Peer2Peer Finance News May 2017 by Alternative Credit Investor

ASSETZ EXPANDS ACCOUNT RANGE

>> 7

SHOW ME THE MONEY

>> 20

The lender capitalises on a surge in demand

The impact of institutional investment

Former NACFB head Adam Tyler on SME finance and his latest venture >> 12

ISSUE 8 | MAY 2017

ROBUST technology is more important than ever, say peer-to-peer lending platforms, as they invest in their systems to maintain their advantage over traditional financial services players. A number of firms are developing new technologies in order to improve their customer service, but most admit that the occasional glitch is an inevitable risk for a fintech firm. “Technology is very important – we invest in our system all the time,” a spokesperson from Collateral told Peer-to-Peer Finance News. “I think occasional bugs are inevitable as the website’s coding changes, but as soon as it happens our development team is responsive.” Last year, the assetbacked P2P lender experienced an IT issue regarding its data storage, which had a significant impact on the platform. “The only major issue we’ve had was to do with faulty random access memory (RAM) on one of our servers,” said the spokesperson. “It only got corrected

Platforms are investing in IT to stay ahead when we upgraded our server. The problem was due to the host, not us, but it was quite a serious fault that meant the website was down for 12 hours.” Aside from that incident, the Collateral spokesperson said that its technology proposition has been reliable and that the

platform can now process 26 transactions per second. It is also developing an app, which it said will set the platform apart from other lenders. “It’s currently in the beta phase and will be going live in a couple of months,” the spokesperson said. “I think it will be one of

the first apps for the industry. Not everyone is PC-based now – people are on the move. It’s very user friendly.” Technology is important on both the investor and the borrower sides of the business. Proplend’s chief executive Brian Bartaby revealed that the platform is planning to develop its >> 4

EDITOR’S LETTER

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WeWork, 2 Eastbourne Terrace, Paddington, London, W2 6LG info@royalcrescentpublishing.co.uk EDITORIAL Suzie Neuwirth Editor-in-Chief suzie@p2pfinancenews.co.uk +44 (0) 7966 180299 Kathryn Gaw Contributing Editor kathryn@p2pfinancenews.co.uk Anna Brunetti Chief Reporter anna@p2pfinancenews.co.uk +44 (0) 7546 995334 Marc Shoffman Senior Reporter marc@p2pfinancenews.co.uk PRODUCTION Karen Whitaker Art Director Zac Thorne Logo design COMMERCIAL 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 saw the second annual Fintech Week take place in London, with conferences held by trade body Innovate Finance and the UK government. The events were organised to showcase UK fintech’s strengths, attract international investment and discuss issues affecting the industry. In the wake of the Brexit vote, the fintech sector – including peer-to-peer lending – is more important than ever. In the last few months we’ve seen the UK government boost fintech links with a number of Asian countries, most recently with India, where industry representatives accompanied the chancellor on his trade visit. Funding Circle’s co-founder and chief executive Samir Desai spoke about the UK’s position as a leading fintech hub in his keynote speech at the government’s international fintech conference, but warned that other countries could catch up if the UK did not “keep moving on very quickly on the regulatory side”. Indeed, with France now issuing P2P licences in a mere two months, while our largest platforms – including Funding Circle – are still waiting for full Financial Conduct Authority authorisation 18 months later, this is a real and serious risk. A week of conferences to celebrate the sector’s strengths is fantastic, but it will take proper, continued action going forward to maintain our position, particularly once we’ve completed our split from the EU.

SUZIE NEUWIRTH EDITOR-IN-CHIEF

NEWS

cont. from page 1 proposition for borrowers later this year. “Tech – or fintech – is to do with the ability to collect and analyse information on both the borrower and the lender side, and distribute that among a group of people,” he said. “We’ve spent more time working on the lender side of business and now we’re starting to look at how to make the borrower process more efficient, creating a better experience going forward.” Bartaby said that Proplend has experienced the occasional IT issue in the past, such as a loan part getting sold twice on

the secondary market. However, he added that the platform usually catches errors within 24 hours and emphasised the importance of good communication with customers. “You’ve got to stay on top of things, rather than just rely on your system,” he said. “It’s important that the platform is running smoothly to reinforce trust.” Several P2P lenders emphasised the importance of responsiveness if an error does occur. “Robust technology is really important for providing a good service for investors and borrowers,” said Sophie Pearce, business

development director at MoneyThing. “Whenever you’re dealing with technology, there’s always a chance that things can go wrong, but it’s about how you handle it.” Lendy, formerly known as Saving Stream, experienced an IT glitch recently which stopped new deposits showing up on certain accounts, but emailed investors quickly to inform them of the issue. “[IT problems] are inevitable to an extent, but there are steps that you have to take to minimise risk and be responsive to clients when they happen,” said a spokesperson

from Lendy. “Open and prompt communication is important in that regard.” The spokesperson added that the platform had been very careful to ensure its growth has been sustainable for its technology. “You hear about platforms essentially having to ‘rebuild the plane in mid-air’, so to speak, and that tends to come as a result of the underlying tech not being scalable enough,” he said. “We have hit a speed bump or two along the way, but for the most part, our tech has been very solid, and has coped well with a very sharp rise in both investors and loans.”

