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INTRODUCER Information carried in Mortgage Introducer is checked for accuracy but the views or opinions do not necessarily represent those of Mortgage Introducer Ltd.
August 2019 www.specialistfinanceintroducer.com
INTRODUCER This month marks the appointment of Prime Minister Boris Johnson. The controversial character was voted by his Conservative peers to become leader, beating rivals such as Jeremy Hunt and Michael Gove. With the appointment of Johnson comes the UK’s 20th Housing Minister in 20 years, with Esther McVey being given the chance to reform the problematic housing sector. As demand continues to outweigh supply and stamp duty adding to “It will be an first-time buyer woes, it will be interesting to see exciting second how Boris’ government half of the year as tackles the current problems. we watch events Boris is widely known as unfold” a marmite character, you either love him or hate him. However regardless of your persuasion, Johnson will be the one to take us over the line with Brexit and end the uncertainty once and for all. Savid Javid has been appointed as Chancellor of the Exchequer after Philip Hammond’s bold resignation threat on BBC’s Andrew Marr Show if Boris was to take power. It will be an exciting second half of the year as we watch events unfold. With this new appointment we can look back at Theresa May’s appointment with a collective sigh. May had no easy task, and her emotional resignation from the post back in June led to many having sympathy for the former PM. It’s difficult to say that she would have left a legacy of any kind, however Johnson has a tough task rallying the troops to agree on a deal, something that ultimately led to May’s demise. As an industry, let’s hope we begin to see steps in the right direction, with a renewed focus and sense of calm. In this issue we look at the state of the peer-to-peer market on page 14. Remember to follow us on Twitter @MortgageChat, and let us know your thoughts on this issue.
5 Brian West
Has the world gone acronym mad?
7 Kevin Thomson
Why getting the right credit is essential to business customers
9 Bret Jackson
With Mrs May consigned to the backbenches its time for business
11 Lucy Barrett
Bridging and buy-to-let may be unlikely bedfellows but they can be the best of friends
12-21 Feature: The state of P2P
Michael Lloyd considers the demise of Lendy and the role of P2P in the property market
23 Benson Hersch
The latest from news and views from the ASTL
24 Build a Better Bridge
Our experts answer your bridging questions
26 Alan Dring
Networks must do more to help their member get up to speed with bridging finance
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KYC, AML, DD… Has the world gone acronym mad?
Steadily increasing loan-tovalues despite a static and in places declining property market, a seemingly endless rate war squeezing margins, a dearth of experienced industry personnel and a relaxation of underwriting standards being presented as service level enhancements. With industry standards coming under pressure against a backdrop of Brexit induced political paralysis, macro-economic uncertainty and of course recent specialist lender collapses is it any wonder that some commentators are now questioning whether the resilience of the short-term lending market is perhaps being pushed a little too far? There are certainly many challenges facing the owners of both established lending platforms and newcomers to the market but perhaps the biggest single worry, the one that’s still most likely to cause sleepless nights, is the perennial threat summed up in a single five letter word, that of ‘fraud.’ It’s not hard to see why an industry that is predicated on speed of turnaround, where lenders regularly trumpet the fact that they’ve completed a complex deal in a matter of days, represents an attractive target for fraudsters and it’s here that the true value of a strict adherence to the acronyms featured in the heading above really come to light. Know Your Customer (KYC) in any financial transaction is a standard, but vitally important element of the due diligence (DD) that every lender needs to carry out in order to fully understand the identity of their potential borrower, the borrower’s historic and current financial dealings, including the source of any funds to be used in this or indeed previous transactions, the purpose of the www.specialistfinanceintroducer.com
loan and the borrower’s aims and expectations. Whilst the money for bridging transactions is often required with a high degree of urgency, this should never deter a lender from carrying out comprehensive and in-depth KYC and anti-money laundering (AML) checks to safeguard against fraud. To combat money laundering, the process by which individuals attempt to conceal the true origin and ownership of the source of their funds, a stringent application of KYC must be complimented by a full understanding of the process by which “dirty” money is placed in a service company, layered with legitimate income and then integrated into a flow of money. All companies must take reasonable care, establishing and maintaining effective systems and controls to combat financial irregularities and financial crime. Comprehensive checks can of course be time consuming, which is why the very best lenders combine significant in-house legal expertise, rigorous internal procedures and a meticulous attention to detail with the robust legal infrastructure that only the very best law firms can provide. The relationship between a lender and their principle conveyancing lawyer(s) should be seamless, ensuring that one is merely an extension of the other. Together they constitute a single team, whose objective is to ensure that before any money is lent the lender is fully aware of any and all risks, be they legal or credit. Part and parcel of the rigorous internal procedures undertaken by responsible lenders is a close working relationship with a whole range of companies beyond what could perhaps be described as primary legal, compliance and
Brian West director, Central Bridging
valuation partners. Secondary partners should include credit referencing agencies such as Experian and Equifax, business information providers such as Dunn & Bradstreet, Her Majesty’s Land Registry with its massive on-line property database and information on prior charges, anti-money laundering specialists like Call Credit, shared information platforms that aim to prevent application fraud such as National Hunter, specialist field services companies like NCI Resources Limited and even the Financial Sanctions Register, which offers another safeguard against money laundering. As fraudsters develop ever more sophisticated means to commit their crimes and stay one step ahead of their intended victims, the fast pace with which technology moves can also work to the lenders advantage. The resources mentioned above can all be readily accessed online and the list is by no means comprehensive. Indeed, lenders and trade federations are increasingly working more closely together to develop anti-fraud networks, information sharing and other initiatives. A fine example of this type of collaboration is the NACFB’s recent initiative with AML, DD and KYC specialists SmartSearch, In summary, if what feels like excessive pressure is being applied to try and get a deal across the line it’s a good idea to take a step back, remember that you are lending real not monopoly money and ask as many difficult questions as you feel necessary. Above all, remember that whilst acronyms in the world of lending can be slightly annoying, strict adherence to the three detailed in the heading above might just end up saving you a fortune!
