The pros and cons of going public TAX UNCOVERED
Our tax guide for investors
ThinCats’ John Mould on the direct lending ecosystem >> 10
ISSUE 17 | FEBRUARY 2018
RateSetter poised to launch IFISA
RATESETTER is on track to launch its Innovative Finance ISA (IFISA) in the first half of February, meaning that all of the ‘big three’ lenders will now offer the tax wrapper. A spokesperson confirmed to Peer2Peer Finance News that RateSetter, which is headed up by Rhydian Lewis (pictured), has received ISA manager approval from HMRC. RateSetter’s IFISA will be available to current lenders only for the first two weeks, which the platform said was “a reward to our loyal customers”. The ‘big three’ firms – Zopa, RateSetter
and Funding Circle – collectively account for 69 per cent of P2P loan volumes in the UK, according to independent
P2P analysis firm Orca. Their presence in the IFISA market is expected to have a dramatic effect on mainstream
awareness and take-up of the product. For more on the IFISA, read our special feature on page 18.
Zopa: Banks must embrace Open Banking or lose customers BANKS risk getting left behind by not making their systems available for Open Banking, Zopa’s lead on the new legislation has warned. Marie Steinthaler, head of new products and Open Banking lead at the peer-
to-peer consumer lender, said banks could end up losing customers if they do not embrace the new data-sharing initiative. “Customers will simply vote with their feet,” she told Peer2Peer Finance News.
“It is widely known that banks are struggling with legacy technology. It would have been great for all the banks to be ready, but for us it is about giving better service regardless of when banks are ready to launch.
“Eventually banks may risk losing people and will be left as the ones with the most expensive accounts and poorest service.” Open Banking is a UK regulatory initiative that mirrors the EU’s Payment Services Directive II. >> 4
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ith January behind us and Christmas but a distant memory, it’s all systems go for the peer-to-peer finance industry. As our special feature on the Innovative Finance ISA (page 18) shows, platforms – both small and large – are gearing up to take advantage of the opportunities that the tax wrapper will offer this year. Another opportunity that P2P lenders are already capitalising on is Open Banking. The new datasharing initiative, which came into force in the middle of January, has the potential to level the playing field between banks and other lenders. Zopa, which is already developing its own Open Banking infrastructure, has warned that banks must embrace the new legislation or lose customers, as you can read on our front page. The P2P sector is full of innovators who will not hesitate to use new rules or products to their advantage. With this in mind, I’m looking forward to seeing how the latest developments will help the industry enter its next stage of evolution.
SUZIE NEUWIRTH EDITOR-IN-CHIEF
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The nine banks with the largest market share are required to adopt and maintain common API (application programming interface) standards through which they will share data with other providers and third parties such as P2P lenders. The first set of APIs were due to go live to third parties on 13 January, with a managed roll-out that will complete in March 2018. But just four of the UK’s nine largest banks met that deadline and the rest have asked for extensions. Providers wishing to access the banks’ data can either obtain regulatory permissions from the Financial Conduct Authority (FCA) to access the API data directly or can do it through third parties. Zopa is currently using a third party,
which helped it launch an income verification tool last month. Steinthaler added that once Zopa has its banking licence it will automatically receive full regulatory permissions to access and make use of all Open Banking APIs. This could include aggregating accounts to create budgeting tools for customers based on user data. Zopa announced at the
end of last year that it was building its own Open Banking infrastructure and is currently advertising for a product manager for this area. Steinthaler said all departments would pitch in to the proposition so there wouldn’t necessarily be a whole team of dedicated staff. “As an industry we should all be excited about Open Banking,” she said.
“It provides a new source of data that we haven’t had access to in the past. “We know at Zopa we are good at using smooth and easy to use interfaces that people are happy to connect with. “It always comes back to starting with the customer need and working back from there. “Any P2P player that follows a similar approach will reap the rewards.”
ThinCats to launch IFISA during this tax year THE DELAYED launch of ThinCats’ Innovative Finance ISA (IFISA) is set to take place this tax year, although the firm is yet to confirm a specific date. The peer-to-peer business lender had previously told Peer2Peer Finance News that it planned to launch its IFISA by the end of 2017, with head of retail Stewart Cazier saying that he would be
“very disappointed if it didn’t happen this year”. But ThinCats said on 1 December that building new systems to accept and administer ISA investments had taken longer than expected, so it would not launch the tax wrapper until the new year. In mid-January, a ThinCats spokesperson confirmed that the lender still does not have a
specific date, but is aiming to launch in this tax year. In an exclusive interview with P2PFN (on page 10), chief executive John Mould expressed concerns about the tax wrapper. “To be honest I would never have made this asset class ISA-able yet,” he said. “This is not savings, it is investment. You’ve got your cash ISA and your equities
ISA, why put a new one in the middle that noone understands?” Mould went on to say that he did not want people transferring cash ISA savings into the IFISA. “I want people moving from the equities ISA,” he said. “I only want a client who is financially savvy; it will probably only be open to existing investors initially.”
Peer-to-peer lenders move into homebuyer market
THE GOVERNMENT has been increasing its support for homebuyers and now peer-topeer platforms are adding themselves to the solutions. Several firms are coming on to the market that enable retail investors to finance mortgage deposits. JustLend is in the process of launching BankOf, a P2P platform that funds borrowers’ mortgage deposits, stamp duty costs or even solicitor’s fees. It follows Property Pact, a similar proposition which was set up last September by former mortgage broker and developer Errol Woodhouse. Property Pact investors
can fund from £5,000 to £25,000 into each loan and receive an annual rate of five per cent over the Bank of England base rate quarterly. But Woodhouse said finding the right type of borrowers was taking a bit longer than expected. “At first borrowers didn’t understand what we were offering and many applicants didn’t have good credit histories,” he explained. “Instead we opted for
a Facebook campaign in December and got 47 preregistrations who we now have to meet with. “I don’t suppose all will meet our criteria as there will be a lot of boxes to tick before they get on the platform. “We want to ensure we have the right type of borrowers for our interested lenders before going live.” P2P lenders have traditionally steered clear of residential mortgages as their long terms are not typically suited to retail investors looking for greater liquidity. However, deposits
and stamp duty offer a different way to tap into the homebuyer market. “P2P mortgage lending increases the choice of mortgages for homebuyers and adds another investment option for investors,” said Neil Faulkner, managing director of research firm 4th Way. “However, more financing options can’t correct a real imbalance between housing supply and demand, as was neatly demonstrated by the increasingly slack regulation of the mortgage market from the 1980s through to the financial crisis, where homebuilding still did not pick up enough to bring the housing market into balance.”
