IT’S NOT EASY BEING GREEN
Renewable energy loans dry up RISK AND REWARD
What lenders are doing to manage credit risk
Open Banking guru Imran Gulamhuseinwala talks to P2PFN
ISSUE 21 | JUNE 2018
P2P lenders prepared for new data rules PEER-TO-PEER lending platforms have welcomed the new General Data Protection Regulation (GDPR) and confirmed that their processes meet with the new EU standard. “We welcome any measures which safeguard personal information, and very much see GDPR as a significant force for good - not least in recent times, where data has too often been dubiously acquired and unscrupulously used,” said a spokesperson for Lending Works. A RateSetter spokesperson told Peer2Peer Finance News that the firm “has implemented a
comprehensive crossdepartmental project to ensure [we are] compliant with new data protection legislation,” while Landbay chief executive and cofounder John Goodall said
that “we view GDPR as an opportunity to further build customer trust and confidence and continue to offer quality information to our customers.” However, a legal expert
has warned that GDPR compliance is an ongoing concern which may raise new issues in the future. Jonathan Segal, head of fintech and alternative >> 4 TOP finance at law
Collateral closure puts living wills into question THE COLLAPSE of peerto-peer lender Collateral has shined a spotlight on the role of living wills in the event of a platform failure. The Financial Conduct Authority (FCA) gained court approval last month to replace Collateral’s administrator Refresh
Recovery with its own choice of BDO. This was despite a leaked administration report by Refresh Recovery that said Collateral’s wind-down policy – or so-called living will – had been “tacitly approved” by the
FCA in 2017, stipulating that the insolvency firm would take on the role of administrator if necessary. Refresh Recovery was appointed after Collateral collapsed in February, when it emerged that the platform had been operating without the
requisite regulatory permissions. However, the FCA stepped in a month later to call for its own appointment, claiming that Collateral failed to seek approval for its choice of practitioner. Trillion Fund chief >> 4 executive Theresa
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ata is a serious business. Who has it, what they do with it, and how it benefits us, the consumer, are questions facing the world today, not just the peerto-peer lending industry. Two big data initiatives have come into play this year – Open Banking and the General Data Protection Regulation (GDPR). Open Banking mandates the UK's largest banks to share anonymised customer data with third-party providers (including P2P lenders). Our interview with Imran Gulamhuseinwala, global head of fintech at EY and implementation trustee of Open Banking (page 10), shows that while the new initiative might be a slow burn, it will be worth the wait. Open Banking is all about data sharing for the benefit of the consumer. On the other side of the coin is GDPR, which came into effect on 25 May. This new legislation puts stronger guidelines into place to protect consumer data – and as our front-page story shows, P2P lenders are more than prepared for it. The value and protection of data is something every P2P platform, investor, borrower and general consumer should be aware of. Hopefully this year’s new initiatives will provide some reassurance after the Facebook/Cambridge Analytica scandal by clarifying the uses – and limits – of data sharing. SUZIE NEUWIRTH EDITOR-IN-CHIEF
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cont. from top of page 1 firm Fox Williams, said that P2P platforms should “be ready for an increase in subject access requests” from both customers and staff and have a policy in place to deal with these. “Customer data should be encrypted, in particular sensitive customer data such as bank account and card details,” Segal said. “If you lose that data (e.g. through a hack), by encrypting the data you will have minimised your risks and reduced any potential liability from the breach. “You would also need to look at your data retention policy and regulatory requirements surrounding retention of data. If you
do not have a policy then you should formulate one. You will reduce risk of fines by the Information Commissioner’s Office if you have appropriate data retention policies in place and you follow them.” GDPR is an EU-wide directive that came into effect on 25 May. It is the most sweeping data protection law to have been introduced since the arrival of the internet and forces every business in the EU to adhere to certain standards with regards to data storage and usage. This means that companies require explicit permission from customers to add them marketing lists, and they must prove that they can
effectively secure sensitive customer data. However, a number of platforms told Peer2Peer Finance News that they do not expect the new regulations to have a big impact on their business growth. “If someone doesn’t want you to engage they are unlikely to have ever become a new customer,” said Ian Anderson, chief operating officer at ArchOver. “The biggest challenge has been working with external suppliers to ensure they are compliant and handle our data properly.” RateSetter said that it relied on its referral programmes to win
new customers, and not email marketing campaigns. Meanwhile, Landbay’s Goodall said that he was “not worried” about losing customers through GDPR “as our customer acquisition strategy is not heavily reliant on email marketing”. GDPR was approved by the EU Parliament on 14 April 2016 and all EU companies were given a compliance deadline of 25 May 2018. Failure to adhere to the law can result in a fine of up to €20m (£17.5m). It will replace the UK’s Data Protection Act of 1998, and will become a permanent part of UK law, despite Brexit.