Funding Circle’s Desai triggers monetary stimulus debate

FUNDING Circle’s cofounder and chief executive Samir Desai (pictured) has called for UK policymakers to start using peer-to-peer lenders as a direct channel to boost the real economy. During his speech at the government’s international finance conference last month, he suggested that the Bank of England could bypass the banking system and inject monetary

stimulus via P2P platforms. “The government now has a choice because of the innovation that has happened in the fintech sector: it can bypass the banking system and get money directly into the real economy when it needs to,” he said. In response to Desai’s comments, other P2P platforms have pointed out the obvious advantages the sector offers SMEs against traditional lenders. “Ultimately it comes down to what type of service can provide finance at the best rate and in the quickest timeframe - SMEs typically need an answer within hours and to obtain funds within weeks,” said

Folk2Folk’s PR manager Mat Gazeley. “The government should motivate and encourage businesses to get alternative finance through P2P platforms.” And Assetz Capital’s chief executive Stuart Law said that P2P platforms would not divert the cash to support their own business, guaranteeing “a far more efficient lending mechanism” than banks. However, while market leader Funding Circle lent nearly as much to small businesses as the entire banking system combined in the last quarter of 2016, the prospects of a P2P government scheme become less tangible if

one looks at the size of the overall sector, economists pointed out. Cumulative P2P lending from the members of the Peer-to-Peer Finance Association hit £7.3bn by the end of last year, but this pales in comparison to the £435bn of treasury bonds purchased by the Bank of England to date. “Regulators around the world have definitely been asking themselves whether there are better ways to stimulate the real economy than traditional QE,” said Paul Hollingsworth from Capital Economics, “but you still need a market with a large enough scale to have any meaningful impact.”

NEWS

One third of IFISA investments came from transfers last year AROUND one third of money placed into Innovative Finance ISAs (IFISA) on individual platforms in the previous tax year was from transfers rather than new money, early figures indicate. Platforms have suggested this shows savers are ditching low-paying cash ISAs for the higher returns from transfers in yielded from an IFISA. the previous tax year. “While our average Co-founder Filip Karadaghi from new subscriptions vindication that our sector account size for IFISAs is in said that almost half of since its launch in provides a viable and line with our average classic investment on the buyFebruary, while the beneficial alternative in account size, standing to-let lender’s platform is remainder was transferred terms of risk and reward.” at £8,200, we are seeing now through the tax-free from other ISAs. The figures bode well much higher value come wrapper, amounting to “It is intriguing that for the UK’s largest peerin via ISA transfers from around £3,000 on average a high proportion of to-peer lenders, who are lower yielding cash ISAs,” incoming IFISA funds have still awaiting regulatory Julian Cork, chief operating officer of Landbay, told Peer-to-Peer Finance News. “In March, the average value of transfers into a Landbay IFISA from existing ISAs was £39,500 per customer. “We saw the volume of Nick Harding, Lending Works transfers increase by 300 per cent between February Peer-to-Peer Finance News, April issue, 2017 and March and with the per investor. come from other, preapproval in order to offer ISA allowance now at Ethical investment existing ISAs, and it is great the IFISA. A number of £20,000 we expect to see platform Abundance has to see so many customers legal experts have told Peerincreasing volumes of offered its IFISA since choosing Lending Works to-Peer Finance News that investment and investors by transferring their ISA they would be extremely throughout the ISA season.” November 2016 and said it attracted £11.2m in the last from many different banks surprised if the ‘big three’ Other platforms tax year, £3m of which was and investment managers,” – Zopa, Funding Circle have reported similar from transfers rather than said Nick Harding, founder and RateSetter – had not experiences. new ISA money. and chief executive of received full authorisation LandlordInvest, which Meanwhile, Lending Lending Works. from the Financial Conduct launched its IFISA in Works says 62 per cent of “We believe this Authority by the end of January, revealed that 28.3 IFISA funds have come represents further the summer. per cent of funds came

“We believe this represents further vindication that our sector provides a viable and beneficial alternative in terms of risk and reward”

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NEWS

Assetz Capital expands its account range

ASSETZ Capital is launching two new investment accounts to capitalise on the surge of demand it has experienced on both the investor and the borrower side. The peer-to-peer lending platform is expanding its account range to five offerings,

adding a longer-term and a purely property-backed account to its existing 30-day access, quick-access and green-energy accounts. The longer-term account will offer investors an interest rate of about 4.75 per cent over one-year investments, while the new specialist account, which caters for investors who want to focus exclusively on loans secured against property rather than other assets, will target returns of around five per cent. The platform also said it may launch temporary rate hike offers on

different accounts going forward, following its recent move to ramp up returns on its 30-day access account by half a percentage point for a 90day window. The firm’s limited-time offer defies the industry trend of falling returns, with Landbay, Zopa and RateSetter recently lowering their rates to attract new borrowers. “I guess the difference is that we are not competing with other P2P platforms in terms of rates,” said the firm’s chief executive Stuart Law (pictured). “We didn’t feel the need

to charge borrowers high rates, and wanted to focus on pricing risk correctly to get much larger volumes of highquality investments.” This strategy brought a deluge of borrower interest onto the platform, which it now looks to match with a larger pool of investors by widening its account and rate offering. However, Assetz is planning to lower interest rates on one offering - its green energy account. Returns will be lowered from seven per cent to six per cent over the next couple of months.