AUGUST 2019 BRIDGING INTRODUCER
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Revolving credit Why getting the right credit is essential for businesses
A lot of sound businesses need short-term cash injections for a variety of reasons but essentially to fill any cashflow gap. In the past a businesses local bank manager would have been able to satisfy these requirements by way of an overdraft but for some years now, these have become harder and harder to arrange, also taking much longer than they used to. The continued uncertainty, politically and economically, will only exacerbate this situation as the banks once again entrench and become more cautious until Boris’s outcomes become clear. The implications of cashflow issues can be significant to a business, especially when it results in nonpayment of debts; creditors can take action for non-payment causing both the business and the directors long term issues. As is the case whenever there is a gap in the market, there has recently been a rise in the number of alternative, unsecured business loan providers introducing propositions to meet this demand. This is giving businesses a choice of short-term funding, depending on their circumstances. However, with this extended choice, business clients will increasingly need advice on where to obtain the funding to solve their particular short-term requirements. The key thing that an adviser needs to establish with such a client is that the business needs to be fundamentally sound and viable; there also needs to be a clear strategy of how the loan will be repaid. If you can establish that this is the case for your client, these short-term loans, providing an often vital injection of cash, can be arranged for up to £500,000 and up to a 5-year term.
As well as fixed period, shortterm business loans, there are other forms of funding available via these alternative funders, which are also seeing a rise in popularity ‘Revolving credit facilities’ are usually taken for a period of 12 months and, as the name suggests, this is not a fixed period but a variable credit arrangement where the business has access to pre-approved funds to use as required. Whilst these types of loan have greater flexibility, they do come with higher fees than fixed term loans, however they can work out more cost effective depending on how much the borrower wants to use the facility. While the upfront interest rate is higher, the business only pays for the time any monies are outstanding, not for the whole loan facility. Revolving credit facilities are a bit like a residential flexible, or current account mortgage; the borrower has a greater sum underwritten which they have access to at any time, but pays interest only when they use the facility to draw down money. They only pay interest on the sums drawn down and only for the period of time that they are being used. As with the fixed-term loan, lend-
Kevin Thomson corporate sales director, Connect
ers will look at the strength of the business, its usual monthly revenue and will usually require directors’ personal guarantee. While the type of short-term loan taken does depend upon each businesses requirements to establish which is the most suitable, revolving credit facilities can be very useful for businesses that need to have overdraft type facilities to cover short-term, cash flow gaps. The benefits are that the business only pays interest whilst the loan is outstanding and once the monies have been repaid then the business can usually withdraw again and again without the need for a new application. This can be really useful for small amounts to cover the unexpected, rather than a larger amount for a specific purpose. These types of short-term funding are available from a growing number of lenders now, but it is important to find the most appropriate solution for each businesses needs. Importantly this needs to be a solution that does not require the directors to place their personal homes as security, but providing the necessary credit facilities to protect the business while enabling it to continue to trade, and maximise any growth plans.
AUGUST 2019 BRIDGING INTRODUCER
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No more nonsense With Mrs May consigned to the backbenches it’s time for business
One of the most inevitable outcomes in modern politics was confirmed on 23 July. Boris was the new leader of the Conservative party and sworn in as PM and asked to form a government. With weeks of hustings, debates, speeches and endless coverage of what we all knew was going to happen, has just provided less time to sort out the mess. Common sense should have prevailed weeks ago and people should have just rallied behind one and get on with it. Politicians have been talking about “kicking the can down the road” for months, but this is what has happened during this whole process. Marmite Boris, love him or hate him, has now the responsibility to deliver on what no other country has tried to do. Leave the EU. We have been trying for three years, without success, so what makes him so confident we can do it in 99 days? As the saying goes, Only time will tell, 99 days in fact. So, how has the market taken to the news. Joshua Elash, director at MT Finance is feeling very optimistic; “Boris has been clear: as Prime Minster he will deliver Brexit, deal or no deal, on or before 31 October. No more nonsense. This gives the market the certainty we all so desperately need. “We excitedly believe that the financial services industry, as a whole, can now look forward to a brighter future.” On the other side of the fence, but still holds a little bit of hope, Brian West, director Central Bridging said: “I’ve always had my concerns that the new Prime Minister is rather too self-interested and lacks any really deep-rooted political conviction. “I hope he proves me wrong and that lurking somewhere underneath that bluff exterior and unkept www.specialistfinanceintroducer.com
‘barnet’ is a true statesman.” But for me, the best view came from Ashley Ilsen, chief executive of Magnet Capital: “I think we’ve gotten to the point where we seem to have accepted the status quo of uncertainty in the economy and the property market. “At Magnet Capital, we aren’t seeing any further reticence from our developer clients, as being SMEs they can’t afford to wait around to see what happens or land bank.” As I was putting this article together, the latest stats from Bridging Trends were announced. Positively, investment purchase was still the number one reason for taking out a loan, indicating confidence is still present in the market, despite news house prices have fallen in certain parts of the country. With uncertainty still present, chain break is the next highest on the list, demonstrating the flexibility of bridging, when this unfortunate issue happens. One notable disappointment is the average completion days figure, increasing from 40 to 44 days. Weekly press releases are made about completing deals in record times. Granted, some of these are under exceptional circumstances, therefore are possible, but one of the key principals to bridging is speed. Looking at the figures since
Bret Jackson head of marketing and communication, BWD Search
2018, it has not dipped below the 40-day mark, indicating some issues persist. I have always been a supporter of this data and still believe it can be utilised better in the industry to continue further improvements and developments. As a financial services specialist recruiter, we are not anticipating receiving the CV of Theresa May anytime soon. However, with all her experience of trips to Brussels, Chequers and other visits she has conducted during her time as PM, she must be excellent at packing a suitcase, perhaps even a professional. Bark.com, a site that connects customers with local service providers, is seeking professionals for its new ‘professional holiday packer and planner’ service for holidaymakers. Professionals can expect to earn up to £45 an hour to come and take care of all holiday admin and packing, including buying the essentials. Packing the customer’s suitcase is conducted under supervision. Instructions on how to pack properly for when travelling home are required, plus organising all paperwork is in the order they need it. Now she is just on the backbenches, this is certainly an attractive proposition to fill the gaps.