“Anything pre-full authorisation or under interim would not be a reflection of whether the authorisation and ongoing compliance process under the FCA is working effectively. There were a lot of transition issues from interim to full authorisation. We won't be seeing those again as any new platform cannot operate until fully authorised now.” The FCA register suggests Collateral operated on interim permissions up until March 2016 and had,
according to the Refresh Recovery administration document, applied for full permissions before taking legal advice that it was no longer necessary. Jonathan Segal, partner at law firm Fox Williams, said the FCA currently provides quite a lot of leeway around living wills and back-up servicers. “I wouldn’t be surprised
if in the next iteration of rules they get tightened up and more prescriptive,” he said. The FCA did not respond to queries regarding Collateral’s living will, but a statement on the regulator’s website said the firm did not have “any valid authorisation or permission to carry on regulated activities”.
cont. from bottom of page 1 Burton, who is in the process of selling off the platform’s infrastructure, argued that the Collateral issue has not questioned the strength of living wills as the lender was never fully authorised in the first place. “It does show the transition challenges of moving a previously unregulated activity into a regulated one,” Burton added. “I think a better test of how living wills work will be with those firms who completed full authorisation.
P2P lenders may face higher bill from City watchdog PEER-TO-PEER lenders are likely to see their regulatory fees increase this year. The Financial Conduct Authority (FCA) decides how much its annual regulatory fees will be every June, following a consultation in March. The FCA said in March that its annual funding
requirement (AFR) for 2018/19 is £543.9m, an increase of 3.2 per cent, which will go towards its operating costs and changes it is making for Brexit. This increase will be footed by all firms regulated by the City watchdog, not just P2P platforms. Depending on the
type of regulated firm, a P2P lender could pay a minimum fee or one for consumer credit. Both types of fees could be increased by up to three per cent, according to the consultation document. There is also a separate levy to help fund the Money Advice Service and Financial Ombudsman Service.
Invoices are sent out by the FCA in July, to be paid by September. The FCA regulatory fees are calculated using criteria such as annual income or value of funds managed. For many P2P firms that became authorised in the past year, it could be the first time they see an increase in costs.
New board appointments highlight gender inequality in P2P TWO recent appointments have highlighted the lack of gender diversity in the UK’s peer-to-peer sector, where women still occupy a minority of roles. In May, Funding Circle named former O2 and Tesco Mobile executive Cath Keers as its first female non-executive director (NED), and in mid-April, Zopa appointed former Peer-toPeer Finance Association chair Christine Farnish as its first female NED. The Women on Boards review is targeting that a third of board positions at the UK’s largest public companies be made up of women by 2020. Funding Circle and Zopa are not yet listed but there has been speculation that Funding Circle will float on the stock market in the autumn. “There seems to be a marked lack of diversity
in the sector,” said Nicola Horlick, chief executive of Money & Co. “There are women lower down the ranks, but not at C-suite level.” Landbay, RateSetter, Funding Circle and Rebuildingsociety have all signed up to the government-backed Women in Finance Charter, which aims to promote a balanced and fair workplace within the financial services industry. However, the charter may not go far enough. John Goodall, chief executive at Landbay, said that while it is “a critical initiative”, any equality efforts must be proportionate to the size of each business. “Much like our other P2P counterparts, we are still in the relatively early stages of growth, so the targets set needed to be proportionate to our size and stage of development,”
he said. “However, with several new hires on the horizon to support our continued expansion, we are focussed on these measures to ensure a gender balance at senior levels going forward.” Horlick added that women are at an early disadvantage in the fintech sector. “In terms of getting more women involved in the sector, I don’t see why this shouldn’t be possible,” she said. “However, all of the businesses that currently exist are start-ups and it is notoriously
difficult for women to get funding to start their own businesses. Thus, it is more likely that they will be recruited into the existing businesses and then will have to rise through the ranks.” According to recent research from headhunter Egon Zehnder, the rate at which women are being promoted to the boards of the UK’s largest companies has slowed for the first time. Women accounted for just 29 per cent of hires to UK boards in 2016, down from 32.1 per cent in 2014 and 31.6 per cent in 2012.