Bankers ditch the Square Mile for Silicon Roundabout FINTECH firms may have a stereotypical image of laid-back technology buffs who have ditched the suits, but recent hires in the peer-to-peer sector show ex-bankers are forming a significant portion of hires. For example, RateSetter, whose founders Rhydian Lewis and Peter Behrens come from investment and banking backgrounds, has made two appointments in recent months from their former sectors. The platform’s Australian subsidiary has hired former ING Direct Australia chief Vaughn Richtor to help grow its business in the country,

while in the UK Richard Sollis has joined its property finance arm from Santander. “A lot of our employees are ex-bankers in certain areas, most notably credit and risk, and small business and property lending,” said a spokesperson for RateSetter. “They have specialist experience and good relationships with borrower networks and brokers. “However, we’re certainly not exclusively hiring ex-bankers and we recruit people with a diverse range of backgrounds.”

In other examples, Assetz Capital, founded by serial entrepreneur Stuart Law in 2012, recently hired former RBS executive Rob Pailin as chief commercial officer. And late last year, ThinCats named Damon Walford as chief development officer, who has previously held roles at HSBC and RBS. Most platforms say the type of qualifications they look for depends on the role but there is a recognition that those in the banking sector have suitable skills to transfer. Brian Bartaby, a property investor turned founder of commercial property P2P lender Proplend, said

it would depend on the role. For example, an underwriter would need real estate skills, he explained. His views were echoed by Michael Lynn, a chartered accountant and founder of bridging and development platform Relendex. “The P2P sector is where financial services and technology meet,” he said. “If we were recruiting loan officers then the banking sector is the natural place to look. “If we were doing something on the IT or technology development side then we may look to other P2P lenders.”

NEWS

Funding Options looks to raise £5m ONLINE small- and medium-sized enterprise (SME) finance aggregator Funding Options is looking to raise £5m from fresh equity investment to support its expansion plans in 2017. The firm has seen strong revenue growth in recent years, in part due to the UK government’s bank referral scheme. “Our last fundraising round was in 2015, when we secured £2m,” founder and chief executive Conrad Ford told Peer-to-Peer Finance News. “Since then, our revenues have grown 13 times larger,

while our costs have grown a mere three times larger. This is an exciting period for us, not just in terms of revenue growth.” Funding Options does not disclose its financials, but Ford said that revenue in the first quarter of 2017 grew fourfold year-on-year. He expects the company to break even by the end of the year, exclusive of the equity investment. “The cost of acquisition is killer for some fintechs,” said Ford. “We’ve experienced staggering growth from organic lead generation. The bank

referral scheme has given us a boost, as half of our lead generation is now free.” The bank referral scheme, which launched last November, mandates nine of the UK’s biggest high street banks to pass on the details of small businesses they have rejected for finance to three aggregator platforms, one of which is Funding Options. These platforms will then share the details of the businesses seeking loans with alternative finance providers, including peerto-peer lenders, who can provide quotes if they wish.

Ford plans to use the £5m to develop the platform’s technology, grow lead generation acquisitions and expand Funding Options’ physical presence across the country, which could include strengthening its network of relationship managers. The chief executive said he had “a relatively open mind” in terms of the type of investors he was hoping to attract. “We’re not just thinking of traditional venture capitalists but other people with an interest in the alternative finance market,” he said.

REGULATION UPDATE

FCA pushes for global fintech rules THE FLURRY of regulatory approvals for peer-topeer lenders dried up last month, with just one platform - FundingSecure - announcing the launch of its IFISA after gaining HMRC permission. However, as our story on page 5 shows, those who already had permission to offer the Innovative Finance ISA were reaping the benefits in the lead-up to the end of the tax year. The main regulatory news to come out of the sector was at the Innovate Finance Global Summit, which was held in London’s Guildhall on 10 and 11

April. Christopher Woolard (pictured), head of strategy and competition at the FCA, said that the City watchdog is pushing for an international regulatory framework to head off a fintech “Wild West”. “As different jurisdictions begin to set up their own sandboxes, with different models and standards, some believe a ‘Wild West’ version could emerge,” he said. “This runs entirely counter to our ambitions, which we know many share, for responsible innovation, which, rather than risk diminishing outcomes for consumers,

should enhance them. “We also see potential risks to the reputation of and trust in financial innovation if there are examples of global failures in the future.” He also confirmed that the FCA has received 77 applications for the second round of its “regulatory sandbox” and will be accepting 31 of those applications to progress towards testing, nearly double the number of firms currently testing in the first round. The “regulatory sandbox” is part of the City regulator’s initiative to support fintech innovators. It aims to create a ‘safe space’ where start-ups

can test out their business models in a live environment without fear of FCA punishment if something goes wrong.

NEWS

LandlordInvest mulls move into development finance LANDLORDINVEST is considering expanding into property development finance as the platform looks to grow its investor base over 2017. Filip Karadaghi, cofounder of the buy-to-let focused peer-to-peer lender, said there is an “interesting gap in the market” for development finance. “We have noticed quite a significant demand for development loans and believe that there is an interesting gap that could potentially be addressed, given that many larger lenders tend to stay away from development

financing,” he told Peer-toPeer Finance News. “However, offering development finance loans would require us to ramp up our expertise including external hires, as development financing loans requires specialist knowledge, and may not be suitable for all investors as it requires that the investors are able to assess real estate developments to fully understand their risk.” Looking ahead, Karadaghi said attracting more lenders will be a priority. “One of main challenges will be to continue to build an investor base, and

establish our own niche in an industry that is quite saturated,” he said. “We will be actively communicating our unique selling points to the investor community and focusing on developing our business model’s strengths. “Another challenge will be to continue sourcing and

identifying loans that meet the platform’s criteria. “Finally, compliance and security is of the utmost importance. We have to ensure that we run compliant operations at all times and that there are no data or IT breaches comprising the data that we hold.”