AUGUST 2019 BRIDGING INTRODUCER
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Bridging and buy-to-let The two may be unlikely bedfellows but can be the best of friends
Landlords and property professionals are finding it harder to achieve the same return on investment from their buy-to-let portfolios than they used to. The affordability stress tests, the changes to tax relief for mortgage interest payments and energy efficiency regulations are all taking their toll. We’re seeing a reduction in the number of landlords with between three and five properties, and an increase in those with between six and 20. This, naturally, means more and more are turning to specialist finance, and finding creative ways of taking advantage of an opportunity where those good returns do exist. And so, bridging and buy-to-let mortgages are becoming increasingly good bedfellows. Landlords are now using bridging to grasp opportunities where speed and a more flexible approach to underwriting is needed. This then buys them time to find longer term finance. The following scenarios, although previously unusual, are now common ways landlords and property professionals are using bridging finance, before finding a complex buy-to-let mortgage.
Purchasing at auction
As soon as the gavel lands, successful bidders at auction enter into a binding contract to purchase the property. With completion dates often set within 28 days, standard mortgages are unlikely to complete in that timeframe - and as speed is crucial to avoid financial penalties, bridging finance can often provide the solution.
Landlords are spotting the opportunity to buy properties that require some work before they can be let www.specialistfinanceintroducer.com
out, as the purchase price is often discounted against market value. Finance is only required for a short time making it unsuitable for longer term mortgage options.
No tenants from day one
Many BTL lenders would be hesitant to pursue a deal until a paying tenant is confirmed, as they don’t know how long it will be vacant for – which raises questions on how the rental void will be met by the borrower in the meantime.
Properties that require major refurbishment will often be considered unmortgageable - again ruling out the majority of lenders. Bridging can step in to enable the landlord to complete the necessary work.
Minor title issues requiring resolution
Many lenders consider the splitting or amending of titles as problematic - as it is effectively decreasing the value of the property. And what next for the borrower after a financial bridge has helped them take advantage of an opportunity? Their exit is increasingly a refinance onto a buy-to-let mortgage. So much so that the market is seeing an increasing number of bridge-tolet products. And they can make good business sense for those happy to hold onto the property longer to achieve a better sales price, or those adding to a portfolio of rental properties. The benefits of these products coming together are four-fold: 1. Pre-agreed exit. As we know with bridging: for lenders, it’s all about the exit plan. Having preapproval for a buy-to-let mortgage
Lucy Barrett Mike Strange managing director, Funding 365 Vantage Finance
gives the benefit of the short-term finance, with the security of a longer-term plan, too. Which suits both borrower and lender. 2. Some lenders will lend against both purchase and build. Typically, the borrower will have a property to purchase, and some build/renovation costs. If the property was £80k and build costs £20k, landlords could borrow up to 80% of the total £100k costs – not just against the property itself. 3. Typically no arrangement fee. Many bridge-to-let products will not charge the borrower to switch from their bridge to their term buyto-let loan. 4. No length of ownership restrictions. Many lenders will not remortgage a property within six months of purchase, or allow the purchase of a property that the vendor has owned for less than six months. But with bridging finance, there are no early redemption charges, and the borrower only ‘pays for what they need’ – meaning that if they finish the renovation work early, they can redeem the loan penalty free. Bridge-to-let mortgages aren’t for everyone, of course. The rate conscious may wish to shop around for a better rate, for example, as they are unlikely to be the most competitive on the market. But for the speed, flexibility, reduced fees and efficiency, they will certainly be a good choice for many. This is another example of how specialist finance can adapt to market conditions and perhaps make unlikely bedfellows of products that wouldn’t normally fit together so well, to help landlords and property professionals continue to deliver returns unachievable through more ‘mainstream’, high street finance.
AUGUST 2019 BRIDGING INTRODUCER
The state of peer-to-peer
eer-to-peer (P2P) has been widely spoken about in the mainstream media and has often attracted negative attention. There have been concerns about how some lenders operate in the sector which has damaged the reputation of the industry, with calls for further regulation. Despite this, it is worth pointing out the merits of the sector too, with many lenders in the space protecting consumers whilst offering good opportunities, proving that P2P has its place. P2P platforms have a unique lending model by linking those who have funds to invest with those who want to borrow, as explains Neal Moy, head of property finance at P2P lender Ratesetter. “P2P platforms like RateSetter connect those who have money to invest with those who want to borrow,” Moy says. “Without banks in the middle, everyone benefits from better value.” Last year, Terry Pritchard completed a short-term consultancy role at Lendy before joining Kuflink as head of origination. Now he is chief executive of Charter HCP, an international commercial loan brokerage, due diligence research and consulting firm. He explains in more detail: “P2P funding is simply a group of individual investors all investing into a project be it purchase, refurb or development with the regulated company, undertaking all of the due diligence
Michael Lloyd considers the state of play of the peer-to-peer sector and asks what the future has in store and underwriting of the project and controlling the pricing and repayment back to the investor.” Typically opportunities are listed on a website where an investor can see investment options and decide how much they want to invest in. Other models see firms makes investment decisions on the investor’s behalf. Zopa, the first P2P lending company in the UK, was launched in 2005 and has since approved over £4bn in loans. Other well-known names in the industry include Funding Circle which lends directly to small British businesses via an automatic tool, and Ratesetter which allows investors to borrow property development loans. Kuflink offers its investors the opportunity to fund a diverse range of property-backed bridging and development loans, and earn up to 7.2% interest per year in return. “As with all investments, capital is at risk, although security and transparency are our highest priorities,” Narinder Khattoare, chief executive at Kuflink says. “We publish full surveyor’s reports for each security property, extensive loan details, risk ratings and we even co-invest 5% into every opportunity.” Another recognisible name to thos in bridging finance with a P2P presence is Octopus, which operates Octopus Choice. The platform prides itself on transparency and allows www.specialistfinanceintroducer.com
investors to follow their progress via an app. “We have made it transparent for everyone,” Charlie Taylor, head of Octopus Choice, says. “We co-invest our balance sheet money into every single loan on the platform and we lose our money before investors whether that be interest or capital.”
