P2P Investing Summit Special Report - 13 July 2021 by Alternative Credit Investor

The peer-to-peer investing report Published in association with the P2P Investing Summit July 2021

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INTRODUCTION

Introduction from report editor, Kathryn Gaw

he third quarterly P2P Investing Summit comes at a moment of optimism for the sector. Over the past 16 months, peer-to-peer lenders have been instrumental in propping up the economy via government-backed loan schemes and their own innovative funding solutions. Now, as the economy reopens, many lenders expect to build on this momentum. We have been lucky enough to hear from some of the leading voices in P2P during this Summit, and they have offered some invaluable insights into the future of P2P. We can expect to see innovations

such as blockchain technology and open banking transform the financial services space, and help more people access P2P loans and investment opportunities. Across Europe, P2P platforms are scaling up and expanding into new markets. And in the UK, P2P is rapidly being absorbed into the mainstream, with all the regulatory oversight that that entails. We hope that you enjoy reading about the latest developments in P2P in this report, and we look forward to updating you once again on this dynamic industry at our next Summit, later this year.

Introduction from our platinum sponsor, Shojin Property Partners

s we emerge from lockdown and the world, or least the UK, starts to take on some form of normality, this is a perfect time to consider the future of the online investment world, notably crowdfunding and P2P. Over the past two years we have seen an upheaval in the industry. Even before Covid, some platforms were being closed down by the regulators due to poor business practices and, in some cases, outright fraud. Covid then tested

the market further causing many more firms to be wound up. Those that remain have proven their resilience in their first big economic test, but each platform is still a minnow in the overall investment industry. To survive and thrive, platforms must work together to create industry-wide standards that investors can understand and trust. Shojin is very pleased to join Peer2Peer Finance News as we take a look at what the future holds in this still nascent sector.

INNOVATION

Innovation in P2P Investing Cryptocurrency, blockchain, fraud prevention and open banking – fintech lenders are driving forward the next era of P2P innovation. We take a look at a few emerging trends…

HE UK’S PEER-TO-PEER lenders are an innovative lot. For a start, they invented the very concept of P2P lending. And when that took off, they started to rewrite the rules. Today, P2P lenders are launching digital banks, online pawnbroking services, cryptocurrency tokens, and bespoke credit checks, while new ideas and solutions are constantly being trialled and tested. During the pandemic – while most industries stuttered and waited for a return to normalcy – P2P

lending platforms doubled down on their efforts to make the sector as user-friendly and forward-thinking as possible. They launched apps, updated their software, and introduced new lending products to meet market demand. They integrated open banking solutions and toyed with crypto assets and blockchain solutions. They updated their back end processes to make customer engagement even more efficient, and they introduced new credit checking processes which are better suited to the post-

pandemic lending market. As the economy reopens, P2P lenders are ready to show what they can do and how alternative lenders can move the needle for the entire financial services ecosystem. Here are just a few of the emerging trends that are being pioneered by P2P lending platforms…. Seamless onboarding The introduction of appropriateness tests for investors in December 2019 threatened to make the investor onboarding process more

INNOVATION

time-consuming. This led platforms to prioritise end-to-end solutions aimed at making the onboarding process as easy as possible. Folk2Folk has recently invested in a new technology platform which will integrate its appropriateness test into the application process, embedding it as a seamless step for investors. Similarly, Blend Network partnered with tech firm NorthRow last year to create a secure, compliant and fast client onboarding process to verify both the platform’s lenders and borrowers in one easy step. Other platforms have opted to automate their essential know your customer (KYC) and anti-money laundering (AML) processes, while others have outsourced these services to a compliance software provider. Fraud cover Cyber crime has risen significantly in recent years and instances of digital fraud are believed to have increased during the pandemic. In February 2021, a specialist police unit funded by the banking and finance industry announced it had prevented almost £20m of fraud and arrested more than 100 suspected criminals in 2020, including several involved in Covid-19 scams. Meanwhile, recent analysis by credit reference agency