BondMason expands non-P2P investments PEER-TO-PEER investment manager BondMason is increasing its exposure to non-P2P lenders to broaden its offering. The firm aims to get its clients a seven per cent return by selecting P2P loans across approved platforms on their behalf, but chief executive Stephen Findlay said he is now looking outside the industry to provide more diversification for investors. “We now do more than 50 per cent of our lending through non-P2P platforms,” Findlay told

Peer-to-Peer Finance News. “We are increasingly working with specialist lending companies such as bridging finance lenders that don’t have a P2P lending website or service. “These established lending companies like to work with BondMason as we can provide access to capital from the ever-popular P2P lending community, and our clients can access returns from loans which aren’t normally available to them. So it’s truly a win-win scenario.” BondMason is also

working to increase awareness among financial advisers and recently partnered with professional body the Chartered Institute of Securities and Investment (CISI) to compile a report on the P2P sector. “The investment management industry and IFAs have been rightfully cautious about advising their clients on P2P lending given the breadth of options and range in quality of the lending platforms,” said Findlay. “The BondMason direct lending market report is the

first impartial and in-depth report into P2P and direct lending in the UK. “We are pleased the CISI has recognised the quality of the report by providing continuing professional development (CPD) accreditation. “This is another step forward for P2P lending as it begins to come of age, and we hope that it enables advisers to help their clients to better navigate this asset class, as investors and lenders coalesce around higher quality operators.”

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COMMENT & ANALYSIS

The evolving regulatory framework Peter Wilson, senior associate in the financial services regulatory group at law firm Taylor Wessing, explains why the Financial Conduct Authority’s scrutiny is good for the sector

HE GLOBAL ECONOMY IS still rehabilitating following the financial crisis. Governments and central bankers, with their hands on the tillers of the real economy, are looking at ways to unlock funding sources to promote economic growth. In the UK, government policy is supporting the development of alternative sources of finance for individuals and small- and medium-sized enterprises (SMEs). Recent additions to the financial services family are peer-to-peer lending platforms. As a sector, P2P has grown rapidly and the UK Financial Conduct Authority (FCA) has recently outlined aspects of the market that pose risk of consumer detriment. P2P is a newly-emerging sector, and many of the firms operating in the UK are still in the process of moving from interim to full FCA authorisation. One dynamic at play is that certain firms may not be granted full FCA authorised status if assessed not to be operating at a sufficient standard. This would leave their existing borrower and lender clients at risk as these businesses will be unable continue to operate without permission. Concerns have also been expressed about the enduring stability of the sector. Consequently, the FCA’s role is to ensure the P2P sector develops in a sustainable manner that provides appropriate consumer protections

and enables competitive forces to operate in the interests of consumers. As a result of these and other concerns, in its feedback statement from December 2016 (FS16/13), the FCA confirmed that it will consult on new rules for the P2P sector during 2017. In late February 2017 and in advance of its anticipated 2017 rule consultation, the FCA wrote to all P2P firms due to a concern that some P2P firms have lent borrowed funds (for onward lending) to lending businesses who do not have the required permission to carry on the regulated activity of “accepting deposits”.

The P2P sector is well “placed to be a success” The FCA has said that any P2P firm that facilitates acceptance of deposits by borrowers who do not have the correct deposit taking licence is at risk of being in breach of certain FCA principles and threshold conditions. It has said they should immediately stop this practice and, where necessary, take remedial action. In FS16/13, the FCA gave P2P firms an indication of how it will develop its supervisory oversight of the sector. Some areas where P2P firms should anticipate potential rule changes or FCA interventions include: additional requirements

or restrictions on cross-investment; enhanced standards for investor disclosures; measures to mitigate perceived regulatory arbitrage between more complex P2P business models and other financial services sectors, including asset management and banking; strengthened winddown plans; extending FCA mortgage-lending rules to P2P platforms that facilitate residential mortgage contracts; and potential interventions on inappropriate preferential treatment being given to institutional investors. Following the 2016 Budget, the Innovative Finance ISA (IFISA) was created to allow for the inclusion of P2P lending in the basket of qualifying ISA assets. Therefore, the FCA’s decision to sharpen its regulatory approach in advance of the inevitable further P2P sector growth that IFISAs will bring is not surprising. With its consumer protection mandate, the FCA would not wish retail investors to be exposed to avoidable risk factors. With a public keen to embrace the new opportunities that technology brings and a permissive governmental, fiscal and regulatory environment, the P2P sector is well placed to be a success, hopefully with buoyed confidence given that the FCA is taking a thorough look at practices in this sector.