The most notable event in the P2P industry over the past 12 months has been the demise of Lendy, the largest collapse of a P2P platform in Europe to date. The Financial Conduct Authority (FCA) placed the lender under special supervision back in March this year, after becoming concerned about its ability to meet the standards required of regulated firms. A report from RSM Restructuring LLP, in which three of its team were appointed joint administrators in May, claimed Lendy has 54 outstanding development and bridging finance loans with 36 in insolvency proceedings. These outstanding loans are worth a combined £152m. There are 29 live loans in Lendy’s bridging book. These are worth £36m and there are 22 in insolvency proceedings. The loans were secured against assets that were historically valued at £81m. The report stated that “some of the schemes were dependent on subsequent securing of development finance and planning permissions”. It goes on to mention “the inability to secure new finance to refinance the Lendy loan or secure appropriate planning consents appears to have
undermined the rationale behind some of these loans”. Terry Pritchard comments on the reports findings. “Having worked within Lendy for a few weeks reviewing their sales platform and promoting what should have been the relaunch, it became obvious that the company had been naïve at times in regard to their early underwriting policy,” he explains. “This led to a higher than average default rate and made it difficult for them to manage the position without bringing in an administrator.” Lendy was not the first P2P platform to come a cropper. Back in March 2018 Manchester-based P2P lender Collatoral entered into administration after being deauthorised by the FCA whilst BondMason pulled its core P2P business in May. Meanwhile, the full effect of the Lendy collapse has yet to be seen according to Pritchard. “The effect has yet to be quantified, however the whole industry will be tarnished with the same brush as investors and clients alike do not understand fully the difference between a P2P lender and a traditionally funded lender,” he says. Similarly Ashley Ilsen, chief executive at Magnet Capital, highlights negative coverage from the mainstream press affecting the bridging sector. “In my opinion some of the mainstream media attention over the Lendy crash could have been handled better, and my concern is that when some bad instances become widely publicised this reflects badly on our industry as a whole,” he says. “It’s not just the P2P market that is affected, but the
It’s all about good practice For lenders and borrowers alike, the recent bad press surrounding peer-to-peer understandably caused some concern. Having read about high-profile platform closures and defaults, investors began to fret that they would lose their money, and in response we had to clearly demonstrate that Kuflink, like many other P2P platforms, are genuinely performing well and delivering consistent returns. The industry is evolving and there is no room for firms that can’t fulfil their promises. It is a huge shame for those who invested their hard-earned cash via these now-collapsed platforms and we sincerely hope they see a return but, at the bare minimum, it’s a push to raise standards for the rest of
Narinder Khattoare chief executive of Kuflink
us. Alongside the recent FCA review, these closures will force P2P firms to pay closer attention to risk, marketing, appropriateness and due diligence. Many of the FCA’s new rules intend to protect retail and beginner investors; a significant change considering P2P is all about giving ordinary people a chance to earn better returns on their spare cash, which otherwise might have languished in a savings account. For us, it has never been about providing the sort of ‘education’ that makes investing everything you have into one loan or platform seem like a good idea. That doesn’t help investors and it doesn’t help us achieve our goal of connecting people to financial freedom. Peer-to-peer is about giving them choice and extending
opportunities that they may not have otherwise considered, hence empowering them to make the most of their money. We recently hit our £50m invested milestone, of which we’ve already returned over £23m in capital to investors along with £1.3m in interest – that’s a great example of how well peer-to-peer can perform under the right conditions. Of course, late payments and defaults are an inevitable part of lending and it’s not always going to be a bed of roses, but it’s far from doom and gloom too. Our team has taken this challenge as an opportunity to raise our standards, raise our profile and boost investor confidence – we need to show people that we can be a responsible industry, and actions speak louder than words.
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Underwriting is key for all P2P lenders The demise of Lendy has placed considerable focus on the P2P market and may well have accelerated the FCA’s decision to publish its policy statement on peer-to-peer, following a lengthy public consultation into the crowdfunding industry. Lenders that rely on P2P funding are likely to see their costs increased, in terms of regulatory fees, the cost of holding capital and the margin they need to pay investors to overcome any reputational concerns. It may therefore be tricky for these firms to remain competitive and I would expect to see more lenders investigate opportunities to diversify their
Benson Hersch chief executive, ASTL
wider short-term lending space. If all of us as lenders can publicly demonstrate our practices and high levels of quality then we will see less cases like this.” On the other hand Chris Whitney, head of specialist lending at Enness Private Clients, believes that the wider specialist lending market has not been adversely affected which Lucy Barrett, managing director of Vantage Finance, agrees with. “One lender collapsing isn’t enough to destabilise the marketplace, but it does highlight the risks of lenders chasing market share and perhaps not always making the right decisions,” Barrett explains. Khattoare argues the lack of communication in Lendy’s case made the situation worse for investors. “Clear communication, honesty and transparency are key to protecting what is generally a good reputation for the P2P and bridging industries,” he says. “We have been busier than ever with new bridging enquiries and loans, so we’d have to say that it hasn’t affected the industry much at all.” Brian West, director of Central Bridging, says the demise of Lendy will hopefully have prompted investors to question the wisdom of pursuing 12% returns in an industry where borrowers are able to access rates at half this level. “As the old saying goes; ‘You do the math’,” he adds. Despite this, most P2P lenders operate successfully, aiming to protect their investors and warning them of the risks involved. Brian Bartaby, founder and chief executive of Proplend, says you have to make sure there is enough income coming off the property and Proplend has an interest reserve. www.specialistfinanceintroducer.com
funding model. This in itself is a positive step as, in any market, a diverse and robust funding model helps to ensure greater consistency of funds and certainty of decision. The main consideration however for P2P lenders; and any lender for that matter, must be maintaining a commitment to quality underwriting and risk management. It’s not necessarily the way that a lender is funded that can lead it into trouble in a healthy trading environment, but the lending decision that it makes. The risk to P2P lenders is that increasing costs will drive riskier lending as a way of winning market share in a competitive market. A recent sentiment
survey of ASTL members found that more than 40% of respondents said their biggest current challenge was competition from other lenders and so finding profitable and sustainable market segments is key. A lot of lenders are already operating on thin margins and if lending that is not properly priced for risk turns to losses, then there is a chance we could see the demise of other lenders. There continue to be opportunities for lenders to make a difference and build profitable, sustainable businesses, however they are funded, but it will take discipline to maintain high standards and resist the lure of taking on excess risk.
“We retain a minimum three months’ reserve on the property so if there is any reason the borrower cannot make the interest payment, we can make it to the investors whilst we engage with the borrower as to why they cannot make the payment,” he says.