TransUnion found the number of suspected fraud attempts in financial services rose by almost 150 per cent between January and May this year compared with the same period of 2020, as more and more people turned to digital banking during the national lockdowns. Digital IDs have been mooted as one way to reduce the risk of financial fraud and platforms have invested heavily in both AML and KYC solutions as well as developing their own software as a service (SaaS) packages. To better supervise its appointed representatives, P2P platform and principal Rebuildingsociety uses analytics that feed into its risk register and key risk indicators giving live information. The platform is also using some software for its risk register which integrates it with its project management system that prioritises tasks for different staff managers. “It lists different types of risks and who oversees the different risks and attributes who is responsible for what,” says Daniel Rajkumar, managing director of Rebuildingsociety. “It references different tasks and says who is responsible and is part of the work we’re doing to improve the

risk management framework and AR oversight framework.” Blockchain integration Blockchain enthusiasts have spent the past few years explaining why blockchain’s distributed ledger technology is not a form of cryptocurrency. Now, finance providers are starting to use blockchain in innovative new ways to improve liquidity, reduce fraud and streamline their transactions. “Blockchain and crypto aren’t making waves, they’re making a tsunami,” says Lee Birkett, founder of JustUs and Moneybrain. “It’s the biggest economic revolution for 100 years if not more.” Money&Co is looking at using tokenisation for creating pools of assets that can be invested in by institutional investors, while another platform chief executive believes that everything that can be tokenised will be, as blockchain solves the ‘trusted third-party’ problem. Open banking Open banking was introduced in January 2018, and alternative lenders were among the first to embrace the concept. But over the past year or so, open banking has been truly embraced by consumers and investors

INNOVATION

who have become increasingly comfortable making online financial transactions. The Open Banking Implementation Entity has estimated that since January 2020 an average of 160,000 users have switched to open banking each month. And according to recent data from Equifax UK and AccountScore, since the start of the first UK lockdown in March 2020, there has been a 140 per cent surge in the adoption of open banking across the board. As open banking becomes the default state of the UK’s fintech sector, many more use cases are expected to be identified, in an effort to make online investing and lending more accessible. The cryptocurrency debate Alternative lenders are split on the viability of cryptocurrency as a tool for innovation in P2P. JustUs has launched its own BiPs cryptocurrency, which is soon set to launch in the US. And Zopa backer Augmentum Fintech has recently made its first crypto investment in digital asset lender Tesseract. But other P2P stakeholders have privately described crypto trading as “a Ponzi scheme” in the making, and pledged

to stay well away from it. Until this debate has been settled, expect to see more platforms toy with crypto solutions, and crypto-adjacent solutions such as the tokenisation of online assets. Credit checks P2P lenders have distinguished themselves by building cutting-edge credit checking processes, which are designed to identify the most creditworthy borrowers. This is an area which continues to provide some of the most innovative technologies on the market. Soon-to-launch consumer loan platform Plend has built a credit checking algorithm which takes into account everything from a borrower’s rental history to their gambling habits. Meanwhile, Elfin Market has created a bespoke credit card which charges a representative APR of 5.8 per cent to its borrowers, with a flexible repayment model that encourages borrowers to pay off their debts early. These are just a couple of examples of how the P2P sector is changing the way that credit checks are carried out – and the banks are clearly paying attention. Last year, Metro Bank acquired RateSetter in a deal which

was said to have hinged on RateSetter’s valuable credit checking technology. Starling Bank has hinted that it may be interested in similar types of deals in the near future. Communicating innovation Innovation is synonymous with the alternative lending market, but it can also create the illusion of risk. Innovation often requires a leap of faith, and some platforms have struggled to communicate this clearly to their investors. The regulatory crackdown on P2P marketing and the introduction of appropriateness tests has placed the onus on platforms to educate the public about the risks of alternative lending. During the pandemic, it has become even more challenging to get this message across in the absence of events, conferences and roadshows. P2P lending platforms have no shortage of solutions to make the financial services space as modern and streamlined as possible. Now, they simply need to explain these solutions to a sometimes-sceptical investor base. Time will tell which innovations will stick, and which innovations will fall away to make room for newer, even more exciting ideas.