Green loans dry up as lenders target “low hanging fruit” A DEARTH of renewable energy loans has been blamed on over-zealous lenders chasing “low hanging fruit” and an end to a government-backed subsidy programme. In May, Assetz Capital closed its Green Energy Account (GEA) and in March, defunct P2P platform Trillion Fund paid off its final renewable energy loan. Both platforms have blamed a lack of new loans and an end to government subsidies for the failure of their green initiatives. However, Bruce Davis, joint managing director of Abundance Investment, told
Peer2Peer Finance News that most P2P lenders were disproportionately targeting lower-risk operational loans in the renewable energy space, and ignoring the opportunities in infrastructure and construction. “In terms of operational assets, there is an abundance of money chasing too few deals at the moment,” said Davis. “The big money tends to go after the low hanging fruit which is operational assets. This means that it is challenging to compete for project tenders in this sector.” According to Theresa Burton, chief executive
of Trillion Fund, the end to government subsidies meant that Britain’s emerging wind and solar farms were unable to scale up to meet demand, and this is what caused deal flow to dry up. “The last three years have been a difficult transition for the industry in wind and solar,” she said. “The cuts were too hard and too fast. It didn’t give the sector time to adjust to the economics.” However, Burton added that she did not believe that low-risk renewable energy loans were disproportionately hit by the subsidy decision. Meanwhile Stuart Law,
chief executive at Assetz Capital, confirmed that the end of the subsidy scheme was largely to blame for the end of the GEA account, but he pointed out that the GEA did invest in some green energy construction projects. “The subsidy reductions created a situation where far less entrepreneurial development was taking place for us to fund,” said Law. “The wind turbine industry has hit critical mass now, with very substantial contributions to national energy needs, and we took the opportunity to simplify our lending back to property-secured loans.”
Alternative finance funds see mixed success THE SHIFT away from peer-to-peer investments by some alternative lending-focused investment trusts is having mixed results. Over the past year, P2P Global Investments (P2PGI), VPC Specialty Lending Investments and Ranger Direct Lending (RDL) have moved away from pure P2P to boost returns and narrow their discounts, while the Funding Circle SME Income Fund (FCIF) has remained true to its roots, all with varying outcomes. The FCIF investment trust solely backs loans
originated via the Funding Circle platform and saw its net asset value (NAV) return 6.9 per cent last year, while trading on a healthy premium. In comparison, RDL – which has been hit by shareholder concern over its management and legal proceedings against its Princeton holding - returned 5.4 per cent, VPC – which has shifted from P2P towards balance sheet lenders saw its NAV total return grow by 3.07 per cent, while P2PGI – which last year merged its manager MW Eaglewood with
Pollen Street Capital and is focusing more on asset-backed alternative lenders – reported a NAV return of 3.03 per cent during 2017. RDL and P2PGI are both trading at double-digit discounts to NAV. “Funding Circle gets a premium because it has a strong brand name and reputation and has been able to have a clear focus on its goal and grow the NAV at steady pace,” said Adrian Lowcock, investment manager at wealth management firm Architas. “Interestingly, there
seems to be a shift from pure P2P plays in the investment trust world to a mixed portfolio including secured loans. “This shift is being received with mixed results – RDL’s move looks to have resulted in a boardroom battle and has been caught up in some problematic loans which has hit the fund. “However, P2PGI seems to have a clearer strategy and mandate in order to meet its return objectives earlier. This feels like it is looking to reduce the risks involved as well as broaden the appeal of the fund.”
Rebuildingsociety boss takes helm at InvestUp PEER-TO-PEER investment aggregrator InvestUp has installed Rebuildingsociety boss Daniel Rajkumar (pictured) as temporary chief executive while it searches for a replacement for Chris Bradbury who left at the end of 2017. InvestUp was purchased by the White Label Company – owned by Rajkumar – last year when the original founders, including Bradbury and James Tuckett, were looking for an exit. “When the founders were looking for an exit they spoke to me,” said Rajkumar. “I’m an interim measure until we hire a chief executive to drive the business forward.”
Companies House documents show Bradbury and Tuckett stepped down as directors at InvestUp at the end of 2017, while Rajkumar was appointed as a director in May 2018. Rajkumar is a director at the White Label Company and separately is the controlling shareholder for Rebuildingsociety, which is one of the platforms InvestUp uses for its portfolio. He said there are now plans to develop the InvestUp platform by adding more lenders and working with discretionary fund managers. “Over the last year we have been continuing to develop the product and fine tune the algorithm
so it can work on a performance index,” Rajkumar said. “We will also look to publish performance data of other platforms and add new ones.”