The problems facing P2P
Transparency is an issue many associate with the P2P sector. Alan Dring, of The MAD Approach, suspects many P2P lenders don’t do enough to warn investors about the risks involved; a point furthered by Paresh Raja, chief executive of Market Financial Solutions (MFS). “Transparency is absolutely essential in any investment. The investment providers, such as P2P lenders, must be extremely clear on the risks involved,” Raja says. “Of course, investors must also be proactive in seeking out such information before making any decisions.” However, Mike Elliot, finance director at Apex Bridging, warns that P2P investors are not professionals, they are people who most likely have not had any contact with commercial finance. “If people don’t understand the risks they’re taking, that is very hazardous,” he says. One key issue raised by Mark Posniak, managing director of Octane Capital, is credit experience. He argues there are lenders putting money out into the market at the wrong risk and at the wrong loan-tovalues. “Hardly a week goes by when I don’t see a P2P lender wanting to put money out at 85% LTV in order to gain AUGUST 2019
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With our unique approach, your customer benefits from a single valuer for both the bridge and Buy to Let Mortgage, and one conveyancer with discounted legal fees. Meanwhile, you can enjoy a single application which we key for you, a dedicated underwriter for the entire case and two procuration fee payments.
market share,” he says. “Investors are increasingly being warned about the dangers of losing money on these platforms, but some still fall under the spell of P2P. “The brutal truth is that there are too many entrants into P2P that simply don’t have the experience to be a lender. “Sadly, there is no real barrier to entry, something that the FCA needs to urgently address.” Both Miranda Khadr, founder of Yellow Stone Finance, and Rob Jupp, chief executive at The Brightstar Group, agree that for brokers the main issue is finding a lender that can offer certainty of funding. “Brokers who are unfamiliar with the market may want to think about partnering with a specialist to help ensure the best outcomes for their clients,” Jupp says. Khattoare says P2P investing is a regulated activity, so the FCA requires firms to handle investors’ money in a compliant and responsible way. “We are very keen to make the risks clear to all our investors and have in-house compliance and investor relations teams on hand to help achieve this,” Khattoare says. LandlordInvest follows this theory and assigns the risk level to investors, presenting them with investment options. “We ensure all interest payments are collected and it’s important to recover if there is an issue with the loans,” Filip Karadaghi, its co-founder and chief executive, says. “We need to take steps to ensure the borrower adheres to the secured documents.”
Posniak recalls that the P2P industry has been in the media spotlight affecting its reputation. “Even though it may not always be true, I suspect more and more people see ‘P2P-funded’ as a red flag,” Posniak explains. “It is increasingly viewed as an industry that has got ahead of itself. It was idealistic and great in theory, yet naive and poorly implemented in practice.” Paul Weitzkorn, sales director at Funding 365, says that whilst P2P funding has its place in the spectrum of products offered to clients, the reputation of all P2P lenders will be somewhat tarnished across the sector given these events. This is furthered by Terry Pritchard. “Reputationally P2P is just about still hanging in there, however the truth of the matter is that the more press those that fail get, the more investors will have a tainted attitude,” Pritchard warns. “The future is not bright without significant changes.” However, Khattoare says that Kuflink has built trust with investors, brokers and borrowers, maintaining a great relationship with them. “The secret is definitely to build strong relationships from the outset,” he adds. Roxana Mohammadian-Molina, chief strategy officer at Blend Network, says P2P lending has a great 01966 (5)
reputation among SME businesses and on many fronts has become part of the mainstream lending ecosystem. “Over the past decade, peer-to-peer lending has consolidated itself as a viable source of funding for SME businesses who are unable to access finance through traditional funding channels due to many mainstream lenders not being actively lending,” she says. Bartaby however argues that it is a mixed scene, with some P2P lenders performing and others disappointing. “We try and be as transparent as possible with all our investors,” he says. CrowdProperty has a 100% capital and interest payback track record and has funded over £1m worth of end-value property. Michael Bristow, its co-founder and chief executive, puts this success down to operating best practices, having the relevant expertise, transparency and being a lender of first resort. “Our tech puts a load of data and analytics together and that matches it up with our in-house expertise to develope a better lending product, in particular to SME lending professionals,” he says.
Following Lendy’s demise and a consultation, in June of this year the Financial Conduct Authority (FCA) announced new rules for P2P platforms. For new retail customers, the FCA is placing a limit of 10% on investments of investable assets for those who have not received regulated financial advice. There are more explicit requirements to clarify what governance arrangements, systems and controls platforms need to have in place to support the outcomes they advertise, with a particular focus on risk management, credit risk assessment and fair valuation practices. The FCA has begun strengthening rules on plans for the wind-down of P2P platforms if they fail, and setting out the minimum information that P2P platforms need to provide to investors. The regulator is also introducing a requirement that platforms assess investors’ knowledge and experience of P2P in cases where they have not received any advice. In addition, the FCA is applying handbook requirements and the Mortgage and Home Finance Conduct of Business (MCOB) sourcebook to P2P platforms that offer home finance products, where at least one of the investors is not an authorised home finance provider. The FCA has set a deadline for platforms to implement these changes - 9 December 2019 - except for the application of (MCOB) which is applied with immediate effect. “These changes are about enhancing protection for investors while allowing them to take up innovative investment opportunities,” Christopher Woolard, executive director of strategy and competition states on the regulator’s website. “For P2P to continue to evolve sustainably, it is vital that investors receive the AUGUST 2019
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The FCA’s new rules The FCA’s recent announcement that it is introducing stronger regulations for the P2P sector is the most important news for our industry in recent years. By bringing areas such as risk management and governance into line with the wider financial services industry the P2P sector will be better regulated than ever before, putting it firmly on a par with other mainstream savings and investment choices. And that is why RateSetter welcomes this news: it confirms that P2P lending has become an asset class. It is now a logical component of everyone’s investment portfolio.