PROMOTED CONTENT

Crowdfunding survived the Covid test, now the real work begins

Shojin Property Partners’ chief executive Jatin Ondhia explains what the sector needs to do to reach its next stage of growth

HE CROWDFUNDING industry requires scale, consistency and transparency before it earns enough trust to bring it into the mainstream. High-profile failures have highlighted weaknesses in the sector, while Covid provided the first true test of a market downturn. Strong players have emerged from the wreckage, but on their own each will remain a minor player. Over the next two to three years we expect to see much more collaboration between platforms, both in the UK and internationally, to bring standardisation across the industry and provide investors with a truly diversifiable alternative investment option. As 2019 started, Brexit uncertainty was in the air. As if that wasn’t bad enough, we experienced the first cracks in the alternative finance and peer-to-peer lending market. London Capital & Finance (LCF), Lendy and FundingSecure all failed spectacularly, leaving investors out of pocket by millions of pounds. When investigated, multiple failures were discovered such as poor business management, lack of due diligence, absence of appropriate systems and controls. The problem was that the regular investor had no way of knowing whether a platform was being open and transparent, or spinning a yarn. The fact that LCF was paying its marketing firm 25 per cent commission to bring in completely unsuitable investors that would unwittingly buy into investments which they did not understand should have been a red flag. But nobody checks for these things until it all unravels. Investors blamed the Financial

Conduct Authority (FCA) for lack of oversight, but of course that’s nonsense. It does not take a genius to work out that if banks are paying less than one per cent interest, but someone is offering you 10 per cent interest, there is going to be risk involved and you should do extra due diligence. The problem was that nobody did their due diligence. They couldn’t. The average investor wouldn’t know where to start. This is where it all went wrong. The FCA may regulate the industry, but they don’t have the time or expertise to micro-monitor all the platforms all the time. We have to start with the premise that those running the firms have been considered a “fit and proper” person by the FCA and that their marketing would be “clear, fair and not misleading” so they wouldn’t do anything to put investors at risk. Unfortunately, there are always rogues and there always will be. Failures will happen. Investors have to use their own judgement and ensure that they are comfortable with the information being provided to them. For this market to properly grow, investors need confidence that the information they are being given is not only correct, but that they have interpreted it correctly. They

must be able to understand what they’re investing into and the firm that they are investing through. If you go to a hundred platforms, they will use a hundred different types of terminology. Investors have no way of understanding the relative risk between one product and another. They also have no objective way of comparing one platform to another. That’s why they are at the mercy of marketing firms that get paid handsomely for selling them the wrong investments. This is where self-regulation and collaboration come in. Leading platforms want the industry to thrive and recognise that the way to do that is by working together, to provide investors with confidence and drive out the rogues. Standardised terminology is a starting point, followed by standardised risk metrics measured objectively. These will really enable investors to understand the relative risk and returns across products. Performance transparency, regular reporting, due diligence process and management audits will all enable investors to compare the quality of platforms. Platforms are starting to come together to do all that and much more. Despite the cost (in time and money) of implementing the above, adherence to a higher set of standards, with accreditation, will attract more investors and help the business to grow further. Once they are working together in such a way, the platforms can collectively create a larger centralised market with a deeper pool of liquidity for both primary and secondary trading. This is when the sector will really take off.

REGULATION

How P2P regulation can impact your portfolio The Financial Conduct Authority has strengthened its rules for the peer-to-peer lending sector in recent years. Where does this leave your P2P investments?

HE FINANCIAL Conduct Authority (FCA) assumed responsibility for regulating the peer-to-peer lending space in 2014, taking over from the Office of Fair Trading. Initially, the regulator seemed to take a light-touch approach to the growing sector, taking the time to get to know the main players and to understand the intricacies of the space. But the FCA introduced tougher rules for the P2P industry in 2019, in order to protect investors from financial harm in the wake of several high-profile platform closures. The industry has been broadly supportive of the new regulations, arguing that they weed out the weaker players, resulting in a stronger and more resilient sector. In fact, many P2P platforms say that they were already operating in line with most of the updated rules, such as increased disclosure requirements and data transparency. In practical terms, one of the key changes has been the introduction of investor marketing restrictions. P2P investors must now pass appropriateness tests and be categorised as high-net-worth or sophisticated, advised or restricted. Peer2Peer Finance News outlines how the investor marketing restrictions may impact you.

