a significant part of the peer-to-peer finance sector, whether it be buyto-let mortgages, bridging or property development funding. But tougher regulations, extra charges and predictions of a slowdown in property price growth mean that challenges lie ahead for lenders. Deal volumes on P2P property platforms such

as Landbay, LendInvest or Proplend made up 37 per cent of loans in the business finance P2P category between 2014 and 2016, according to comparison website site Orca. Data from Peer-toPeer Finance Association members Landbay, which originates buy-to-let loans, and LendInvest, which focuses on development finance and bridging, shows that the platforms have seen lending soar

over the past two years. Between 2014 and 2016, cumulative lending on Landbay went from £1.7m to £43.1m, equating to a mammoth 2,435 per cent increase, while LendInvest has gone from £194m to £855m, up 338 per cent over the same period. Brokers are regularly using these sorts of platforms as banks close their doors on particular sectors and focus on larger loans. This harms

the ability for smaller developers and landlords to access finance through traditional lenders. Paul Goodman, chairman of the National Association of Commercial Finance Brokers, says property P2P lenders are increasingly looking like credible alternatives to the high street. “In the years after the financial crash, smaller developers felt strangled by an inability to access

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Brokers are seeing these platforms as much “ more sustainable and mainstream, rather than ‘alternative’ or secondary solutions ” finance as lenders tightened their belts,” he tells Peer-to-Peer Finance News. “Even if this is no longer the case, small- and medium-sized enterprise (SME) builders have failed to shake off this ‘lockout’ mindset - something which the government’s housing white paper is seeking to redress. “This environment has allowed innovative funders to spring up - giving SME developers a route to finance alongside more ‘mainstream’ lenders.” He cites quick access to finance and dedicated property managers as major benefits that P2P platforms can offer, compared to banks. “As a reflection of this, our brokers are seeing these platforms as much more sustainable and mainstream, rather than ‘alternative’ or secondary solutions,” he says. John Goodall, chief executive of Landbay, says the flexibility of P2P platforms makes them an attractive choice against mainstream banks. “Typically, P2P platforms

are fully technology enabled, allowing borrowers’ applications to be streamlined and generally processed faster than a traditional alternative,” he says. “At Landbay, for example, we launched an online application portal for our broker partners who provide us with mortgage enquiries. “We are also able to respond to changes in the market – both from a product and regulatory perspective – within days, versus traditional lenders who often have timeconsuming legacy systems in place. “Much of the buy-to-let market is broker-driven and we have worked hard to build strong relationships with the key broker players in the specialist buy-to-let space.” The Buy to Let Business, a brokerage focused on the sector, has used Landbay to fund around £200,000 of loans. “We appreciate the agility that P2P lenders such as Landbay possess,” explains managing

director Ying Tan. “We find that they are well placed to react quickly and genuinely listen to our feedback and suggestions. To have the chance to build strong relationships where we are able to directly contribute to product development is extremely important to us and helps to drive the sector forward.” However, when it comes to pricing, P2P buy-tolet loans can be slightly more expensive than other players in the market. Landbay offers fixedrate buy-to-let mortgages from 3.85 per cent, while another P2P platform LandlordInvest has an initial rate of five per cent. In both cases a borrower would need a 20 per cent deposit. In comparison, Aldermore Bank currently has a two-year fix at 3.78 per cent for the same loan-to-value. Shaz Nawaz, of AA Accountants, which regularly helps clients use P2P for their buy-to-let portfolios, recognises it can cost more to do a deal through P2P but gives

greater flexibility in terms of speed. He uses platforms such as Funding Circle for his landlord clients, as he says the banks do not seem interested in competing for the business. “The main benefit is it seems to be quicker,” he explains. “I went to one bank who said unless you have clients with 20 or more properties they are not even interested. “It is much quicker than going to the bank but I have found the amounts are limited up to £250,000. “I have found it is particularly good for clients who want to make a purchase, do it up, and quickly sell it on.” On the investor side, a benefit for P2P lenders is that there is security behind the investment, says Filip Karadaghi, chief executive of buy-to-let platform LandlordInvest. “Secured lending is more appealing than unsecured, given the possibility to recover capital in the event of default,” he affirms. “Some investors might