Coin-backed P2P platforms shrug off crypto volatility THE MARKET for initial coin offerings (ICO) incorporating peer-to-peer lending has remained vibrant despite wider volatility among cryptocurrencies. Digital currencies such as Bitcoin and Ethereum suffered from price falls in January but many firms are still seeing the benefits of creating their own cryptocurrency to use for P2P lending. One provider, SOFIN, is currently looking to
raise up to $1m (£720,000) to create a token that can be used as a tool to bypass high exchange rates so loans can be funded internationally. Instead of having to pay exchange rates for converting from one currency to another, up to 20 per cent of a loan would be funded by the token which the borrower could convert into their local currency. The platform plans to increase this capability to
the full loan eventually. It marks a busy time for P2P ICO launches. Stephen Findlay, chief executive of P2P investor BondMason, is working with global cryptocurrency expert and University of Cambridge Research Fellow Dr Garrick Hileman on ARC Reserve Currency, a cryptocoin aiming to provide a digital currency for those living in areas with high inflation or under-developed banking systems.
Another offering, FintruX, is looking to raise a minimum of 5,000 ETH (Ethereum) in return for tradeable FTX tokens as part of an international unsecured loans platform. Meanwhile, cryptobacked P2P lending platform ETHlend, which had a successful ICO at the end of last year, has partnered with technology provider Enigma to help record and store transactions more securely.
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Stock market flotations will take P2P to the next level
THE UK’S biggest peer-topeer lenders will be facing millions of pounds-worth of annual costs when their flotation plans come to fruition, but experts say the benefits of going public outweigh the cons. Funding Circle is reportedly seeking an initial public offering (IPO) this year, while RateSetter has said it would like to float in the longer term in order to solidify its position as an investor brand. Analysts have suggested Funding Circle would be valued at over £1bn, meaning it would meet the LSE main market’s required minimum market capitalisation of £700,000. Funding Circle is likely to join the FTSE 250’s financial services sector, which is home to challenger bank Metro
Bank, sub-prime lender Provident Financial, and mortgage and business finance provider Paragon Banking Group. All three have a premium listing, which requires them to meet standards over and above those set out in EU legislation, including the UK’s corporate governance code. Listed companies are open to far greater scrutiny and face higher costs. Neil Glover, business development director for IPOs at
PEER-TO-PEER investment manager Goji is planning to boost the take-up of its Innovative Finance ISA (IFISA) among advisers after securing a multi-millionpound investment backed by Anthemis and AXA Strategic Ventures. Jake WombwellPovey, chief executive of Goji, said the company has received positive feedback for its platform
and Diversified Lending Bond, which launched in January 2017. It now wants to focus on building a sustainable business and has made several hires to help it achieve this goal. The next three months will see Goji roll out its IFISA to the financial adviser market. “We have made some great progress but a lot of advisers are waiting to see our track record
EY, said a main market listing can cost between £1.5m and £3m a year. “A public company has to publish quarterly and annual results, employ an investor relations team and a financial PR firm, and have a non-executive board,” said Glover. “It also has to reveal management salary, profitability and the cost of sales. It is a very disclosing situation, particularly if it operates in a competitive environment.” However, there are huge advantages to going public. It enables companies to obtain financing for organic and acquisition-led growth, enhance their visibility and prestige, broaden their shareholder base, and reward
staff with shares. The owners can also release cash by selling down their shareholding. James Clark, head of tech and life sciences at the LSE, said: “Joining a public market is one of the most significant decisions a business will ever take, but it demonstrates a company’s commitment to high standards and provides it with the means to access capital from the widest set of investors.” A RateSetter spokes person said: “We have been clear that our aim is to become a publicly-listed company, but we are in no rush. RateSetter is an investor brand and it would be natural for people to also be able to invest in the business itself.” Funding Circle declined to comment.
through the initial 12 month milestone period,” said Wombwell‑Povey. “We are coming up to that milestone and we’re on course to make a return of above six per cent. That will be another sign of our credibility, which will enable financial advisers to rest assured that Goji has a great investment product and we’re here to stay.” Goji plans to launch a self-invested personal
pension (SIPP) wrapper in the summer. Goji also intends to introduce its platform as a service offering. Wombwell-Povey said traditional asset managers are increasingly looking for investment opportunities in the direct lending market. He expects 10 asset managers to come on board and work with Goji throughout 2018.