Appropriateness tests All P2P platforms are now required to introduce an appropriateness test for new investors. The purpose of the test is to weed out any potential investors who do not fully understand the risks associated with P2P. According to FCA guidelines, the appropriateness test should include a range of questions which will assess the investor’s understanding of the relationship between the borrower and the platform, and their exposure to the risks of P2P lending. It should also confirm that there is no Financial Services Compensation Scheme protection, that returns may vary and that P2P investments are not comparable with a savings account. The test should also ensure that investors are aware of the risk that they may be unable to exit a P2P agreement before maturity, even where the platform operates a secondary market. However, while this test can be presented in multiple choice format, the regulator has warned that platforms must avoid a “tick-box approach.” The 10 per cent rule The FCA has decided that restricted retail investors should not put more than 10 per cent of their investable portfolio into P2P loans. “We maintain that limiting how

much a restricted investor can invest in P2P agreements is an important means of ensuring that retail investors who are new to the asset class do not over-expose themselves to risk,” the FCA said at the time. However, the City watchdog noted that investors can re-classify as sophisticated investors (thereby removing the 10 per cent investment limit) when they have more experience. Self-certification Since 2019, all potential P2P investors can self-certify as sophisticated or high-net-worth investors. In some cases, platforms may ask for proof that you have the funds that you claim to have. If you have declared yourself to be a sophisticated investor, you will likely be asked to demonstrate

REGULATION

your financial nous by answering a series of questions. There is not one standard questionnaire, so the difficulty of the questions may vary from platform to platform. Under FCA regulations, sophisticated and high-net-worth investors are not subject to the 10 per cent portfolio rule. Professional advisers Investors receiving regulated financial advice are also exempt from the 10 per cent rule. Over the past few years, the P2P community has been working hard to win the trust of financial advisers. Some platforms have created their own adviser portals, and products which are particularly suited to the independent financial adviser (IFA) sector. Before it exited the market, Octopus Choice hosted regular

meetups for advisers in every corner of the UK in an effort to educate IFAs about the potential benefits of P2P investing. Adviser engagement has become even more important in the wake of the latest regulations. According to FCA data, 4.5 million people sought out professional financial advice in 2018, and that number is believed to have risen since then. Financial advisers are trusted experts with a deep knowledge of the investment market, and the ability to introduce many more people to the benefits of P2P investing. This will make them a valuable part of the alternative lending ecosystem in the years to come. What next? Earlier this year, the FCA published proposals to strengthen its financial

promotion rules for consumer investments. Following feedback to its call for input (CFI), the regulator has published a discussion paper seeking views on three areas with the aim of better protecting retail customers. The three areas are: the classification of high-risk investments; further segmenting the high-risk investments market; and the approval of financial promotions. Within the classification of highrisk investments, the FCA is seeking views on whether more types of investments should be subject to marketing restrictions and what marketing restrictions should apply. The FCA will publish a full response to its CFI on consumer investments, alongside the next steps on its wider consumer investments strategy, later in the year.

The P2P Investing Summit Peer2Peer Finance News and AngelNews are delighted to present the P2P Investing Summit, a quarterly event series for the investor and adviser community. Our virtual events showcase high-profile speakers and expert panellists, to provide an insight into the untapped opportunities provided by peer-to-peer investing. These events are exclusively for investors and advisers. Please put the next Summit date in your diary now, to avoid missing out! Thursday 28 October 2021 If you are a peer-to-peer lending platform interested in sponsoring the next Summit, please email Tehmeena Khan at tehmeena@p2pfinancenews.co.uk. Previous sponsors include:

EUROPEAN MARKET

P2P investing in Europe U K INVESTORS CAN PUT their money in overseas stocks and shares, and the same is true for peer-to-peer lenders. In fact, according to a recent report

from Croatia-based lender Robo.cash, demand for P2P lending investments in Europe is outpacing the growth of the market. UK-based P2P investors can

Germany is home to many pan-European platforms, including Funding Circle and EstateGuru. The country's total P2P transactions were believed to have reached €252m in 2020.

The Netherlands has a mature P2P market, with international names such as Funding Circle and local brands like Lendahand.

diversify their portfolio by putting their money in European platforms, as well as home-grown lenders. Here is a brief overview of the current state of the European P2P market...