He also noted that the market is currently watching the Financial Conduct Authority and Prudential Regulation Authority, who are both looking at further supervision of algorithmic trading. “Algorithmic trading may become a separate regulated entity,” he said. “Our view is that working with an aggregator in an interest of lenders is a step removed from active trading on an investment platform.” InvestUp allocates money across 14 platforms including ArchOver, Assetz Capital and Lendy. Investors have earned on average 9.66 per cent since the business launched in 2015.
The best from the web
We round up the biggest stories from www.p2pfinancenews.co.uk over the past month • RateSetter and Funding Circle opened their Innovative Finance ISAs to transfers from other providers, potentially opening up a pipeline of money stuck in low-paying cash ISAs. At the start of May, RateSetter reported it had received more than £75m of subscriptions since its launch in February.
• Investment trust Ranger Direct Lending (RDL) accused two of its shareholders of attempting to impose their own agenda on the future of the fund. Oaktree Capital issued multiple letters to RDL, one of which expressed disappointment over the performance and management of the investment trust and proposed two new board
members, while LIM Advisors has proposed a vote on the removal of the chairman of the RDL board Christopher Waldron at the next general meeting. • Funding Circle’s latest securitisation was priced at a tighter spread than its first with backers including the European Investment Fund and German development
bank KfW. The £207m portfolio was issued by investment trust P2P Global Investments and was priced at 75 basis points, compared with 220 basis points on the tranches issued in 2016. It is the second securitisation of loans originated by the peer-to-peer lender and opens up the small business loan asset class to an even wider range of investors.
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Investment made easy
Andrew Turnbull, director and co-founder of Wellesley, explains how the platform’s property bonds offer an appealingly straightforward and simple investment opportunity
HERE IS A LOT to be said for simplicity when it comes to investments. Retail investors are often torn between pursuing complex financial arrangements which offer high returns, and lowyielding yet ‘safe’ options which struggle to reach the rate of inflation. But alternative property lender Wellesley believes it has cracked the magic formula, by offering a series of easy-tounderstand property bonds which offer annual returns of five per cent or more. “People want to see simplicity when they're investing in something,” says Andrew Turnbull, director and co-founder of Wellesley. “They want to buy an investment and have confidence that it's going to do well, but they don't want to have to manage their investments proactively. By creating a simple investment in our listed bond we've found that it gives people the ability to have something that's straightforward.” Over the past five years, Wellesley has split its
funding between its two core products – peer-topeer lending and property bonds - and Turnbull says that the two sides of the business have been equally popular with investors who are seeking reliable returns. “The reason we think investors like the bonds so much is that they provide
and shares ISA, so savvy investors can also benefit from tax-free earnings. But building this product was not an easy task. “We spent an awful lot of time and money to set up the infrastructure that made the bond available,” says Turnbull. “Firstly, it is a listed bond, and it is therefore ISA eligible. But
“ The bonds provide a degree of certainty and regularity” a degree of certainty and regularity in the sense that they have a fixed start date and fixed end date,” he says. “They can receive regular payments of interest, and they offer diversification, because they are generally secured upon pools of development loans.” At the moment, Wellesley is offering a three-year property bond which pays 5.5 per cent, although Turnbull adds that most of its bonds pay in excess of five per cent. The Wellesley Property Bond is eligible for inclusion in a stocks
it also had a prospectus approved - which means it had to be approved by the regulators. And secondly, we thought it would be really nice to give it independent governance.” With this in mind, Wellesley approached Intertrust, a global manager of corporate services related to debt issuance. Intertrust acts as an independent overseer, checking on the performance and conduct of the investment. “The fact that it’s gone through a robust prospectus approval process gives an investor
comfort when considering the components of that investment,” says Turnbull. Within the P2P sector, offering an independent listed bond facility is still somewhat innovative. Wellesley was the first P2P platform to become involved with property bonds, and it was the first to issue retail bonds. Having issued more than £109m bonds to date, Wellesley is the largest issuer of bonds amongst its immediate peers, making it a pioneer of the property bond market. The success of these bond offerings has convinced Turnbull that more and more P2P platforms will start diversifying into the property bond market soon. “I fully expect that to be a medium-term trend,” he says. “People want these types of investment products as we are reducing complexity while feeding the strong investment appetite that sits in between lowerreturn bank savings rates and the potentially volatile investment in stocks.”