Goji steps up its focus on adviser market
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A credible choice
Stuart Lunn, chief executive and co-founder of LendingCrowd, explains why investors are flocking towards the peer-to-peer business lender’s Innovative Finance ISA
IT’S AN exciting time for us,” asserts Stuart Lunn, chief executive and co-founder of peerto-peer business lender LendingCrowd. “There’s been a lot of focus on the ‘big three’ lenders over the last couple of years, but now there are other platforms breaking through and being recognised as significant lending platforms. “We very much see ourselves as having the opportunity to grow significantly and become one of those key players.” Edinburgh-based LendingCrowd has already seen dramatic growth, increasing its annual lending from £2.5m to £16m over just two years. This year Lunn has aspirations to lend out as much as £40m. This is set to benefit retail investors, who will be able to enjoy an increasingly ample selection of business lending opportunities through the platform. “We don’t have any institutional funding, other than an agreement with Scottish Enterprise,”
Lunn explains. “We’re very much a peer-to-peer platform. Our level of growth this year will be determined by how much ISA money we attract.” Indeed, the Innovative Finance ISA (IFISA), which gives retail investors the added benefit of tax-free earnings on their P2P investments, is pivotal to the growth of LendingCrowd and the wider P2P industry. LendingCrowd launched its IFISA in February 2017 as a passive Growth ISA, meaning that money is autoinvested across a range of loans, with capital and interest reinvested. In May it launched its Self Select ISA, enabling active investment portfolios to be held within the tax-free wrapper as well. The passive product, which offers target returns of six per cent, is increasingly overtaking the active option in popularity, Lunn reveals, as investors are attracted to the ease and diversification it offers. “It doesn’t matter what the underlying product is,
diversification is crucial in terms of protecting yourself against the downside,” explains Lunn. “The passive product aims to ensure that investors remain diversified, so it reinvests on their behalf each month into new loans if they’re available and tops up existing loans. The number-one aim is to continue to grow the portfolio.” As well as choosing between active and passive products, LendingCrowd investors will now be able to choose between the growth product and the new income product, which are both available within the IFISA wrapper. Launched last month in response to investor demand, the income account reinvests the capital component of the repayment but allows investors to withdraw the interest, with target returns of 5.6 per cent. As well as enjoying enviably high returns in a low-interestrate environment, LendingCrowd investors can be assured that the businesses they lend to have been through
rigorous credit checks. “We have a traditional credit-assessment approach, with a team that really understands SMEs and how to price risk,” Lunn says. “That should be a significant tick in the box for investors, that we’re not relying on parameter-driven, black-box algorithms.” With an alluring combination of bumper returns and robust credit risk assessment, it’s no surprise that investors have been attracted to the platform. So what’s next for LendingCrowd? “The signs are very positive, both for us and the sector in general,” Lunn affirms. “There’s a lot of appetite out there. One of the key factors over the next couple of years will be the attitude of intermediaries such as financial advisers towards the sector. “More has to be done on a sector-wide basis to clarify risk-return profiles, but an increasing number of individuals are looking at IFISAs so financial advisers will have to sit up and take notice.”
No holding back
ThinCats chief executive John Mould is determined to fill a gap in the small business finance market. He talks to Andrew Saunders about the deserving underserved borrower, the role of institutional funding in P2P and his concerns about the Innovative Finance ISA
HINCATS CHIEF executive John Mould is on a mission to help the UK’s struggling small businesses to grow. “I want to help British business, it’s important,” he states. “Every time I lend £1m to a business in, say, Manchester, they do some work, employ some people and they get ahead. I am really passionate about that.” Of course he is hardly the only boss of a peerto-peer lender to lay claim to that motivation. But what does set Mould apart is the way he is going about it. With just under £273m of loans to date, ThinCats is one of the larger P2P business lenders, but it’s a long way behind Funding Circle’s £3bn plus, not least because ThinCats’ model is a bit more involved. Rather than growing a simple ‘lender meet borrower/borrower meet lender’ proposition as quickly as possible,
ThinCats is in the process of constructing what Mould calls a ‘direct lending ecosystem’, to unite retail and institutional lenders with small- and mediumsized enterprise (SME) borrowers all over the country, using the existing network of regional brokers, advisers and accountants as intermediaries to
that it’s bloody hard for them to borrow.” Key to his ecosystem vision is signing up the army of local business advisers, brokers and accountants – whose clients are ThinCats’ target market – to act as intermediaries. “There are loads of lawyers, accountants and brokers around the country who want to work with SMEs
doing a single loan that “I amthenotbanks are doing” help source and deliver a ready supply of good-quality loans. “UK SMEs are very underserved for debt,” says Mould. “Funding Circle have a portion – loans up to about £200,000. But above
but have no loan product to sell,” he explains. “I have the product.” Firms which are looking to borrow several million pounds also like to get advice from independent intermediaries, he adds, but getting the advisers
on board means having reliable funding sources. That in turn means institutional money. “If I am talking to a broker in Newcastle and I say I can fund your loans with lots of retail investors, they say ‘No thanks’,” says Mould. “But if I say I can fund these loans largely with institutional money, and that retail might take some of it, that’s the difference. They say ‘Yes’.” The regional aspect is another key to the identity of ThinCats, which was founded by three local entrepreneurs – including chairman Kevin Caley – in Ashbyde-la-Zouch in 2011. It is the hard-pressed midsized SME outside the prosperous South East that is its target borrower. Lending to these firms is a job that urgently needs doing, he says. “If people think that the UK is doing well, that’s bollocks. GDP is growing at one per cent but if you
take out London then it’s stagnant or going down. The average company in Scotland or Manchester doesn’t have access to the funds to invest and it’s not growing.” Offering between £1m and £10m to firms who are looking to invest in growth but struggle to find a lender, ThinCats’ average loan size of just under £300,000 sets it apart from many other P2P lenders whose modus operandi is automating large numbers of smaller loans. Consequently Mould sees his role less as competing with the likes of Funding Circle, and more as plugging
the gap for mid-sized structured finance loans that banks can’t – or won’t – service themselves. “We focus on what we call the deserving underserved companies,” he explains. “They tend to have rising sales and staff numbers but no assets, so banks won’t lend to them. I am not doing a single loan that the banks are doing. To quote one of my loan originators – who used to work for Santander – ‘I haven’t been able to lend any money for the last five years, finally I can sit here and actually start lending’.” Persuading institutional
investors like pension funds that there is more to life than stocks, shares and bonds is a slow process but will be well worth the effort, according to Mould. “This model works but you can’t do it on retail investors alone,” he says. In October ThinCats scored a major victory, landing £200m of funding including £70m plus from US asset-backedsecurities outfit Waterfall Asset Management. No doubt it helps open doors that ThinCats’ owner, ESF, is itself majority owned by a British pension fund. “[The big institutions]
have been thinking about how to do this, but they haven’t had the tools,” he asserts. “I walk in and they say ‘Ah, that’s the tool’. My prediction is that eventually between 10 per cent and 50 per cent of all lending in the UK will be non-bank lending, just like it is in the US.” So does that mean that ThinCats is not really a P2P lender? Its focus on institutional investors and use of intermediaries have prompted some to ask this question, but Mould says that both the platform which lies at the heart of the business, as well as its core of loyal ‘expert’ retail investors,