Norway's P2P market has grown significantly in recent years thanks to brands like Funding Partner. Nordic P2P investors are among the most active in Europe.

Sweden's Fellow Finance recently revealed that its loanbook had passed €800m (£685m). The country has a diverse fintech ecosystem with crypto lenders as well as P2Ps. Estonia's booming P2P market took a knock when two platforms were declared bankrupt in 2020. However, it is still home to big names like Bondora and Fagura.

Linked Finance became the first P2P lending platform in Ireland in 2015. It recently passed its €150m lending milestone.

Latvia has become one of the most popular jurisdictions for P2P lenders in recent years. Mintos and Twino hold the largest market share.

France has a wide range of P2P lending platforms, the most famous of which is business lender October. Spain is the fifth biggest market for alternative finance in Europe, with homegrown brands including Grow.ly and Via Invest. Portuguese platform Raize became Europe's first P2P lender to go public in 2018, with a market cap of €10m.

Smartika was the first P2P platform to launch in Italy in 2012, as a franchisee of Zopa. There are a handful of other lenders in this growing marketplace.

Robo.cash is the biggest name in Croatia's growing P2P market, with more than €200m lent to date.

Lithuania is a growing hub for P2P, with notable names including EstateGuru and PeerBerry.

ETHICAL INVESTING

New environment bill and growing ESG trend boost case for green P2P investing

EGISLATION TO HELP the UK reach its net zero carbon emissions target by 2050 was promised in the Queen’s Speech but peer-to-peer investors don’t have to wait for laws if they want to show their green credentials. The Queen’s Speech, unveiled during the state opening of Parliament on 11 May, included an environment bill to set out binding environmental targets. “My government will invest in new green industries to create jobs, while protecting the environment,” said the Queen. “The United Kingdom is

committed to achieving net zero greenhouse gas emissions by 2050 and will continue to lead the way internationally by hosting the COP26 Summit in Glasgow.” The bill had already started going through the House of Commons at the end of last year and will now continue its passage and be debated by MPs. Meanwhile, the growing demand for investments fulfilling environmental, social and corporate governance (ESG) criteria could also benefit P2P lending platforms. According to recent figures from the Investment Association,

ESG investments quadrupled in 2020, while a separate study by OnePlanetCapital found that the ESG market is set to double in 2021. There are already plenty of opportunities for green and ethical investments within the P2P lending sector. Crowd bonds platform Abundance has worked with councils to provide community municipal bonds that support renewable energy projects in a local area. More than £2m has been raised so far for West Berkshire and Warrington councils. Bruce Davis, managing director of Abundance, said the case for change

ETHICAL INVESTING

has been accepted by the majority of voters. “People want to see action at a local level to transition to net-zero and also deliver real changes to the quality of local environments and arrest the declines in biodiversity,” Davis said. “The good news is that economic studies show that investing in green infrastructure is also the most effective way to deliver the ‘levelling up’ agenda which was so prominent in the Queen’s Speech. “We are hopeful that many local councils will now issue climate bonds in support of the national targets for net-zero and that the environment bill contains the powers to make those targets legally binding.” Other alternative lenders such as Downing Crowd, Ethex, Folk2Folk and Crowdstacker also offer green energy investment opportunities. Crowdstacker raised £1m in 2019 for a project with Prime Agri, which provides funding for agricultural, horticultural and rural small businesses with a focus on

renewable energy. The platform has said it has similar projects in the pipeline. Folk2Folk recently pointed out that its investors have used their money to support their environmental concerns by investing in renewable energy projects. “Today there are more opportunities to make money while contributing to the social good,” said Folk2Folk spokesperson. “It’s not about altruism – investors still require a return – but a balance is struck and ESG related factors may more often form part of that total equation. “Change begets change and this trend is likely to accelerate. Imagine if all investors invested with purpose as well as for profit. A shift along these lines could make a dramatic difference.” Furthermore, property lenders such as Relendex, CrowdProperty and Assetz Capital have been championing sustainable methods of construction and the creation of affordable housing.