Leading the way Imran Gulamhuseinwala, global head of fintech at EY and implementation trustee of Open Banking, tells Andrew Saunders why the new datasharing rules are set to change the face of financial services
INCE ITS FIFTEEN minutes of fame back around ‘OB Day’ on 13 January, when excited media reports promised the dawn of a new era of high-tech banking, Open Banking has slipped back into the fintech background, accompanied from some quarters by accusations of having been something of a damp squib.
But such claims misunderstand the nature of the beast, says Imran Gulamhuseinwala, implementation trustee of the snappily-named Open Banking Implementation Entity (OBIE) which develops and tests the APIs on which the system is built. “It’s a long-term play and we genuinely have the
potential to change the way that consumers and small- and medium-sized enterprises (SMEs) deal with financial services,” he explains. “But it’s not going to happen overnight and it isn’t going to be mainstream for a period of time.” So less damp squib, more slow burn. 13 January, he adds, was the start rather than the finish of the process – there are more releases of the OB API standard still to come, and that’s before you even start talking about the adoption rates by banks, the authorisation of third parties and the takeup of new services by consumers. This sort of timescale
may not be what thirdparty fintechs, eager to get new Open Banking services up and running, want to hear. But Gulamhuseinwala has to balance the interests of all the parties involved, and is less interested in artificial deadlines than he is in getting it right. “We don’t need to get ahead of ourselves, there is no product launch or fanfare around this,” he asserts. “I want to make sure that the standard works – there are three more implementations to come and each will add functionality and scope. “Then I need to make sure that the banks implement it, and
“ We are the pioneers, and it’s the pioneers who take the arrows” implement it well – we’re on a journey there. It works but we need to make sure it gets better.” Open Banking’s big idea is to use APIs to allow fintechs to access customers’ banking records, creating an ecosystem where the banks provide the infrastructure while the fintechs provide the innovative new services to consumers and SMEs. Rather as ISPs provide the back bone connectivity of the internet. There are a handful of peer-to-peer lending platforms already active in Open Banking, including Zopa and Lending Works. Applications include speeding up loan processing, for example. Where historically some borrowers might have been asked to provide paper copies of bank statements, the Open Banking account information service provider API can be used to access account data directly – which is not only faster but also less hassle for the customer. In the fullness of time,
says Gulamhuseinwala, a whole range of new services will emerge as more third parties sign up. “In the first cohort we’ve got a really good spread – we’ve got overdraft unbundling which will enable customers to get unarranged overdrafts 50 to 90 per cent cheaper than they can through their bank directly. “We’ve got top-up apps so people can save more, we’ve got sweepers for high-interest accounts. I’m excited about it.” In the longer term, interest could even spread beyond the conventional financial services sector. “There are a whole bunch of blue chip non-financial services companies whose customers number in the millions, which see the value in interacting with Open Banking,” he states. He cites mobile phone operators as an example of the kind of business he is talking about: “It could be a game changer that would really spark adoption.” Adoption is certainly an issue for Open Banking, as awareness is poor among
consumers. One recent survey from CYBG and YouGov found that 58 per cent of UK adults don’t know what Open Banking is, and that 77 per cent say they are unlikely to use it. But that’s precisely the point, argues Gulamhuseinwala – it’s not awareness of Open Banking itself that will drive uptake, it’s the emergence of compelling new services on the back of it. Open Banking is the app store, but the apps themselves come from the third-party providers. “My vision for the medium term is that people will partly be choosing their banks based on the fintechs that are supporting their proposition,” he predicts. The OBIE itself was created by the Competition and Markets Authority (CMA) in 2016, as a direct result of yet another enquiry into the persistent lack of competition in the retail banking market – an issue which has been causing head-scratching in Whitehall for several decades. Open Banking is
thus the CMA’s latest, and most radical, attempt to finally persuade the great British current account holder and/or SME to shop around more. “The CMA themselves are on a journey – the traditional way of looking at competition has been to examine market share,” says Gulamhuseinwala. “Do we want to limit that, bring in new players?” But the problem with this approach, he says, is that the new players end up looking just like the old ones. “You end up with more companies, all of them offering the same thing,” he adds. “But there is another way of looking at competition, which is that you allow new players but also new services. I find that much more interesting.” The OBIE is funded by the so-called CMA 9, the UK’s nine largest banks and building societies, and part of Gulamhuseinwala’s job is to maintain the organisation’s independence. “The trustee is there to ensure that Open Banking