Neal Moy head of property finance, RateSetter
right level of protection.” Both P2P lenders RateSetter and Kuflink welcomed the news, with Moy stating the sector has been granted more confidence. “As a result, the industry will be better regulated than ever, putting it on par with other mainstream savings and investment choices, and any sense that regulation of P2P was too light has now been completely dispelled,” he says. “P2P lending is well-regulated and here to stay as an established investment. The tighter regulation means that more can be confident in our sector.” “Kuflink is already working to many of these stricter rules and we welcome any efforts to make the industry more transparent,” Khattoare adds. “This is a great opportunity to raise standards across the board.” Mohammadian-Molina explains that prospective lenders on Blend Network need to take an appropriateness test, a five-question test, which was available before these new rules, that ensures prospective lenders understand the risk of investing. “We had this test even before the FCA made it a requirement because we believe it is paramount that lenders understand the risks of investing and are therefore protected,” she says. Posniak argues the rules will require P2P lenders to improve in terms of explaining the risks to investors and will hopefully give the industry a bit of a shakedown; removing players who are not in it for the long-term. “P2P is a perfectly fine model, assuming the money actually goes back from the peers who borrowed it to those who lent it,” he says. However, Pritchard says regulation is not sufficient as it still feels like a ‘light touch’ approach. He calls for www.specialistfinanceintroducer.com
Having carefully built RateSetter’s unique track record over many years, we have been very concerned that a few bad actors could ruin the reputation of the sector. Tighter regulation will drive out the cowboys and sub-standard platforms, leaving well-run platforms that put the customer at the heart of their model to grow, and confidence in the P2P sector will build. My view is that the sector will consolidate. Currently, there is a handful of established, popular P2P platforms that are operating at scale, and then there is a long list of smaller niche platforms. Consolidation may involve orderly wind-downs, but also platform
failures in the case of particularly weak platforms. While the failure of any business is understandably a blow for its customers, it is inevitable in the case of badly run platforms or those that lend to poor quality borrowers. The point is that in the P2P sector, just like any other, businesses that are not up to scratch because they are badly-run or don’t put the customer at the heart of their model, do not last long while businesses that are well-run and deliver for their customers grow. It’s a process of natural selection that will result in a stronger, better P2P sector which delivers great outcomes for customers.
immediate changes in monitoring, for the industry’s self-regulation bodies to be more honest and clear, and for tighter control and more focussed guidance. “The biggest problem the FCA have are those who are spending investors’ money and returns on their lifestyles,” he says. Guy Harrington, chief executive of Glenhawk, calls for more regulation and for more responsibility on where a P2P lender’s funds are being deployed. “It’s like the wild west when it comes to the P2P market,” he says. “You can so easily open up a white label P2P webpage even within a few weeks and get funding in. There is definitely a reckless element to it.” Despite this view, many P2P firms argue that they strive to be as transparent and responsible as possible. Max Lehrain, chief operating officer at P2P firm Relendex, says on its platform from the beginning it has operated on a transparent business with investors knowing exactly what they’re investing it. “On our website there’s a virtual data room, so it’s straightforward knowing what you are lending on,” he says. “You’ll be provided with a lot of detail so you can know whether the return is appropriate to the risk you’re taking. “I think it’s hard to make that judgement on some platforms and that was guiding the FCA’s rule change.” Furthermore, LendingCrowd has full risk warnings across its website and communications. “Businesses who require funding come to us,” Darren Cairns, chief marketing officer at LendingCrowd, says. “They are fully credit assessed by our credit risk team and we have a very good, strong reputation for responsible lending. That is part of our core ethos of being very responsible.” Brian West adds that the solution to the problem AUGUST 2019
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The market needs change Peer-to-peer lending is currently under the spotlight because of a small number of those involved rather than the concept or idea itself. The first wave of P2P lenders were completely unregulated and running their business as if the product was an unregulated collective investment scheme, whereby they would literally take in investors money with the promise of a huge return and do whatever they wanted with it. There was no real robust underwriting process and no monitoring so you would see all sorts of weird and wonderful deals written. Strangely enough the real entrepreneurs who were in at the very beginning actually did make it work as they would use the platform and investors to bolster their own cash input meaning they
Terry Pritchard chief executive Charter HCP
highlighted by Lendy is simple. He says: “Every lender, be they P2P or other, has to fight tenaciously to protect their funders’ interests, for it is only by doing this that they can build a lasting reputation and long-term success.”
There are mixed views about the future of the P2P industry, with some predicting success and others warning of an alternative fate. “The P2P industry is an exciting space that has boomed over the past five years or so and it makes sense that we will continue to see new entrants to the market, albeit not at the pace they once joined,” Khattoare says. “We would anticipate a small amount of further platform closures, although this is not necessarily a bad thing; platforms with stronger propositions will thrive.” Posniak believes there will be more casualties in the short to medium-term. “There is just not enough experience out there,” he says. “The P2P market will survive but I think a lot of ‘froth’ will be removed in the months and years ahead.” Furthermore, Mike Elliot expects the marketplace to shrink overall, predicting some good operations to grow and some firms to fail. “I hope we will end up with a small number of high-quality operations,” he says. “I believe the higher quality bridging lenders should be able to team up with high-quality P2P platforms to www.specialistfinanceintroducer.com
spread the risk but also increased the number of deals they were able to take in, again reducing the risk further as everyone’s money was spread across different risks. Let’s also not forget that the market was in a far better place when this all started so any comparison between the early products and what is available now is hard draw, simply because of the improvement in structure but also the competitiveness of pricing that now exists. The truth is P2P will remain, however, the FCA will be forced to improve the quality of regulation in light of those that have abused their position of trust and lost investors a great deal of money. It is essential this is done sooner rather than later and that the small minority who continue to operate with no real
processes or procedures in place are singled out and either forced to change or stopped from lending. Believe me I am not on a crusade, I just do not want my livelihood taken away because we simply sit and do nothing. You mark my words- if we carry on the way we are the P2P market will end up strangled by regulation rather than operate with a regime we can all work with! I am very aware that some people will think I am saying this so this sector is shutdown or kicked into the long grass by being regulated to death. The reality is quite the opposite, Charter HCP will launch a P2P platform of our own before the end of this year, because I am so confident the concept works that I want to be part of it, but only in a cleaned up version and not as it is today.