Assetz Exchange – the sister company of Assetz Capital – has opted to focus on funding building developments which do some social good. However, Assetz Capital’s chief executive Stuart Law recently said that “we’re not doing it because we want the ESG label.” “We’re not putting that label on it because it just happens to be what we want to do,” he added. “I think a lot of people are putting a sticking plaster on their business and using it in that way. So we're not particularly playing that part of it up for the time being.” There are also new entrants to the ethical P2P investing space. Charm Impact, which plans to provide peer-to-business loans to clean energy entrepreneurs in developing economies, raised more than £273,000 in a Crowdcube campaign last year to prepare for its upcoming launch. It has plans to offer an Innovative Finance ISA – the tax wrapper around debt-based securities such as P2P loans – later this year.

PROFITABILITY

P2P platforms start to reach profitability A

SIGNIFICANT NUMBER of peer-to-peer lending platforms in the UK are now turning a profit, despite the uncertainty caused by the Covid-19 pandemic. Over the last few months, more than a dozen UK-based P2P lenders have either reached profitability for the first time or increased their previous year’s profits. This trend can be seen across a range of platforms such as Funding Circle, Zopa and Shojin Property Partners. Funding Circle became profitable for the first time in the second half of 2020, with the company’s UK division making operating profit of £21.3m in the second half of last year. The Funding Circle group made a profit of £7.2m over the same time period. While Zopa Group reported pretax losses for 2019, profits for its P2P business ticked up to £575,000, compared with profits of £145,000 the previous year. Earlier this year, Folk2Folk said that it had made a £1.1m profit in its latest full-year results, up 460 per cent from £198,043 the previous year. "One could argue that it is a bull market for P2P/marketplace lending

because of the high level of investor appetite," said Roy Warren, managing director of Folk2Folk. "These funds are the essential ingredient to drive the engine of lending to small- and medium-sized enterprises where demand for business loans remains strong as business owners look to invest in their business to adapt, diversify or ‘future-proof ’ by building in greater resilience." Meanwhile, Relendex made a profit of £135,760 in the 12 months to 31 January 2021, reducing its losses since inception to £5,773,702. Rebuildingsociety achieved a profit of approximately £33,000 during 2020, and is targeting a profit of between £25,000 to £60,000 for 2021. And Shojin Property Partners reported a £234,000 profit on almost £1m in revenues in the year to 30 June 2020, after making a £830,000 loss in the previous financial year. EasyMoney also turned around its balance sheet, making an operating profit of £57,184 last year, after posting a loss of more than £1.023m the previous year. These figures suggest that the UK P2P sector has proven itself both before and during the Covid-19 pandemic, proving the viability

of the business model across all lending segments. It is believed that higher lending volumes, the normalisation of alternative lending options and government support packages are behind the trend of P2P profitability, as well as the long track record of some platforms and the success of their business models. “The platforms that are now becoming profitable have spent several years successfully building a scalable business and franchise,” said Mike Carter, head of platform lending at the 36H Group. “The economics of a P2P platform require the business to spend heavily in the early years on tech and other fixed costs to build the brand, credit capabilities and servicing operations. “These platforms have now built critical mass in their loan volumes, which means they are generating gross profits that more than cover their fixed costs allowing them to move into profitability and start scaling up further. “Reaching profitability is an important milestone in a platform’s development and provides the business with strategic flexibility to move forward.”

P2P TIMELINE

The history of P2P lending

T HAS BEEN 16 YEARS SINCE the first peer-to-peer lending platform was launched right here in the UK. Since then, P2P lending has grown to become a multi-billion-pound industry, which has connected millions of borrowers and lenders across the world. And it all started with Zopa.

2005

UK fintech Zopa launches the world’s first P2P platform.

2006

Prosper becomes the first US-based P2P lender to launch.

2008

The global financial crisis creates demand for non-bank lending and alternative investment options.

2010

Funding Circle launches, becoming the first P2P business lender in the UK.

2014

The Financial Conduct Authority (FCA) begins to regulate the P2P space.

2016

The Innovative Finance ISA (IFISA) is launched, allowing individuals to enjoy tax-free earnings on their P2P investments.

2018

Funding Circle becomes the first P2P lending platform to float on the London Stock Exchange, with an initial offering of 440p per share.