“ There is another way of looking at competition, which is that you allow new players but also new services
benefits all stakeholders – the consumer, the regulators, the third-party providers and all the banks – not just the CMA 9,” he explains. There have been hiccups of course – five of those nine top UK lenders weren’t ready to open up their account data on 13 January. One – Santander – has been granted a whole extra year to get its private banking arm Cater Allen Open Banking ready. Nor have all the banks been unfailingly enthusiastic about granting access to their customers’ accounts – a bank’s most precious data asset - to third parties. NatWest (owned by RBS) chose the day before ‘OB day’ to warn customers that Open Banking might enable hackers to access their money fraudulently – a move hardly likely to encourage them to sign up. Overall however, says Gulamhuseinwala, the banks are engaging well with Open Banking – even some which are not part of the CMA 9, such as soon-to-be-owner of Virgin Money, CYBG. It has joined several of the
larger banks in launching an Open Banking account aggregator app for its customers. But the landscape has to be allowed to take shape. “At the moment a lot of the resource is going into compliance,” comments Gulamhuseinwala. “But now they are beginning to say ‘What should I do with this to improve my ability to compete?’ And after that it will be ‘What can I do to improve my ability to innovate?’ “When all three of those things [compliance, competition and innovation] are working together, that’s when things will really start to happen.” Keeping tomorrow’s bigger prize in sight means not rushing things through today, he adds. And that includes the authorisation process for third-party providers. “It’s fundamentally important to Open Banking that only authorised entities can use the APIs. “The application process is prescribed by the EU [under the PSD2 regulations] and is being implemented here by the Financial Conduct
Authority (FCA). The process is robust and intense and it takes a long time.” How long, exactly? The FCA, he says, began taking applications three months prior to ‘OB day’ but only half or dozen or so third parties were actually approved on day one. “Considering that we have over 100 fintechs who have expressed a strong interest, only a small proportion have come through,” he reveals. There are currently two or three third parties
completing approval every week, he says, and it will take another three or four months to approach something like a critical mass of authorised providers. Gulamhuseinwala is unapologetic about the timescale. “I am entirely happy with that,” he affirms. “People place a lot of trust in the regulator. My takeaway is that it’s a robust process and they are not just being rubber stamped.” It may help ease the frustrations of fintechs
“ Open Banking is designed to give customers control over their data”
going through the process to know that Gulamhuseinwala is an entrepreneur himself – he is co-founder and chairman of cheap season ticket loan provider CommuterClub. It’s an experience that taught him that fintech was no flash in the pan, not least because of the way modern modular tech has helped start-up costs in financial services to plummet.
“If I had wanted to start a bank in 2000 I would have been looking at $100m (£74.2m),” he says. “In 2010 it would have been $20m. Now? Maybe $5m. “Each night, every fintech entrepreneur says a little prayer to AWS [Amazon Web Services] for making it all possible.” He is also global fintech lead at EY, a role from which he is
on secondment to the OBIE. After working with government on the Open Banking working group, the OBIE was a natural move, he says: “I spent a lot of time working with government at EY, helping them get their arms around fintech.” One of the aspects of Open Banking that everyone is keen to get their arms around now, especially in the wake of the Facebook/Cambridge Analytica scandal, is security. New tech always ignites fears over data
security – and never more so than when the data is your bank account. “Open Banking is designed to give customers control over their data,” says Gulamhuseinwala. “I think that if Facebook had been subject to the regulations we are working to, they wouldn’t be in that situation. “Security has been put at the very heart of Open Banking,” he continues. “It doesn’t require sharing a user name or password – that gets a big tick. Only authorised third parties can use the APIs, that gets a big tick. “It’s opt in so customers only use it if they want to, that gets a big tick. And if something does go wrong, there are customer protections in place especially around the movement of payments.” So Open Banking is coming and even if it takes a bit longer than some of those breathless 13 January headlines suggested, it will be worth the wait and any accompanying hassle, he says. “We are far ahead of anywhere else in the world on this. We are not walking down a well-trodden path and we can’t point to precedents outside the UK. We are the pioneers, and it’s the pioneers who take the arrows.”