PROFILE

Credit where it’s due Commercial finance veteran Adam Tyler speaks to Peer-to-Peer Finance News about his time at the helm of an industry trade body, his new venture and why small businesses have never had it so good…

DAM TYLER LIVES AND BREATHES COMMERCIAL FINANCE. Seconded from Nat West in 2005, he joined the National Association of Commercial Finance Brokers (NACFB), where he held the chief executive role at the trade body for 11 years. He is now embarking on a new venture, FinancemyBusinessonline, which helps small businesses find funding. But the lending landscape for businesses has changed greatly since he began at the NACFB, he explains. “If you go back to 2005, it was a traditional market with a set number of lenders,” recounts Tyler. “Then we had the hiatus of 2008-9, when we lost most of the lenders we had at the time, which gave rise to the birth of all the new funders and lenders and all the innovation we have now. “I’d say that change was brought about because of the recession. So what we’ve got now is the widest choice of lenders

to businesses that we’ve ever had and the most innovation we’ve ever had in terms of small business lending.” Small- and mediumsized enterprises (SMEs) looking for funding have never had it so good, according to Tyler. “Without a shadow of a doubt…it’s the best market there’s ever been for a small business owner,” he affirms. “There’s so much choice. I received a call today from somebody who’s had two offers of a £150,000 unsecured loan. They asked me if there is a better place to borrow from as they don’t feel as though they’ve scoured the whole market. “A £150,000 unsecured loan 11 years ago would have been so difficult to source. Now they’ve got two different places they can go to and can look to see if there’s a better option.” There are now a plethora of finance options available for SMEs, including alternative sources of

finance such as peer-topeer platforms. Tyler says he believes this is due to lenders recognising that they need to innovate to compete and that they can lend more money on an unsecured basis if they do better due diligence on the business. He explains that instead of insisting on security and personal guarantees, they have become more sophisticated in their approach and understand businesses’ affordability better than before. It is not only the lenders on the market that are providing more variety these days, but the small businesses themselves, he adds. “I think the market’s evolved because it’s had

to,” asserts Tyler. “The small businesses out there don’t necessarily have the same backgrounds they used to. A traditional small business owner might have lived in a big house somewhere and had a very little mortgage. “Nowadays, the small business owners don’t have all that security behind them. They come from different backgrounds and perhaps they’re younger than they were in the past. “Therefore the lenders have had to adapt to cope with the new-look small business owner that’s out there.” FinancemyBusinessonline was launched in February this year to address this growth in the number of SMEs in the UK, many of which struggle to obtain financing from traditional

PROFILE

lenders. Around 100 finance providers have registered with the site, including P2P lenders RateSetter and Funding Circle. “85 per cent of small business owners still go to the high street bank as their first port of call,” explains Tyler. “High street banks can’t help everybody and if borrowers are turned down they may become disillusioned, so not employ more staff, nor buy a new piece of kit, nor get bigger premises. That’s

no good for the small business owner.” The platform works as an aggregator for business finance providers, who have all been vetted using “a strong due-diligence process”, akin to the one at the NACFB, says Tyler. “We need to make aggregating finance platforms mainstream, that’s the next phase now,” Tyler says. “We’ve had P2P lending, now we have the aggregators coming to the market. So that’s the

We need to be ready to cope “ with Brexit and part and parcel of that is access to funds” reason I’m behind it.” Tyler has spent two months signing up the right number of lenders to the platform, utilising his experience and contacts within the lending, broker and small business markets.

“All of the ones I wanted to sign up now appear on the platform or are going through the on-boarding process,” Tyler says. “I’ve launched into the SME market and I’ve signed up the first lead providers, which are

PROFILE

TYLER ON… …BROKERS “The broker’s obviously sitting in a better position now, with such a wide choice of lenders out there. Only five per cent of businesses employ finance directors, but most will use brokers in some format, whether that be physical brokers or online resources. There’s a need for them more now than ever before, because they’re the ones who can actually say ‘the best place for you to go is there’.”

…HIGH STREET BANKS “In fairness, the high street banks have come back into the SME lending market in the last couple of years. That’s definitely happening, but of course they are able to pick and choose who they lend to, to ensure their lending books are in the best possible position. “I think high street banks will always have the majority share of the market, but the new lenders’ share will definitely grow. There’s no two ways about it. I don’t only mean peer-to-peer lenders. I mean the likes of Close Brothers, Investec, Hitachi…”

...THE TOP PRIORITY OF SMES “Whenever we did a survey of small business owners, service is the priority, without a shadow of a doubt. If you apply for a loan, you want a decision quickly, so speed is a major part of service. Also, the ability to talk to somebody to discuss what’s happening. Service is the key word. I’ve known many people who’ve opted for a provider with better service and paid a slightly higher interest rate for it.”

We’ve got the widest “choice of lenders to

businesses that we’ve ever had and the most innovation we’ve ever had in terms of small business lending

”

PROFILE

target affinity groups.” Tyler has arrived at an enviable position whereby finance providers are proactively contacting him to register with FinancemyBusinessonline. However, maintaining a balance is also important, he explains. “I’ve now got to start to get the deal flow going to keep the lenders happy that are already on the platform,” he says. “As time goes on, obviously I’ll bring more and more lenders on when the opportunity arises. “I’m seeing some

people I haven’t met before and hearing some new ideas, so it’s been an education for me, it really has.” yler reiterates industry sentiment when he states that the biggest challenge for lenders is finding borrowers. “The reason behind that is twofold,” he explains. “Firstly, it’s cultural that we still go to the traditional source of business lending. The other challenge providers will be facing is how to market themselves in such a wide fashion that