offer good risk opportunities to people who want to invest.” Neal Moy from Ratesetter also predicts that consolidation of the number of P2P platforms and across fintech more generally, is inevitable. However Lehrain is more optimistic, expecting Relendex to see its growth double. Ashley Ilsen, argues that there are many good P2P lenders in our industry with strong offerings, however he finds it poignant that many of these are dropping ‘P2P’ or ‘crowdfunding’ from their marketing collateral, as sadly they seem to have become ‘dirty’ words in our space. “I have no doubt (or at least I hope) our industry will learn the appropriate lessons and we can continue to grow and mature as a sector,” he says. Undoubtedly, the reputation of P2P lenders has been hit hard by news of lenders such as Lendy collapsing. However, the future may not be so bleak, with examples of good P2P practices not difficult to find. “P2P lenders can survive and thrive with a more robust process and underwriting but they do need more than one funding route so that they can sustain their position,” Pritchard warns. “Just having a P2P funding line will mean you do not survive. “There are some very good P2P platforms along with some mediocre ones. The FCA need to have a task force on this before the whole thing turns into a real mess… just like the sub-prime market did!” AUGUST 2019
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Arrears rise – no surprise Lenders remain positive despite talk of growing arrears
A recent Quarterly Economics Bulletin from the Association of Mortgage Intermediaries (AMI) highlighted an issue than many of us have been anticipating for some time. Within the report AMI noted that “incidence of arrears on short-term finance loans funded by peer-topeer and other bridging lenders has already risen. “The number of borrowers falling behind on loan repayments, albeit in unregulated markets, is steadily climbing.” AMI added. “Anecdotal evidence indicates that short-term lenders are beefing up collections departments in anticipation of further arrears.” So, it looks like arrears on shortterm loans are becoming more widespread, but in reality this is unlikely to come as a surprise
to many people. In a highly competitive lender market, we have warned that some lenders will be tempted to extend their risk appetite in order to win market share and that this can, and usually does, lead to less than robust lending decisions. The recent demise of Lendy has been well publicised and will cause many to speculate whether other lenders will be next. The harsh truth is that we probably will see more lenders, operating on thin margins, who will not have the strength to overcome a period where their loan book does not perform and so we may well see more lenders depart the market. But we should not consider this to be all doom and gloom. It is a timely reminder about the importance of robust underwriting
Benson Hersch chief executive, ASTL
and risk controls at the point of taking on loans. Anyone can lend money; the art is being paid back. So, I would expect to see a flight to quality, with lenders investing in their processes, technology and people, to ensure they are well placed to make the right decisions that result in profitable and sustainable business. It is also important that lenders have a considered and appropriate approach to collections for those loans that do go astray. This is just a reality of lending. The good news is that the latest sentiment survey of ASTL members shows that bridging lenders remain confident that the economy and property prices will remain robust despite continued political uncertainty. The number of respondents who are not confident about the long-term prospects for the UK economy has fallen from 29% in January to 18% in the most recent sentiment survey, which was carried out in June. At the same time, nearly 60% now expect ‘slight growth’ in UK property prices over the next six months, compared to just under 29% in January, although 68% say they don’t expect to see a ‘Brexit Bounce’ in house prices. And, while lenders are less confident about prospects for their own businesses than they were earlier in the year, nearly 60% still expect turnover to increase in the next six months. The sentiment survey found that more than 40% of respondents said their biggest current challenge was competition from other lenders, whilst 36% said it was the slow moving property market. It will be interesting to see how this dynamic changes in the coming months if we do start to see more lenders taking a more conservative approach to their business.
Build a Better Bridge
Finding the finance to bridge the gap Can bridging be used to help your clients with difficult circumstances? Our experts answer your questions I am a property developer and have a number of residential development schemes which I have arranged on a joint venture basis with the current owner. Most recently, I have been obtaining development funding from a private equity firm based in London, allbeit with charges and rates which are high. I am due to start work on small project by the end of the month and the equity firm has now advised, due to other commitments it will not be in a position to fund my project for at least three months – can I get the funding from a bridging lender – quickly? Mel Fordham: You most certainly can. It would appear that you are looking for only the development funding, which makes the matter straightforward and relatively simple. Given that you are an experienced property developer will be a major consideration for any lender and you will need to demonstrate you have completed projects of a similar nature and size recently, which I have no doubt will be an issue. Obviously, the lender will make the advance secured by first charge on the land and given there is no funding to buy the site they may consider making an initial advance payment towards the cost of the construction works. With regards to the timing and speed of the funding; the lender will want to see an appraisal of the scheme being proposed to ensure you have budgeted properly. Given your experience and the fact you would have presumably provided all the documents to your equity funder already I would assume you will have most of the paperwork already prepared and can provide this without delay. Without a doubt, as I am sure you will expect, the lender will require the site to be valued, if you have already had a valuation carried out this may be acceptable and a simple re-type required, in which case this can be funded (subject to legal satisfaction) in three or four days. Phil Mabb: The answer is quite simple – yes. In 24
Phil Mabb property finance broker, Bridging Development
Mel Fordham chief executive, Centrado
fact, on the basis of your observations about charges and rates, I am surprised you have not looked away from the private equity house sooner. The fact that they have run out of money is something else but will be ultimately be their loss to another within the property special lender fraternity. Having been through the lending process before you should know what to expect, and the only issues I can foresee are what a potential suitor might want from the landowner (i.e. personal guarantees) and for that matter what the landowner might want (i.e. a second charge behind the lender), but in my experience neither are insurmountable and a good broker should help you on your journey tout de suite. To my mind, this should be no more than changing the name above the door and benefiting from improved terms as a consequence. Our son lives and works in the USA and has been given an opportunity to buy a property just outside Miami at a massive discount from his friend who needs to get back to the UK quickly and needs the equity in his property. Rental demand is high and increasing and this will be a very good investment. Can he obtain a bridging loan to make the purchase? If not can we secure a bridging loan on our home and send him the money? He needs to complete very quickly as timing is critical. MF: I am unable to advise you if there would be a USA based lender that could make the facility available to your son; the legislation, regulation and procedure for lending is not something I am familiar with. However, I would suggest for currency, logistical, economic and legal reason it may be to your son’s advantage to fully explore the possibility of arranging the finance locally in the first instance. In the event your son is unable to secure the funding locally, provided you have sufficient equity in your home and surplus income to support the borrowing; I am reasonably confident the advance could be secured.