2019

Property lender Lendy collapses, marking the most high-profile platform failure to date, and opening up a conversation about platform oversight.

2019

The FCA issues sweeping new regulatory changes to the P2P market, introducing marketing restrictions and a series of requirements designed to protect consumers.

2020

Metro Bank acquires P2P platform RateSetter and pledges to offer RateSetter’s consumer finance produces in its branches.

2020

P2P lenders including Assetz Capital and Funding Circle are authorised to offer loans under the government-backed coronavirus business interruption loan scheme.

2021

Zopa revealed it is planning to list in London next year or in early 2023 and has identified buy-now-pay-later (BNPL) as its next market.

TRANSPARENCY

Clear as day

How transparent is the peer-to-peer lending sector – and what does transparency actually mean to the industry’s key players?

RANSPARENCY HAS become something of a buzzword in the world of finance. Ever since the 2008 financial crisis, consumers have come to expect a certain level of transparency from their financial providers – and this is particularly true for peer-topeer lenders. P2P lending was born out of the financial crisis, and pitched itself as a transparent, consumer-focused alternative to big banks. But while the majority of platforms and investors believe the industry is doing its best to be as transparent as possible, there is still plenty of room for improvement. Recently, Peer2Peer Finance News conducted an exclusive survey of restricted, high-net worth and sophisticated P2P investors, and found that 70 per cent believe the sector is “slightly” transparent. Almost one fifth (17.5 per cent) of respondents said they believe the sector is “very” transparent. These are rather promising statistics for a relatively young sector which has just been hit by its first economic downturn. “It’s at a reasonable place at the moment,” says David Turner, cofounder and director of Invest & Fund.

investors reporting they do not think the sector is transparent at all. David Bradley-Ward, chief executive of Ablrate, believes that this is a particular problem for platforms with access accounts, which do not always tell investors where individual loans go, or what liquidity is available to lenders. Peer2Peer Finance News’ survey included similar feedback, with some investors citing honest information about liquidity as a key indicator of transparency, while another respondent highlighted diversification and how many loans go to the same borrower. “It’s a lot more transparent than some fund sectors but there’s always room for improvement,” says Bradley-Ward. “I think in some P2P platforms you’re just investing in a diversified portfolio across a bunch of loans and you don’t know where each goes to and I think platforms need to be more transparent in what they mean by normal market conditions.” While it appears that some improvement is still needed, the majority of platforms believe the P2P sector has become more transparent over the past year, and this can partly be credited to the regulator.

“ I think more platforms should voluntarily publish full loanbook data”

“Lenders have an ability to assess platforms to a reasonable degree now and you can see that with the amount of money lent through platforms.” But improvement is clearly still needed, with 12.5 per cent of

In December 2019, the Financial Conduct Authority (FCA) introduced a raft of new P2P regulations, which included measures to boost transparency. All platforms are now required to publish detailed

disclosures relating to how they undertake due diligence, how they characterise risk and price an agreement, what will happen in the event of the platform failing, and ongoing disclosures regarding individual agreements. The rules also mandate for detailed publication of the expected and actual default rate of all P2P agreements the firm has facilitated by risk category, shown as an Outcomes Statement published annually. However, while these statistics must be reported to

TRANSPARENCY

the FCA, there is no requirement for platforms to make this information public. Atuksha Poonwassie, cofounder and managing director of P2P property lender Simple Crowdfunding, believes that data transparency in the sector has improved over the past year and that the sector is already in a new era of data transparency. “Over the past year I believe platforms have started providing more information in terms of how

they are performing,” she says. “The new rules shine a light on it. Platforms were providing information, but the rules enforced it.” However, Stuart Law, chief executive of Assetz Capital, disagrees and says he does not believe it has improved at all. “Platforms are giving out the same information,” he says. “And there are the complicated issues of the pandemic and trouble comparing data in 2020 to previous

years so I’d say transparency in many ways has gotten worse.” Despite making it more difficult to compare to historic data, the Covid-19 pandemic has amplified the need for greater data transparency. “It’s very important to give people the information because there are so many moving parts,” Law adds. This is reflected in Peer2Peer Finance News’ survey which revealed that investors are especially interested in the risk management of P2P platforms.