are very much in the classic P2P mould. “We’re just about the only one [of the big P2P players] left where you can still pick the individual loans you invest in,” he says, referring to the rapid spread of auto-select offerings across the sector. All the same it’s telling that in the latest, recentlyrebranded ThinCats brochure, nowhere is the business described as a P2P lender. Perhaps the term is a bit momand-pop for the big institutions they are now courting? “The contract is between the lender and the borrower. I call it direct lending,” he says. “At the top of direct lending you have £100m deals for big infrastructure like Hinkley Point. At the bottom you’ve got the £5,000 consumer loans from Zopa, and then you
have Funding Circle for SMEs. What’s missing is the £250,000 to £10m bracket for SMEs.” But if filling that gap means going after institutional money, where does that leave the firm’s retail investors –
ThinCats’ funding, but he is adamant that no-one gets any preferential treatment. “Everyone signs the same loan documentation and we always say that loans are underwritten by an institution but that we
The average company in “ Scotland or Manchester doesn’t have access to the funds to invest and it’s not growing
who have an average of £70,000 each invested? Will they find themselves relegated to second fiddle? Mould admits that for the immediate future at least retail will only provide a small proportion of
keep a certain percentage for the crowd,” he affirms. “We did a £6.7m loan in September [its largest ever, to Chelsea Yacht & Boat Company] – the crowd took £4.7m. Retail investors get access to
institutional quality loans, to me that’s beautiful.” He also admits to some concerns over the Innovative Finance ISA (IFISA). The tax-free wrapper has generated a lot of interest in the P2P sector but has also been accused of muddying the waters for retail investors more used to the cash ISA, which is backed by the Financial Services Compensation Scheme. “To be honest I would never have made this asset class ISA-able yet,” he says. “This is not savings, it is investment. You’ve got your cash ISA and your equities ISA, why put a new one in the middle that noone understands?” So perhaps it is no surprise that ThinCats’ own IFISA has been delayed and is yet to come to market, rescheduled to an unspecified date
later this year. When it does launch, expect it have limited availability. “If people are moving from the cash ISA to the IFISA, I don’t want them,” states Mould. “I want people moving from the equities ISA. I only want a client who is financially savvy; it will probably only be open to existing investors initially.” Like the firm he runs, Mould himself is not the classic P2P entrepreneur, his years of experience and bluechip financial services background making him more of a poacherturned-gamekeeper. After heading to Europe in the early 90s to escape a recession-hit Britain that was, in his words, “a bit shit”, he worked for the finance department of the Council of Europe in Strasbourg before landing a job in Luxembourg
“for a firm I had never even heard of at the time called Morgan Stanley”. That took him to London, where after a few years as Morgan Stanley’s head of operational risk he deftly escaped investment banking before the crash. He
P2P [platforms] and use them to create funds,” he reveals. “But my colleagues met 60 of them and our conclusions were that most would never stand the test of time.” The problems, he says, included too much focus on tech, a lack
will always grow slowly but “Wesurely and cautiously” headed to New Star Asset management and then to Hermes, the BT pension fund manager, as chief operating officer. In 2015, when ESF acquired a majority stake in ThinCats, he was appointed chief executive. “The idea was that we’d buy some other
of understanding of how to find borrowers – “saying you’ll use Google Ad Words, well it just doesn’t work that way” – and poor credit management. So what was to have been a series of acquisition sprints instead became more of a build-and-
scale-up marathon focussing on ThinCats. It may have taken a while to perfect the model but Mould is not in a hurry to chase any audacious lending targets. Despite making a record £12m of loans in December he won’t be drawn on how far or how fast ThinCats may develop, only that he intends to build a long-term, sustainable business fit for whatever the future may throw at it. “I don’t have any great ambition to be lending £25trn or whatever,” he affirms. “The ones who win will be the ones who keep their credit quality. “So we will always grow slowly but surely and cautiously. I just want to keep supporting British business and provide a risk-adjusted return to investors that they can understand.”
Face to face in the digital age
Phil Reynolds, managing director at Newable Lending, explains the benefits of physical branches for the business finance community
N A world of bank branch closures and an increasing number of digital lending platforms, one would be forgiven for thinking that face-to-face meetings are a thing of the past when it comes to accessing finance. However, Newable Lending has stepped in and bridged the gap, providing its customers with the benefits of a high-tech online solution combined with the attractions of a physical space where they can meet the team and members of the local business community. Newable is uniquely placed to support businesses with a range
of services across four key pillars: lending, private investing, advice and property. As one of the Department for International Trade’s leading delivery
benefit from connections through the Enterprise Europe Network. Adding another string to its bow, the peer-to-peer business lender has launched
What we bring to the market is “quite different to other lenders” partners, Newable also helps businesses start exporting for the first time or to grow their exporting activity into new markets. Its Growth Services team helps companies access support from Innovate UK and
the UK’s first Business Exchange on Epsom High Street, Surrey, where businesses looking for funding can meet with Newable Lending’s team and mentors. The longer-term plan is to set up more Business
Exchanges across the country, providing investors and businesses alike with a human dimension to finance. “What we bring to the market is quite different to other lenders due to the ‘high-touch’ mentoring element,” explains Phil Reynolds, managing director at Newable Lending. “The Business Exchanges act as beacons for the local business community. Businesses looking for funding can come down and get advice on the products on offer, or speak to their mentors face to face. “From the investor’s perspective, I think
there’s a level of comfort that we have these physical locations so that we’re not an internetonly platform. We have these roots that are going to be embedded in the community for potential investors to learn more about Newable Lending and see the services that we offer to businesses.” Businesses looking to obtain a P2P loan through Newable Lending must have been trading for at least two years and have a property that is
not their home to put up as security. Interest rates range between four per cent and 8.5 per cent per annum. Investors could receive returns ranging between 2.75 per cent and 6.25 per cent per annum*, with a minimum investment of £10,000. Loans start at £150,000 and terms range between three and five years. Newable Lending has decades of experience providing mentoring and finance to businesses,
prior to launching its P2P offering. Borrowers can access Newable Lending’s mentors for advice on everything from finding an accountant to marketing and scaling up. “We operated a lending business with mentoring for quite some time, so we’ve had time to hone our proposition,” says Reynolds. “We believe we know what the most frequently asked questions are, what borrowers typically need money for and where they need the most support.” Going forward, it’s exciting times for Newable Lending as it pioneers its Business Exchange model. In the next three to five years it plans to open 10-20 Business Exchanges across the UK, aiming to lend out more than
£500m to businesses. Demand will dictate where the next branches are set up, but Reynolds predicts that the company will look outside of London to regional hubs. “We’re aiming to make the Business Exchanges into hubs for local businesses,” he says. “Our aspiration is to host numerous events, including ‘speed dating’ for businesses to meet accountants and lawyers, or for people to meet local firms. “I believe the concept of P2P lending is great from a local angle – for businesses in the community looking to grow and for people who are interested in accessing those loans – and hopefully our Business Exchanges will help connect these two groups.”