they will reach every single small business at that moment in time when they want to borrow money.” Small business lenders have a greater task on their hands than consumer lenders in terms of marketing, Tyler says. “A small business owner will only look at the finance market when he wants to borrow money, simple as that,” he explains. “Small business lending does not have the same profile as consumer lending and that’s why it’s going to take a long time to get that message across to everybody. “However, it’s accelerating. There’s a lot of people trying to make a lot of noise all on their own.” Looking ahead, Tyler hopes to see the government do more to boost SMEs’ access to finance. “That’s the drum I’ve been beating in Westminster for the last seven or eight years and there are more people listening now,” he says. “We probably haven’t got the same profile we had in [former Business Secretary] Vince Cable’s day, that’s for sure, but it’s certainly gaining momentum since Brexit.” It is not just the government who needs to do more to support

the sector, it’s down to the industry too, argues Tyler. “All of us need to raise awareness to small businesses that there is another range of lenders out there,” he says. The commercial finance veteran is broadly optimistic about the impact of Brexit, saying it will “bring opportunity, without a doubt” for SMEs, but concedes that a possible slowdown in economic growth could hinder the market. “It’s a confidence thing,” he says. “If Brexit affects the confidence of small businesses across the UK, they’re less likely to borrow and that’s the one unknown factor. We don’t know what’s going to happen. We need to be ready to cope with Brexit and part and parcel of that is access to funds.” Despite the challenges, Tyler is upbeat about the future of SME finance in the UK. “I spoke to somebody who’s just raised £100m and wants to lend to the small business market, asking if they can join my platform,” he comments. “So we’re still seeing new lenders coming to the market and I think that’s going to continue. New lenders, more innovation and some consolidation as well.”

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A helping hand

Brokers and financial advisers have the power to send millions of new lenders and borrowers into the P2P sector, so what’s holding them back?

EPENDING ON WHO YOU ASK, financial intermediaries are either utterly essential or completely irrelevant to the future of P2P lending. On the one hand, they can open up a whole new world of funding options and investors. But on the other hand, ‘classic’ P2P is fuelled by individual investors and borrowers, so why complicate things by introducing a third party? But there’s no getting past the fact that mortgage brokers and independent financial advisers (IFAs) have an enormous influence over large numbers of borrowers and lenders respectively. Brokers are already becoming fixtures in P2P property lending, driving borrowers towards platforms with the promise of competitive rates and flexible arrangements. But IFAs have been much more cautious. Thanks to the retail distribution review (RDR), financial advisers are now liable

for giving bad advice, perpetuating the problem of low-risk, low-interest recommendations. Furthermore, the very concept of P2P investment bypasses advisers and brokers by encouraging investors and borrowers to simply lend to and from each other. IFAs would be forgiven for seeing the P2P revolution as the next big threat on the horizon. However, brokers have been much quicker to see the benefits in P2P lending, and the feeling is mutual. When it comes to property loans, brokers are vital, setting up much-needed loans and even carrying out some of the due diligence on behalf of the platform. According to Landbay data, brokers facilitate around 90 per cent of the buy-to-let mortgage market, so any property lender would be understandably keen to win over the broker community. “As with all other lenders in this space, we are heavily reliant

“sayIt’sthatfairmostto

P2P players haven’t quite cottoned on to the level of support that advisers require

”

on brokers,” says Julian Cork, chief operating officer of Landbay. “However, to maintain control and speed of service, we have a restricted distribution policy, operating mainly via our specialist intermediary partners.” These “specialist intermediary partners” represent the main hurdle for mortgage brokers, as they gain access to the platforms themselves. The broker market is dominated by a clutch of networks who can afford to hire master brokers to get the best deal for their members. This leaves the smaller ‘directly authorised’ (DA) firms priced out of the market. Anthony Thornhill, a mortgage broker with Canter Holland, says that as a directly authorised firm, he does not do many deals with P2P platforms. However, he added that he would be willing to consider P2P if it were easier to deal with firms directly, and not only via specialist intermediary partners.

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“It would be more cost effective for us to deal directly with the lenders,” he says. “If the lenders were to allow more brokers to access them directly then we would be more likely to use them. However, some of them don’t want the hassle of having thousands of brokers calling into them – they want the handiness of a master broker.” his may represent a missed opportunity for P2P lenders. Directly authorised firms have much more autonomy when it comes to working with new types of lenders, and they are more likely to go out of their way to accommodate specialist clients. They can also work more quickly and offer lower fees than their networked counterparts – two features they have in common with P2P platforms. An upcoming ‘DA Alliance’ seeks to bring together more than 100 of these directly authorised firms to help them to access better deals from lenders, without having to join networks. Martin Stewart, director of brokerage firm London Money and founder of the DA

from IFAs so “farFeedback has been mixed. Some

have not yet familiarised themselves with the market

”

Alliance, estimates that each one of the alliance’s 100 brokers could enable £40m of lending a year, making it a tantalising prospect for banks and alternative lenders alike. “If I was a bank I’d be interested in that £4bn,” says Stewart. “But the first thing we are doing is getting momentum from the brokers.” “Working with brokers is a much more costeffective way for us to

attract borrowers,” agrees Cork. “Approximately 90 per cent of the professional buy-to-let mortgage market is broker driven, so that’s where the lion’s share of business is for us.” By contrast, IFAs still play a minimal role in the P2P sector. Although the rise of the IFISA has seen more and more IFAs (and their clients) consider P2P investments as part of their clients’ overall

portfolio, the overall response among financial advisers has been muted to say the least. Octopus Choice is the only P2P platform which is actively targeting the IFA market, building on its existing network of around 3,500 IFAs and holding regular seminars where they educate advisers on the benefits of P2P lending. “Most P2P players haven’t quite cottoned