TRANSPARENCY

It found that 82.5 per cent of investors see information on underwriting processes and risk assessment as an important indicator of transparency, while 77.5 per cent value insight into the management team and corporate governance. Some investors prioritised information about the financial stability of a P2P company as a key indicator, while one respondent called for transparency about the runbook for P2P bankruptcy and loan default management and another wanted to see that the platform’s business plan and profitability milestones are being met. Some platforms are already making these changes. Bradley-Ward says that Ablrate will soon launch a repayment analysis section to show repayments that are made and how many are late, as well as new technology to allow lenders to draw down better levels of data. “There will be more data-driven transparency where lenders can see where their money is going,” he says. Meanwhile, other platforms, such as Simple Crowdfunding, believe that change is continuous. “It’s finding the best way to be able to do that to provide more information,” says Poonwassie. “It’s a continuous process, not just something you stop and start – you’re

“ For the sector to

grow, standardisation is vital

”

always looking for ways to improve information sharing and data transparency.” Jatin Ondhia, chief executive of Shojin Property Partners, which is working on standardised metrics with European counterparts, says that standardised product definitions, risk metrics, performance reporting and due diligence framework is needed to improve data transparency in the sector. “For the sector to grow, standardisation is vital – without this it will always remain fractionalised,” he says. “Individual investors are the ones that pay for this – as they are unable to reap the benefits of being able to make the best investment choices and profit from true diversification.” Ian Anderson, chief operating officer of ArchOver, agrees, saying it can only benefit the industry but will be difficult in practice. “It can only benefit the industry, and in certain sectors (property lending is a good example) we think it could work,” he says.

“However, making everyone work from the same play book, sharing investors and combining secondary markets will be difficult to pull off – after all, these are the core elements of any lending business and partly defines their value – sharing these elements may be a step too far for many of them.” Assetz Capital’s Law also agrees that more standardisation is

TRANSPARENCY

needed in theory but believes that regulation around data transparency and reporting statistics should be simplified and a standardised default definition is needed from the regulator. “That would help,” he says. “You can’t compare one platform with another on many levels such as platform risk, lending risk and defaults. It’s missing lots of data and is not very clear at all.” Neil Faulkner, managing director and head of research at 4th Way, believes that the FCA should enforce a minimum disclosure about people, processes and results on platforms’ websites. “I think more platforms should voluntarily publish full loanbook data,” he says. “I think that platforms should explain lending costs, liquidity and target lending rates more regularly and more clearly in non-legal language, above-and-beyond the legal disclaimers and risk pages that they are already required to do, which are too dry and too fleetingly observed for some investors to properly take in the full implications.”

This is backed up by 90 per cent of the investors from Peer2Peer Finance News’ survey who cited loanbook data, borrower rates, default rates and returns as key indicators of transparency that they look for in platforms. However, Mike Bristow, chief executive of CrowdProperty, does not think more regulation is needed, although he believes platforms should provide more data to investors. “Not enough information is displayed from some platforms,” he says. “I think platforms need to start realising that showing data is a good thing and attracts lenders. People need to think more strategically rather than thinking it’s just about ticking regulatory boxes.” Thinking strategically could be part of the answer as well as collaborating to execute new ideas. At the P2P Investing Summit in April 2021 – a virtual event hosted by Peer2Peer Finance News and AngelNews – one P2P lending industry stakeholder called for a borrower register to prevent people

from using the same personal guarantee (PG) with multiple lenders. P2P platforms are wholeheartedly behind the idea, but some recognise it will be difficult in practice and should possibly go even further to a portal where lenders only have to undergo ‘know your customer’ and anti-money laundering checks once in order to invest on multiple platforms. “A simple PG register is a good idea, but it is only part of the solution,” says ArchOver’s Anderson. “A register has to offer a lot more than ‘flat data’ such as a simple confirmation of an existing PG. A PG register will only be as successful as the number of lenders prepared to participate, and those participating need to be a wide range of players across all business lending sectors, not just P2P.” We could well be heading into a new era of data transparency, but first platforms must reconnect with their consumer-focused roots and ensure that transparency remains a cornerstone of the alternative lending community, now and in the future.