Your capital at risk if you invest. Investments are illiquid (meaning the inability to sell assets quickly or without substantial loss in value). Newable Lending for Growth Limited is not covered by Financial Services Compensation Scheme (FSCS). *Projected return is an estimate of what investors could earn after fees but before bad debt and taxes. Newable Lending for Growth Limited is an Appointed Representative of Resolution Compliance Limited. Resolution Compliance Limited is authorised and regulated by the Financial Conduct Authority (FRN 574048).
Earn an estimated 8.7% return with our Innovative Finance ISA Join the Crowd2Fund investor community and enjoy tax free earnings on your ISA allocation this tax year when lending to great British businesses. www.crowd2fund.com/ifisa
Earnings from investments can vary between 6% - 15% APR return before fees and bad debt. Equity investments are not included within this estimated return. Past performance and forecasts are not reliable indicators of future results. Tax treatment of any of the investment offers will depend on the individual circumstances of each investor and may be subject to change in the future. When making a peer to business loan, your capital lent to a borrower is not covered for compensation in the event of a loss by the Financial Services Compensation Scheme. Crowd2Fund Limited is authorised and regulated by the Financial Conduct Authority (FRN 623683).
Standing out from the crowd Chris Hancock, founder and chief executive of Crowd2Fund, explains how the platform’s Innovative Finance ISA offers more than competitive returns
S ONE of the earliest peer-to-peer platforms to bring its Innovative Finance ISA (IFISA) to market, Crowd2Fund is synonymous with the tax wrapper heralded as the sector’s passport into mainstream investing. With an increasing number of IFISA providers now entering the space, founder and chief executive Chris Hancock is confident that the business lender’s unique proposition helps them stand apart from the competition. “The IFISA has enabled innovative platforms to challenge the older P2P lenders and offer more choice to investors,” Hancock explains. “With many of the earlier players, you’re not able to choose different lending opportunities. “For us, it’s crucially about having lots of transparent information about the businesses and being able to make a balanced investment decision yourself. We are a genuine executiononly P2P platform.” Crowd2Fund puts a strong emphasis on community and connectivity between the investor and the borrower.
The platform is purely open to private investors who can actively choose which opportunities to put their money into. They can even contact the businesses they plan to lend to with any queries. The relationship between the investor and the borrower does not end with the loan. The investor may become a client of that business or decide to make an equity investment
ethos is the success of its secondary market, called the Exchange. While P2P traditionally has a reputation for poor liquidity, Crowd2Fund’s investors have been extremely active in trading loans with each other. “People love trading on the Exchange because it introduces that gamification where they can buy and sell investments at a rate
further down the line, as Hancock explains. “From an investor perspective, we’re offering more because you’re not just giving us a pot of money that’s aligned to the lower price of institutional wholesale debt like a lot of the other platforms,” he says. “As a group of investors, you’re helping that business; you might tell your friends about it or you might reinvest in the future. That’s what’s really valuable.” Adding to Crowd2Fund’s strong community
they decide upon,” Hancock affirms. “As well as boosting liquidity, it helps people diversify their portfolio which is so important to manage risk exposure.” With impressive 8.7 per cent target returns, tax-free income and a wealth of information about the promising businesses that their money will support, the attraction of Crowd2Fund’s IFISA is obvious. “It’s for people who want to get into investing and have more control on their capital,” asserts
The IFISA has enabled “ innovative platforms to challenge the older P2P lenders”
Hancock. “Rather than simply choosing a higher rate of return, they’re choosing to support people and entrepreneurs in growing British businesses that are the lifeblood of the economy.” Unlike some older players that are only just starting to enter the IFISA market, Crowd2Fund was built with the IFISA at its very core and will be entering a third IFISA financial tax offering this coming April, Hancock explains. “We’ve always offered IFISAs so our focus is very clear, whereas for some of the other platforms it’s more of a bolt-on product,” he says. And the IFISA market is far from reaching its potential. “There are 13 million people in the UK with an ISA, the market has a collective value of around £480bn and approximately £80bn of that is being transferred every year,” Hancock states. “Considering that the entire P2P lending market is worth £2bn a year in the UK and we’re opening up a pot of £480bn, it really puts the potential scale of the sector into perspective.”
IFISA SPECIAL REPORT
The long road
With the industry’s largest lenders now offering the Innovative Finance ISA, surely the tax wrapper will cement its status in the mainstream investment space this year? Danielle Levy provides an update on the product’s process
T IS hoped that the 2017-18 tax year will mark a watershed moment for the Innovative Finance ISA (IFISA). The product was first mooted by former Chancellor George Osborne back in 2015, enabling investors to enjoy tax-free earnings on P2P investments, akin to a stocks and shares ISA. “The ISA is the flagship savings vehicle for the government,” says Nick Harding, chief executive of Lending Works, which was the first Peer-to-Peer Finance Association member to offer the IFISA.