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on to the level of support that advisers require,” says Richard Wazacz, head of Octopus Choice. “At the end of the day, clients are trusting financial advisers with their hard-earned money. That means the adviser has to be comfortable that the product they’re recommending is suited to their client’s specific objectives – not to mention brought to market by a provider that

can be trusted. It requires thorough and ongoing due diligence.” P2P lending is still very much seen as an alternative investment, and not many advisers are willing to take any sort of risk with their client’s money unless they are completely confident in the product. “Feedback from IFAs so far has been mixed,” admits Cork. “Some have not yet familiarised

themselves with the market, whilst other more innovative advisers have really got to grips with it and can see the benefits certain products can bring for their clients.” ndeed, the majority of the IFAs who were contacted for this article told Peer-to-Peer Finance News that they would not consider investing client money in the sector, largely because they view it as a new and

unproven entity with an unquantifiable risk factor. This means that it is up to the platforms themselves to educate advisers on the huge potential for inflation-busting returns, while reassuring them on the risk. “There’s a lot of caution and circumspection among IFAs regarding the mainstream P2P sector,” says Wazacz. “Track record is hugely important. The simple fact is that most P2P providers are unknown to financial advisers. They have little, if any, experience of engaging with intermediaries and, consequently, have little idea as to how they work, or the tools and resources they require. “Across the UK, financial advisers collectively manage billions of pounds, while mortgage brokers continue to be the crucial link between borrowers seeking finance and the lenders eager to provide it,” adds Wazacz. “Neither camp is going anywhere – and nor should they. We’ve staked our name on helping financial intermediaries fulfil what’s arguably one of the toughest and most important jobs going: helping their clients manage their money.” Of course, not every P2P

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lender has the resources, or the inclination, to woo intermediaries as Octopus is doing. Both brokers and IFAs are going to need to see hard evidence of the benefits of P2P, and even then they will still need time to observe the track record of each individual platform. While the IFISA has helped to draw some positive attention to the P2P sector, there is clearly still a long way to go before P2P platforms can attract the attention of the millions of new lenders and borrowers who rely on the advice of their brokers and advisers. Despite this, Cork says that he “absolutely” sees both brokers and IFAs playing a larger role in the future of P2P. “On the borrower side, brokers will continue to be our main acquisition channel for the foreseeable future,” he says. “And on the investor side, IFAs are now unable to offer their clients an honest whole-market view without including P2P investments.” “The opportunity is massive,” agrees Wazacz. “I strongly believe that more and more advisers will look to P2P as a helpful addition to their investment armoury: a solid diversifier that can play a powerful role as part of a balanced portfolio.”

FIVE REASONS WHY BROKERS AND ADVISERS ARE UNWILLING TO WORK WITH P2P LENDERS While researching this article, Peer-to-Peer Finance News spoke to more than 20 mortgage brokers and financial advisers who said they would not currently consider P2P lenders. These were the most common reasons:

LACK OF TRACK RECORD

The fact that P2P lending is still relatively new was enough to keep some brokers and IFAs at bay. They are concerned that P2P lenders have not yet weathered a downturn, and want to see proof of their staying power before recommending them to clients.

CONCERNS OVER THE RISK FACTOR

Both brokers and IFAs were concerned about the risk associated with P2P lending, particularly in the wake of the retail distribution review and other regulations. “I think its potentially too speculative and I’m too proud of my professional indemnity insurance to go with that kind of thing,” said Richard Davidson of Crofton Financial Planning. “I tend to stick with the more mainstream investments.”

LOW VOLUMES

A number of brokers complained that the relatively low volumes of property loans coming via P2P lenders meant that they felt it was not worth their while conducting the relevant due diligence required to work with them. They pointed out that P2P platforms were competing with large, established banks who are currently offering very competitive rates on their property loans, although some added that P2P had the edge when it came to commercial property lending.

LACK OF CLIENT DEMAND

Despite the ongoing popularity of the IFISA, the vast majority of IFAs told Peer-to-Peer Finance News that none of their clients were asking about P2P investments. This may be down to the fact that most of the largest, best-known P2P platforms are still awaiting approval to offer the tax-free wrapper.

POOR VISIBILITY

Many brokers and IFAs simply said that they were not familiar with P2P lending, but expressed an interest in getting to know the sector a little bit better. “We haven’t had a huge amount of experience with P2P lenders, but if there was more publicity out there about them we would potentially use them more,” said Anthony Thornhill of Canter Holland.

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City slickers Institutional money already dominates the US peer-to-peer lending market and now it’s making waves in the UK. Is this a natural evolution or is it eroding the true essence of P2P?