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A new model
Even before its official launch, Loanpad is breaking the mould, with a brand-new model of peer-to-peer lending that is set to upend the sector. Chief executive and founder Louis Schwartz reveals his innovative formula…
HE UK’S PEER-TOPEER lending sector has a reputation for being innovative. But it is still surprising when a new company comes along and does something truly different. Due to launch in the third quarter of this year, Loanpad has been in development for almost three years, while chief executive and founder Louis Schwartz perfected the formula that just might upend the entire P2P model. In an industry first, Loanpad allows retail investors to invest alongside professional lending partners, with the professional lenders taking on a greater level of risk. Schwartz describes it as “the first real hybrid P2P platform”, offering retail investors the ability to participate in P2P lending with an additional layer of protection. “Loanpad is effectively partnering retail investors on our platform with established professional lending partners on a senior and junior basis where professional lending partners have the junior level security giving retail
investors a higher level of safety,” explains Schwartz. “Arguably, Loanpad is the first real hybrid P2P platform as retail investors get the benefit and stability of a professional lending partner without the platform actually putting ‘skin in the game’. Significantly, this means that the platform bears no credit risk on the underlying loans so there is no impediment to growth.” Initially, Loanpad is targeting returns of four to five per cent for its investors by sharing shortterm property-backed loans to businesses and property developers. The first 200 investors to open an account via www.loanpad.com will also receive a 20 per cent bonus on any interest accrued during the first year. All retail investors will be able to choose from two different accounts: the Classic Account, where investors can access their capital daily, free, at any time; and the Premium Account, which offers a higher rate, although lenders have to give 60 days’ notice to withdraw
their capital free, or pay a small charge to access their funds early. This is all part of Loanpad’s liquidity goal, whereby investors can collect their returns on a daily basis and remove their money whenever they like. “I ask myself why no-one else is doing this and I think it's because the sector is still young enough that this model hasn't appeared,” adds Schwartz. “What we do is enable professional lending companies to ‘securitise’ approved loans on our platform, but they must retain their own portion of at least 25 per
cent of each loan as a first loss position. So, there is a direct relationship between investors and borrowers, but managed alongside professional lending partners.” The combination of daily interest, daily access and lower levels of risk is likely to draw comparisons with bankbased savings accounts or cash ISAs. There is of course one major difference – unlike bank accounts, Loanpad actually offers inflationbeating returns. “A cash ISA is risk free but there's low returns,” says Schwartz. “We’re offering an Innovative Finance ISA with a much higher return albeit with a level of risk, but we are protecting our investors with an extra layer of security through the lending partner model.” If successful, Loanpad may have just invented a new model for P2P which strikes the perfect balance between risk and reward. And in the current economic climate, that may be exactly what investors are looking for. To find out more, please visit offer.loanpad.com.
The automation evolution Robo-advice is a hot topic in the world of retail investment, but how important is it in the world of peer-to-peer lending? By Marc Shoffman
EER-TO-PEER lending emerged as an alternative to mainstream banks, simultaneously widening access to credit and boosting retail investors’ returns. Some would argue that P2P has made finance more accessible and shifted it from the ‘computer says no’ mentality of the banks.
But is there room now for machines? Like P2P lending, robo-advice provides an alternative to the more expensive world of financial advice, offering lower minimum investments and less paperwork. Robo-advice comes in a number of forms. First there are investment firms
such as Nutmeg that will build an online portfolio of exchange-traded funds (ETFs) based on the goals and risk assessment of an investor. There is little sign of P2P platforms making headway on roboinvestment portfolio websites, but there are signs of life in other automated channels.