“There is a huge amount of cash and investments tied up in ISAs, so we feel it is a
that operate within it.” Estimates from P2P lenders for this tax year suggest IFISA inflows
the government’s belief “inIt thesignifies credibility of P2P lending and the platforms that operate within it
positive thing to be a part of that. It signifies the government’s belief in the credibility of P2P lending and the platforms
have been strong so far, following a slow start for the savings vehicle. While the wrapper was officially launched in
April 2016, many larger platforms were delayed in getting their products to market as they were awaiting the required regulatory permissions. As a result, the 201617 tax year proved to be a damp squib, with only £17m of IFISA subscriptions spread over 2,000 accounts, according to HMRC. While these figures have been contested by the industry, it is still clear that IFISA uptake paled in comparison to stocks and shares ISAs which attracted £22bn, while £39bn flowed into cash ISAs. This time last year, only
IFISA SPECIAL REPORT
four of the 31 major P2P lenders had received full authorisation, according to Orca, a P2P research and analysis company. Today, 29 have regulatory approval and 21 have actually launched IFISAs. Stuart Law, chief executive of Assetz Capital, expects to see total IFISA inflows of £100m across the sector over the course of this tax year, while other industry estimates have put the figure nearer £1bn. Law’s platform, which provides P2P business loans, launched its flexible IFISA in December 2017 and has so far seen significant demand. “Over the next two to three months, we would expect to bring in as much as the industry brought in during the 2016-17 tax year,” predicts Law. “Ballpark, I would not be surprised if we had about £20m plus within our ISAs by the end of this tax year.” One year on from the launch of Assetz Capital’s IFISA, the chief executive hopes inflows could total £50m. While the average IFISA account size stood at £8,000 during the 2016-17 tax year, Law suspects the amount typically invested into Assetz Capital’s IFISA will “comfortably exceed” this. So far, the platform has seen a large number
• You can invest all or some of this year’s £20,000 ISA allowance into an IFISA. Gains and income accrued within an ISA – up to the annual limit – are exempt from income and capital gains tax. • Only one IFISA can be opened each year. However, it is possible to transfer your IFISA to another provider during the same tax year. • Equity crowdfunding investments are excluded from IFISAs. • Flexible IFISAs allow investors to remove funds from the ISA wrapper and replace them within the same tax year – as long as the most recent subscription does not exceed £20,000. • Outside of this year’s ISA allowance, investors can also utilise their personal savings allowance, which is £1,000 for basic rate taxpayers and £500 for higher rate taxpayers.
of ISA transfers from previous years, with forums suggesting a large proportion has come from cash ISAs. A sizeable chunk of existing investors have also transferred from standard accounts into the IFISA in order to take advantage of the tax benefits. “If our customers have their money in a Quick Access account they can transfer into an ISA in a minute or so,” Law adds. Assetz Capital’s forums indicate that some customers who transferred out of standard accounts have moved into lowerrisk loans within the IFISA. They are happy to settle for a lower interest rate because of the tax savings they receive from the IFISA. Law said the platform has been able to accommodate IFISA inflows because it originates £20m to £30m of new loan facilities each month. Other platforms have had issues matching an influx of new money with supply of loans. Just 24 hours after launching its IFISA last February, Lending Works closed access to the product temporarily after it attracted “unbelievable demand” from investors. Over the remaining two months of the 201617 tax year, Lending Works’ IFISA brought
IFISA SPECIAL REPORT
in £9m. Harding estimates the platform could attract around £30m of IFISA money during this tax year. At the moment, 48 per cent of Lending Works’ outstanding loans are funded by IFISAs. “Of new loans that are funded each month, 59 per cent are funded by an ISA and therefore 41 per cent by a classic account,” Harding says. A closer look at Lending Works’ IFISA inflows shows that 50 per cent have come from existing ISA transfers. Balancing supply and demand represents a
major challenge for any P2P lender. If the number of lenders
compromised in any way. After its initial challenge managing
I don’t think any education has “really started yet to convert new people” increases substantially, loan origination needs to match up and platforms must ensure that credit quality is not
supply and demand, Harding says normal activity has resumed on the Lending Works platform.
Zopa, the UK’s oldest P2P platform, is more than aware of the supplydemand challenge. It currently has a waiting list for new investors to avoid lengthy waiting times while funds are being lent out. Its IFISA, which launched in June, is still only available to existing investors. Funding Circle also chose a staggered roll-out of its IFISA, starting with existing investors in November, to manage demand. A spokesperson for the platform previously told Peer2Peer Finance News that it expects
IFISA SPECIAL REPORT
to attract “hundreds of millions” into the savings product in 2018. Fellow ‘big three’ lender RateSetter plans to launch its IFISA this month, initially targeting existing investors. The lender anticipates that close to £500m could be channelled into its IFISA during the next tax year. This measured approach by the three largest P2P lenders underscores their commitment to managing inflows. While this should be viewed positively, industry figures suggest the IFISA will only begin to move into the mainstream once the big three offer IFISAs to new investors – a development that will ultimately raise awareness. “Until they open up their IFISAs to new customers, we are not going to be able to measure the popularity of the IFISA to the broader retail investor market,” asserts Jordan Stodart, co-founder of Orca. “This is because it remains siloed to existing P2P customers. “Zopa, RateSetter and Funding Circle account for 69 per cent of the market in terms of loan volumes. That is quite a hefty chunk.” This underscores a major obstacle for P2P lenders: namely, a lack of awareness about the benefits of the IFISA
amongst the general public. For example, a survey by Crowdstacker found that only five per cent of 2,000 active investors understood what an IFISA was. This helps to explain why the majority of IFISA subscriptions have so far come from existing and active P2P investors. “I don’t think any education has really started yet to convert new people,” states Law. Michael Lynn, chief executive of property
evident amongst the financial adviser community. After carrying out research with advisers last year, Orca identified a lack of understanding about how P2P loans can be used within client portfolios. “The big issue for a financial adviser is they are not going to produce the level of due diligence on a product that is not onboarded onto their daily business,” Stodart says. While financial
industry needs to show that “itThe is credible and robust through recessionary cycles”
platform Relendex, notes that most small platforms do not have significant marketing budgets. This makes it harder for them to publicise the benefits of IFISAs. “We will embark on our own [PR] campaign to try and increase awareness, but we can’t do it alone,” says Lynn. “The sector collectively needs to co-operate to make that happen.” A lack of support for P2P lending is similarly
advice firm Chase de Vere recognises the attractive interest rates that can be accessed tax-free via IFISAs, it says investors must be aware of the potential risks to capital and lack of protection from the Financial Services Compensation Scheme. “We have seen very little client interest in the IFISA,” reveals Patrick Connolly, a certified financial planner at the firm.