Build a Better Bridge
However, the lending would need to be supported by a repayment/exit strategy which makes chronological, economic and logistical sense. In short, using your home as security for what could be considered as a speculative venture could leave you very exposed and this would undoubtedly give the lender and any broker involved great concerns. I would suggest in order to secure the facility, any lender would require confirmation that your son has a long-term mortgage offer from a suitable lender that could be drawn down post completion, in order to repay you and the bridging facility. Obviously, to arrange the bridging facility there would be associated costs and fees which you would need to recover. Additionally, there may be costs to transfer the funds and currency/exchange risks both sending the money out and returning it to sterling all of which you should consider carefully and seek professional advice about. Finally, given the complexity and nature of the transaction and the pronounced risk, I would suggest any lender may ask you to obtain independent legal advice prior to being committed. PM: Ideally you would probably want bridging finance assistance from within the USA and I am sure there is a bridging market there, but not one I know with any tangible experience. On the other, you are looking at a BTL hold which I know a few UK-based offshore mortgage operators who can help with that element. Whilst you have not stated whether you have an existing mortgage on your home, you may need to secure the assistance of both a regulated mortgage broker and regulated mortgage lender to complete the exercise, but there is an abundance of both to assist. They will probably need your input on the proposed exit i.e. BTL mortgage, so the sooner you can demonstrate this is plausible (via the same or independent broker) the better. Lenders often understand markets within their own country and can second guess the likelihood of you achieving an exit, in this case we are talking Florida, USA – a different world. I retired last year at age 47 after a long and very successful career in the City. My wife was made redundant earlier this year and received a substantial package from her employer. Although we have paid off our mortgage and have several unencumbered investment properties we are looking for something to “get involved with”. We have a very close friend who is a property developer who has asked if we would fund his developments for a profit share. Could we secure bridging loans against our home and other properties in this respect? MF: It is possible you could use your investment
property and potentially your own home as security for a short-term bridging loan and the proceeds could be provided to your developer friend to fund his projects. However, there are a couple of issues the lender would need to be satisfied about before the facility was made available to you. Firstly, the term of the loan would be a maximum of 18 months and the lender would need to be satisfied that the developments could be started, completed and sold within this period as otherwise the loan would be in a default position. In addition, the lender would have concerns that you are proposing to invest substantial sums of borrowed money into development projects and it would appear you have no previous construction/ development experience. In this respect the lender would need to be satisfied the developer was experienced and had the ability to complete the projects in a professional and timely manner. Finally, but not less importantly, the lender may want to make stage payments against the progress of the developments, this would be a protection mechanism for both you and the lender as invariably construction projects incur cost overruns and delays, which the lender would want to insure this risk is minimised. So, in conclusion; this proposal is not quite as straightforward is it may seem and there are some aspects which need the most careful consideration PM: Well congratulations to you - at 47 you’re still young? - your proposals look both reasonable and plausible. In the first instance rather than take out a number of secured loans, some of which may not be necessary, you should be looking for involvement on a deal specific basis. By that I mean, you and the developer should approach lenders (ably assisted by a good broker) to confirm what levels of ’equity contribution’ they would want to see in any specific deal, whether the lender would work with additional security (which of course they will) and at what potential cost and obligation to you. This can then be compared to raising capital via alternative routes such as BTL on your investment stock. There are pros and cons in terms of cost and term obligation. Bearing in mind you are just starting your working relationship with your developer friend, from the outset you might want to stick to short-term obligations, whilst the business arrangement matures. You should also seek good tax and legal advice as to structure in order to mitigate risk and the potential tax burdens. Whilst there may be some cost and tax benefits, I would avoid offering up your private residence. Apart from which it brings in a regulated element which many lenders cannot work with, why put this at jeopardy over some rental investments?
A shout-out to all networks What are you doing for members who haven’t submitted a bridging loan?
So, we have a new leader of the Conservative Party and we are fast approaching the October 31 deadline for the UK’s exit, deal or no deal, from the EU. How significant are these events for your members? To be honest I do not know and as I have said since the 16 June 2016, only time will tell because of the mess we have got ourselves into. What I do know is that markets like equity release and the short-term lending sector offer opportunities that forward-thinking brokers should consider as they prepare for whatever is going to beset them in 2020 and beyond. Which? Network recently published its second quarter network performance figures for the 16 remaining networks. Whilst HL Partnership and Sesame will be taking some comfort in their increased numbers and Quilter will be reflecting on a 5% drop in numbers, the one thing that the industry should review is the fact that all 16 have only attracted 12 new members in total. There are now 5,347 network members and according to speculative figures quoted earlier in
the year, not many more than 2% (110) have placed a short-term loan. This has to say a great deal about the potential for the other 5,237 in a market that is now worth more than £6bn (£2bn in 2013). The Commercial & Bridging Club was launched by Tony Bunting of Platinum Options in May with a priority objective of spreading the word to network members that if they wanted to grow their business and had concerns about the landscape post-Brexit then now was the time to explore the shortterm sector. Not only because it is a growing market, but because it can be very lucrative. Over many years I have tried to get most of the networks to be more focussed on the data they capture from members and how that data can be best used to educate members in the opportunities that exist in markets they have previously ignored. The Commercial & Bridging Club is looking to stimulate the interest of more brokers by offering a route to market for brokers who are happy to be the middleman leaving the specialist knowledge to the club. Good in theory, but for it to
Mike Dring Strange Alan managing director, director, MAD Approach Funding 365
succeed and for more brokers to realise the potential, the need for a robust training programme in cooperation with networks who have a like-minded approach is essential. Whilst the rewards can be worthwhile brokers should be under no illusions that it is not easy money. They must understand that a successful case is the result of a well packaged application and that requires an understanding of the legal role, the valuers demands and the expectations of the lender. Leave it to ignorance and the time wasted will inevitably lead to a failed application. All these requirements take us back to the importance of the data that lenders must encourage networks to capture to ensure that they target the right members. The specialist sector is not a casual market, it is a market for experts but one that can be beneficial for casual network members if they form a strong relationship with those such as the Commercial & Bridging Club and other master brokers who will use their expertise to navigate what can sometimes be choppy waters.
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Wednesday 13 November 2019 To ямБnd out more, contact the team 0203 883 9010 M AT T B O N D COMMERCIAL DIRECTOR M AT T @ M O R T GAG E I N T R O D U C E R . C O M F R A N C E S CA R A M S E Y A DV E R T I S I N G M A N AG E R F R A N C E S CA @ M O R T GAG E I N T R O D U C E R . C O M