HERE WAS A TIME WHEN MARKETING peerto-peer lending was straightforward - the solid certainty of a mass of consumers standing on both sides of a P2P platform was enough to

make its bank-disruption mission a success story. People lending to people was a healing and redeeming message at a time when banks were still cleaning up the mess they had scattered around the globe by mixing

consumers’ savings and investors’ bets. With the real economy still grappling with the daunting ramifications of the banks’ subprime social experiment and grasping for credit, bringing the lending business back

to basics and scrapping the evil middleman altogether seemed an irrefutable proposition. But then the idealism of youth needs to make room for the pragmatism of maturity, and an insidious realisation started to cloud P2P’s coming of age: retail money alone is not enough to keep the ball rolling and let platforms become believable competitors of traditional lenders. In the US, where

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Without it, growth would be much “slower, making it difficult for many platforms to survive before they reach a large enough scale

”

institutional money now accounts for more than 80 per cent of the sector, this was a natural progression that magnified funding possibilities for both the platforms and the borrowers they cater for. nstitutional presence has been increasing on this side of the Atlantic too, albeit at a slower pace. “It’s very likely that institutions will continue to bulk up the percentage of cash flowing into this sector, purely because it is a simple way to make money at competitive interest rates,” says Daniel Tunkel, head of financial regulation at law firm Howard Kennedy. “A fund that needs to return a coupon of five per cent will be no more interested in a pointless bank deposit than an individual offered a rubbish rate at the bank.” However, justifying such a shift in the UK may

prove a tougher job, as the P2P sector here is still split by the burdensome dilemma of whether to welcome money from institutional investors with open arms or relegate it to a ‘diversification allowance’ pot. On one hand, platforms such as MarketInvoice and Landbay make no mystery of the benefits of involving institutional money, first and foremost as a catalyst for business growth. Some argue that amassing decent volumes from retail funds would cost a disproportionate amount of time, money and resources. “Without it, growth would be much slower, making it difficult for many platforms to survive before they reach a large enough scale,” affirms Neil Faulkner, managing director of P2P research and comparison website 4th Way.

Without a little help from institutional friends, “individual lenders would thus have less choice of platforms,” he adds. And retail clients stand to benefit from the institutional investors’ seal of approval, as it means the platform in question has passed its criteria. “Institutional investment shows that the platform and its underwriting has passed serious due diligence,” says

Landbay’s chief executive John Goodall. “They validate the credit and risk underwriting models,” agrees MarketInvoice’s head of investor development Aman Mehra. “They also ensure better standards of protection for all investors through enhanced reporting and through feedback on presentation of risks, which ultimately

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The last thing the FCA “ wants to see is the retail element of the business being diluted or disadvantaged

”

results in improved legal frameworks and operational procedures.” However, other platforms are not so convinced of the validity of such an argument. For them, the involvement of institutional investors should be restricted to the bare minimum necessary to diversify a platform’s client base. Any other type of involvement could jeopardise the platforms’ independent decisionmaking process. Far from strengthening their underwriting and transparency standards, it could actually push them in the opposite direction. “There is a danger that the platform becomes reliant on this capital and may be forced to make changes requested by that investor, which it would otherwise be unwilling to make,” says a RateSetter spokesperson. This is a real and present issue that some

lenders have already experienced first hand. “We’ve had cases where a certain type of institutional investor was looking for higher returns and therefore tried to influence the underwriting process,” affirms a spokesperson from a platform, on condition of anonymity. “But we have declined to do business with them - we’re not willing to look at higher-return deals or changing our underwriting criteria just to accommodate single requests.” Howard Kennedy’s Tunkel warns that this is a feasible scenario, whereby institutional investors would try to direct the platforms’ business. Some platforms would then arrange loans tailored to the institution’s needs and risk appetite. However, the spokesperson speaking on condition of

anonymity stressed that the vast majority of institutional investors interested in P2P tend to be on the cautious end of the risk/return spectrum. “Most institutional investors are not particularly creative those investing through our platform are at the lower-risk end of the spectrum and have an interest in the process complying with strict due diligence requirements,” the spokesperson explains.

Nonetheless, their presence seems to prompt an equal level of optimism and concerns. “Their involvement would be a way of getting money into the economic system, which can offer marvellous opportunities,” comments Tunkel. “But it could be calamitous if the same money goes around, which is what happened with Lending Club in the US there must be a means to an end.”

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of the UK’s largest platforms and Financial Conduct Authority (FCA) approval. In the not-so-distant future, regulators could go as far as requiring a clear separation of retail and institutional investments through P2P platforms, the source says. ransparency is pivotal to the P2P sector – both from a regulatory and reputational standpoint. The City watchdog’s recent enquiry into P2P wholesale lending activities has raised awareness of the risk of losing track of the end borrower. But wholesale lending can take place on the other side of the P2P equation and the FCA may soon take steps to head off risks of losing track of retail money. “The last thing the FCA wants to see is the retail element of the business being diluted or disadvantaged,” says Relendex’s chief executive Michael Lynn. “[Retail investment] is still such a strong selling

had cases where “anWe’ve institutional investor tried to influence the underwriting process

”

The largest US P2P lender was running a 70 per cent ratio of institutional funds when its corporate governance scandal started to unfold.

According to an industry source, the mix-up of retail and institutional money could be the main hurdle standing between some

point to so many people, and such a big issue in terms of the platforms’ reputation, that I believe many of them will always hold on to the original ideals, and profit by doing so,” says Faulkner, who believes that platforms who fall short of prioritising this vital aspect may be doomed to fail. “I would consider that a failure of many major P2P lending platforms, if they are unable to communicate to individuals that they offer the key benefits of investment funds without the additional layer of costs,” he adds. If institutional investment penetrates the UK market as heavily as it has done in the US, individuals could end up paying institutions an extra layer of fees to pick P2P loans for them when they could easily avoid those fees and diversify across thousands of loans for themselves by lending directly. “That would be a lot of intermediation in a market we’re trying to disintermediate,” comments one industry source.

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