“These aren’t products which we actively recommend to clients and, at the same time, we’ve had very few clients approaching us about them either.” While IFISA inflows are likely to grow significantly compared to the previous tax year, Assetz Capital’s Law says it is important to think about the long-term picture. In his opinion, two milestones need to happen before the IFISA moves into the mainstream. The first will be when 25 per cent of P2P platforms’ loan books come from IFISA money. And the second will be when IFISAs account for five to 10 per cent of total ISA subscriptions. “In the future, I would not be surprised to see more than half of our P2P industry funded from ISAs in terms of retail money,” he adds. Lending Works’ Harding agrees that the P2P industry must be prepared to play the long game before the IFISA gains traction amongst the public. “The industry needs to show that it is credible and robust through recessionary cycles – all of the stuff you want to see as an investor,” he comments. “Over time, I think the industry will fulfil its longterm potential.”
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Brian Bartaby, founder and chief executive of peer-to-peer property lending platform Proplend, explains how eroding savings in cash ISA accounts are boosting the case for Innovative Finance ISAs
HE FIRST Bank of England interest rate increase in more than a decade did little to help the millions of people with cash ISAs who are earning less than the rate of inflation. In fact, savers have suffered the worst year for cash ISA returns since the accounts first launched in 1999, a Money Mail investigation has found. The average interest rate earned by new savers is now less than half the 0.59 per cent paid this time last year. With inflation around the three per cent mark, it’s unsurprising that savers withdrew £6.8bn from cash ISAs in the six months to November 2017. “The whole point of putting money into an ISA is that there’s a tax advantage, but if you’re actually losing money because interest rates are not beating inflation then there really isn’t much financial benefit,” explains Brian Bartaby, founder and chief executive of peer-to-
peer property lending platform Proplend. As a result, an increasing number of investors are now considering Innovative Finance ISAs (IFISA) as a way to maximise returns. While IFISAs are not protected by the Financial Services Compensation Scheme like cash ISAs, they can still be suitable for the more cautious investor with alternative risk mitigation in place. Proplend offers three separate risk tranches based on different property loan-to-value (LTV) levels, with a first legal charge of the property and the LTV ‘buffer’ acting as security. The lowest risk is tranche A at zero to 50 per cent LTV, tranche B is 51 to 65 per cent LTV and tranche C is 66 to 75 per cent LTV. Proplend launched its flexible IFISA in May, with investors now earning an average of 7.25 per cent on the least risky tranche of loans held in the wrapper. Although loan investment has historically been on a manual-
selection basis and no investor has ever lost money on the platform, Proplend is keen to make investing simpler. It is set to launch an Auto-Lend option for tranche A loans which will be available for both its Classic and IFISA accounts. This will offer investors greater diversification without the involvement of picking their portfolio themselves, and a target return of between 4.5 per cent and five per cent. “All tranche A loans are backed by commercial property with LTVs of 50 per cent or less,” Bartaby says. “So, the value of the property would have to fall by more than 50 per cent for investor’s capital to be eroded. To put this in context, property prices fell by around 40 per cent during the 2008 financial crisis.” Specialist P2P ratings agency 4thWay uses a similar ‘safeness in a very severe 1-in100-year recession’ to assess platforms and
has awarded Proplend’s tranche A investments their maximum five PLUSes rating. “Proplend’s tranche A gives new investors a reassuring entry point into P2P lending,” explains Bartaby. “There’s significant security, there’s income derived from the property and there’s diversification.” With IFISAs still making up a diminutive slice of the ISA pie, there is plenty of potential for the market to grow. Uptake has increased gradually so far, which Bartaby says is a good thing for the industry. “I think it needs to be more of a slow burn so that the industry can provide investors with steady and ongoing returns,” he says. “This will help cement its place in the mainstream investment market.” The launch of the new Auto-Lend option is expected to coincide with a re-launch of the website, providing investors with a more user-friendly interface.
Everything you always wanted to know about tax but were afraid to ask
There are a number of tax issues that can arise for peer-to-peer investors. Marc Shoffman guides us through the minefield
HE UK tax code is reportedly 12 times the size of the King James Bible at more than 10 million words, and while not all is relevant to peerto-peer platforms and investors, there is plenty that baffles the sector. Tax on P2P is paid in a similar way to savings or investments. Income tax is due on interest payments and capital gains tax (CGT) may be due on the sale of loans for example on the secondary market.
This is typically reported at the end of the tax year by filing a self-assessment return or – where less than £3,000 tax is paid overall – by altering the tax code so anything owed is effectively taken from an employee’s monthly payslip. Corporate investors would report any interest in their accounts and company tax return. HMRC clarified in March last year that investors can offset losses
from defaulted loans or those in arrears against interest from others. But Neil Faulkner, founder of P2P analysis firm 4th Way, believes more clarity is needed on how this works for loans purchased on secondary markets. “If interest has been accrued and not yet paid – such as with loans that roll all the interest to the end of the loan – lenders will be liable for tax on all the accrued interest,” he says. “If the loan is repaid
early, the lender could end up with a tax loss. “Lenders could factor that into their calculations when deciding what price to pay for existing loan parts and should spread their money across lots of loans so that you don’t get unlucky on just one loan.” When it comes to CGT, very few people are likely to be impacted as the profit would need to be above the current allowance of £11,300, and many platforms cap the premiums on loan sales.
However, Faulkner adds that it would be useful to have specific guidance on CGT and P2P rather than the generic tax rules. How tax is taken Since the introduction of the personal savings allowance in April 2016, tax is no longer deducted automatically for savings and investments, including P2P loans. This is because basic rate taxpayers can now earn up to £1,000 in savings income taxfree, while higher-rate taxpayers get a £500 allowance, which can be hard to earn in a whole tax year. But tax is still taken automatically for debtbased securities, so those investing in crowd bonds on platforms such as Downing and Abundance face having to reclaim their money from HMRC. “There are still some inconsistencies in the way HMRC administers tax between very similar models of P2P investment,” Bruce Davis, managing director of Abundance, explains. “Abundance has been working hard with officials at HMRC to try to iron out these differences which we believe cause unnecessary bureaucracy and confusion for our small investors. “For example, the difference in treatment between
loans and debentures for withholding tax at source means that thousands of our small investors will have to reclaim small amounts of tax themselves
such as self-invested personal pensions (SIPPs) and Innovative Finance ISAs (which you can read about in our special IFISA feature on page 18).