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not realise the importance of the loan security until a default occurs.” However, challenges lie ahead for P2P property lenders due to weakness in the wider market. Estate agents, surveyors and house price indices are predicting broadly flat growth in the property sector this year and many reported a slowdown in activity in the third and fourth quarter of 2016. LendInvest saw new originations fall from £115m in the first quarter of 2016 to £79.22m in the final three months of the year. P2P platforms focused on buy-to-let have had to deal with the additional impact of extra stamp duty charges on buy-to-let properties, which was implemented in April 2016. any commentators believe the tax hike, coupled with the removal of other incentives such as the scaling back of mortgage interest relief and the end of the wear and tear allowance, will deter landlords and property investors. Figures from the Council of Mortgage Lenders show that gross buy-to-let lending fell 20 per cent year-on-year in the final quarter of 2016, while over the year, almost two-thirds of lending was channelled into remortgages for landlords. This chimes with P2PFA figures for Landbay, which

shows fewer loans were originated in this period. Landbay issued £282,820 worth of new lending in the third quarter and £193,800 in the fourth quarter of 2016, compared with £16m in the first three months and £5.3m in the second. Just like the rest of the market, Goodall says there was a rush of applications and completions in advance of the stamp duty changes last April, before a slowdown towards the end of the year. However, he says originations have picked up again in 2017. Other platforms similarly reported a decline in demand last year, as the buy-to-let clampdown has weighed on the sector. In contrast to Landbay, LandlordInvest says that loan enquiries have remained subdued this year, which Karadaghi attributes to tougher affordability rules introduced by the Prudential Regulation Authority (PRA). “We have seen a substantial reduction in buyto-let enquiries both from direct borrowers and from intermediaries,” he says. “We believe that this reduction could be explained by the stamp duty changes along with the PRA’s new affordability rules. Although the new rules do not affect us directly, they are likely

to have an impact on the overall buy-to-let market, damping the demand for buy-to-let mortgages. “There are many things that platform can do to attract more borrowers; criteria, speed of financing, rates, another approach to underwriting etc. But in the end, each borrower has their own reasons for approaching a lender or P2P platform.” Amid the wider market challenges, P2P is slowly creeping into the mainstream, with both Landbay and LendInvest signed up to the sector’s trade body, the Council of Mortgage Lenders (CML). The organisation recognises that these platforms have a role to play, but there are doubts as to how big they can get. “They will grow from very low to pretty low,” says Paul Smee, director general

of the CML. A number of buy-tolet mortgage brokers and lenders have declined to comment to Peer-toPeer Finance News on the growing presence of P2P lenders in the sector. Robert Sinclair, chief executive of the Association of Mortgage Intermediaries, suggested that the silence was due to the sector being too small and niche in comparison with the main market. “The P2P sector needs to get people with affinity and the skill-set to be able to drive business across,” he says. “It needs people with good contacts who can leverage their own personal brand.” He cited Landbay’s recent appointment of Paul Brett, who has worked for lenders SPML, Borro and Masthaven, as a good

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It is very important not “ to fall into a false sense of

security just because a loan is backed by property

”

example of someone who has moved across from the mainstream market that could help increase awareness of P2P lending. Another source said P2P lenders faced barriers due to the relative nascence of the industry. The platforms have not had to cope with any major defaults to date, so there is uncertainty over what would happen and if a platform would survive. All P2P platforms say their due diligence is of the same standard as that of banks. Landbay’s Goodall also

highlights the difference between buy-to-let lending, where the bank can become the receiver of rent, and mortgage lending where the property needs to be sold. It is the latter that was a key driver of the 2008 financial crisis, as property values had fallen so much that there was very little security for the banks if they wanted to repossess and sell the property. It seems unlikely that P2P lenders will enter the residential mortgage market any time soon, with its lengthy loan terms and low

interest rates. “I think this will be the last area of property P2P that anyone enters,” says Brian Bartaby, chief executive of commercial property P2P lender Proplend. “While it may be seen as the most altruistic by helping people buy their own homes, lending on owner-occupied mortgages falls into a different Financial Conduct Authority regulation category. “Banks are already very active and the rates are among the lowest, therefore this would produce much less attractive returns.” Despite some industry wariness, P2P property lending looks set to continue its strong growth trajectory, in part due to the Innovative Finance ISA (IFISA). A number of property lenders now offer the tax-free product, including Landbay and LandlordInvest, while CapitalStackers and Proplend are also due to launch IFISAs. “This is encouraging for the industry and for retail investors who want added security in the form of asset-backed loans to property borrowers, wrapped in a tax-efficient ISA product,” says a spokesperson for Orca. But Brian Bartaby, chief executive of commercial property P2P lender Proplend, emphasises that investors must consider the

type of underlying loan in their IFISA. “It is very important not to fall into a false sense of security just because a loan is backed by property,” he comments. “The loan needs to be properly underwritten with clear understanding of how the interest will be paid and the loan exited. “Not all propertybacked loans are equal. Remember property development creates a capital gain and not an income stream, which is important when looking to pay interest to lenders.” Despite these headwinds, a spokesperson from comparison site Orca remains positive about the future of the sector. “There is scope for growth on all fronts,” he says. “The accessibility and efficiency offered by P2P property lenders, along with lower interest rates, makes P2P appealing to borrowers seeking loans for property purposes. “P2P lenders employ a rigorous screening and vetting process, but use technology to advance the process and streamline it so borrowers can be approved faster.” While landlords and developers may be getting hit by increased regulatory scrutiny and tough banking requirements, at least the door remains open to P2P platforms for themselves and investors.

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