There are still some “ inconsistencies in the way HMRC
administers tax between very similar models of P2P investment
from HMRC using their online or postal forms.” Tax wrappers P2P may be seen as an alternative form of lending, but it can still be used in mainstream tax-free savings products
However, there is confusion over how the rules are applied. SIPPs are a popular way for people to maximise their retirement savings by providing tax-free earnings on their investments.
While P2P loans are technically allowed in SIPPs, connected parties rules stipulate that there must be no connection between the lender and borrower. This provides a challenge for SIPP providers if a P2P loan is allocated to a large number of borrowers. Anyone found to be lending to connected parties faces a tax charge of up to 55 per cent and the pension provider could also face a fine. As a result, investors are left using smaller, niche SIPP providers that can be more expensive. Loans within SIPPs typically have to be secured, which affects the eligibility of some P2P loans, but Simon Laight, partner at law firm Pinsent Masons, says there should still be scope to include them.
“This is a complex definition but it covers obvious things like being married, civil partner, same company,” he explains. “You have to ensure a SIPP member doesn’t accidentally lend to a borrower on a P2P platform he is somehow connected to. In many cases the investor wouldn’t necessarily know the identity of the individual whom the proposed loan is being made to. “A lot of SIPP operators say it is impossible and decide not to play in the P2P market.” But Laight says these interpretations are unfair as the tax charges only arise if there is an actual connection between the two parties – mere possibility is not enough. He highlights that a SIPP scheme administrator should not intentionally allow unauthorised payments and should report them if they arise, but argues that should not equate to refusing all investments that have the potential of triggering unauthorised payments. The other major stumbling block with SIPPs and P2P is the treatment of residential property. SIPPs generally cannot invest in residential property, which could catch P2P investors out
if they do not know who they are lending to. Similar to the connected parties rule, a SIPP that invests in residential property faces unauthorised tax charges which could be up to 55 per cent. Laight believes this should be manageable. “Any SIPP considering P2P lending should include declarations by the borrower as to use of the money; and insist on including a
put P2P in SIPPS should also make the asset more popular with financial advisers which will also provide a boost.” Wet signatures P2P is associated with fast-paced technology but the ISA market drags it back into the dark ages due to the way that transfers work. All transfer authority forms, for any form of ISA including IFISAs, require ‘wet’ signatures
of SIPP operators…decide “notA lotto play in the P2P market” term in the loan that the loan must not be used to purchase residential property,” he says. The Tax Incentivised Savings Association (TISA) has been lobbying HMRC to clarify rules around using P2P inside a SIPP. Technical policy director Jeffrey Mushens says the lobby group has met with government officials about changing the system to remove these obstacles. “The mood music from the Treasury has been positive, we will continue to push for change,” he says. “Making it easier to
and they all require the applicants to return the forms by post. This will hit transfer speeds, according to 4th Way’s Faulkner. “The system is still paper, manual, and costly, which is why several platforms are charging extra for their IFISA wrapper,” he says. “In addition, some traditional ISA providers do the transfer by posting a cheque. In this day and age, cheque transfers should be prohibited. “Costs and frustration are not the only issue with slow transfer speeds. While I personally
think investing is best done in a slow and steady way, an awful lot of investors get quite upset if they miss out on opportunities, and they don’t want bureaucracy to be the cause.” Transferring P2P loans HMRC is clear that P2P loans held outside a tax wrapper can only be sold and repurchased into an IFISA if they have been made available for purchase by more than one prospective purchaser. This means P2P investors effectively have to take their chances on the secondary market, which could mean sale fees and the possibility of income tax if they want to move existing loans into an IFISA. But Stewart Cazier, head of retail at business lending platform ThinCats, says there doesn’t seem to be a clear reason for HMRC’s ban on transfers of existing P2P assets into an IFISA. “This process is fine for ordinary exchangetraded assets, for example if you sell BP shares in your general account and buy some more in your ISA account,” he says. “You might just have some market movement in the price. It is not clear why HRMC prevents P2P assets being directly transferred into the IFISA other than the question of
establishing their market value by public auction. “However, it seems a more simple approach would be to say that the transferred loans are worth par plus accrued interest, and restrict the prohibition on transfer to any loans in default where the market value might not be clear.” Flexible ISA Savers have been able to access flexible ISAs since the start of the 2016-2017 tax year. This lets someone take money out of a cash ISA and put money back in during the same year without losing their allowance, which they would have done previously. This rule also applies to IFISAs, but Cazier questions
its appropriateness. “It seems strange to encourage investors to treat IFISAs as a shortterm savings vehicle by offering flexible IFISAs,” he says. “P2P investments
that it isn’t thought of as being at all similar.” Data collection Recent data on IFISAs provided by HMRC has been fiercely contested by the industry.
The mood music from the “ Treasury has been positive” are best reserved for money which a client is unlikely to need to access unexpectedly. Why then offer withdrawals from the current tax year without affecting the subscription? This isn’t a cash ISA, and we should be making sure
HMRC said there were £17m subscriptions and 2,000 accounts in the 2016-17 tax year, but Crowdstacker and Abundance alone say they took in almost £18m of new subscriptions in total. HMRC has said its data is based on ISA
returns submitted by the platforms but is open to hearing feedback. Seeking advice Chris Barnard, senior accountancy manager at software provider Crunch, says investors can consult their P2P provider to find out what tax needs to be paid. “P2P lenders generally provide a year-end tax statement which makes it clear that they need to report this with HMRC,” he says. It may be easy for HMRC to use its popular phrase that tax doesn’t have to be taxing, but it can clearly still be confusing. It is best for investors to check with their platform or an accountant if they are not sure so they don’t get caught out.
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The first online and print magazine dedicated purely to the UK’s fast-growing peer-to-peer finance industry, Peer2Peer Finance News (P2PFN)...
Published on Jan 29, 2018
The first online and print magazine dedicated purely to the UK’s fast-growing peer-to-peer finance industry, Peer2Peer Finance News (P2PFN)...