There is a robo-world of automated savings apps, such as Plum that uses an algorithm to identify consumers’ spending habits to calculate a small amount of money that will automatically be put aside every few days. Plum uses a chatbot through the Facebook messenger service where users can move their
“ People are curious and want to
try things with an interface they feel comfortable with” money and track their spending. It also offers an option to invest with RateSetter. “Robo-advice and the huge growth it is experiencing is symptomatic of a wider change in the way we communicate and engage with institutions previously only accessible over the phone or website,”
Daniella Camilleri, communications lead at Plum, explains. “The appeal of robo-advice comes from the intuitive and unobtrusive form it uses to communicate, allowing for users to manage their money with as little hassle as possible. “We have thousands of users investing in our P2P option with more
and more joining their ranks every day, demand is definitely there. People are curious and want to try things with an interface they feel comfortable with.” P2P has always had a robo-style function, whether it be auto-lending that automatically spreads loans across a variety of borrowers, or the more recent aggregators such as Goji, InvestUp, BondMason and Orca that build and manage a portfolio of P2P loans across several platforms on behalf of an investor. But a platform offering pure robo-advice geared solely towards P2P that builds individual riskprofiled portfolios still seems a world away. “Conducting suitability on investors, then matching suitable investments to a score, is a difficult task, particularly if the scoring system is on the same scale as other asset classes,” Iain Niblock, chief executive and cofounder of Orca, explains. “Current market players who conduct risk profiling of traditional investments such as Dynamic Planner, Defaqto or FinaMetrica would be best placed to risk profile P2P investments. This would help open up P2P to the financial adviser market and potentially allow innovative solutions such as robo-lenders to evolve.” Although it is difficult,
Niblock recognises there is still potential. “There is demand for products that allow people to build diversified portfolios of loans,” he adds. “Investing in P2P is complex due to the large variance of assets available and the fact that investing occurs directly on platforms makes building a diversified portfolio painful. “Automated portfolio solutions may make the asset class more accessible to a larger demographic of retail investors. The element of providing advice doesn’t necessarily have to form part of this solution to deliver value to users.” There are also P2P platforms who recognise the potential for robo-advice. “We certainly expect an increased demand for robo-advice going forward,” Stuart Law, chief executive of business P2P lender Assetz Capital, says. “This is being driven by a retail market that wants bespoke products to help them meet their financial goals. A one-size-fits-all approach doesn’t cut it. P2P lending will need to become more fluid and flexible, and using roboadvisors to guide investors through this decisionmaking process makes perfect sense.” Property P2P lender Octopus Choice, which
already works with human financial advisers, says it is the process of looking at working with the robo market. “From an investment and financial advice point of view, P2P simply represents another asset class that can fit into an investment portfolio, whether that is through robo-advice or traditional financial advice, and that is what is exciting about it,” Sam HandfieldJones, head of Octopus Choice, explains. “Technology has allowed access to asset classes that were previously only available to high-net-worth or sophisticated investors. “We work closely with financial advisers to illustrate how P2P can fit into a typical portfolio, how it could work from an asset allocation perspective and of course diversifying your ISA. “We are also talking to robo-advice platforms around integrating our P2P product within their offerings. It’s not yet a mainstream part of an asset allocation discussion but we hope to try and change that.” There is no reason why P2P lenders
couldn’t provide a robo option, according to Jamie Cooke, chief executive of compliance specialist FSCom. “There is nothing to stop P2P lenders using robo-advisors to define a portfolio composition,” Cooke explains. “I would also assume that any advice provided by P2P lenders will always be for retail customers because P2P is targeted at individuals and small businesses. Larger corporates, who would qualify as professional clients, would have less demand for alternative financing arrangements in my experience due to the
“ We certainly expect an
increased demand for robo-advice going forward
availability of credit from banking providers.” Neil Faulkner, cofounder and director of P2P analysis firm 4th Way adds that the Financial Conduct Authority (FCA) may even be pleased to see another way of filling the advice gap. “The FCA has acknowledged the investment advice gap for less-wealthy or nonwealthy individuals and it is supportive of P2P lending, so robo-advice will help address this issue,” he explains. But, as attractive as P2P robo-advice may be, there are some questions as to whether it would work as a standalone product as you cannot get a full financial plan from purely investing in P2P. Handfield-Jones explains that platforms need separate permissions for P2P to other regulated
advice so it would be hard to combine this with a wider financial plan. “Ultimately you cannot give financial advice when only looking at the P2P component of someone’s total wealth,” he says. “You need to look at their stage of life, life goals, the cash they have, their pension, their cash and stock market holdings along with their personal tax position. Providing advice on a P2P portfolio is not going to provide good client outcomes as it won’t be looking at the whole picture. “Simply advising on P2P without knowing the customer’s broader financial position would be very hard to get right.” He insists P2P is still appealing for investors, financial advisers and robo-platforms. Others are less effusive. Stephen Findlay, of
BondMason, which offers a portfolio of alternative financefocused loans across several platforms to investors, says there is already a robo element at the loan level for investors but questions how it would work across platforms. “At the platform level, I think it’s a bit dangerous as the data is sparse and not homogenous – so I fail to see how you could meaningful create
Robo-advice also has its own limitations. Many providers have a set strategy such as only investing in passive funds, so would not be looking across the whole of the market in the same way an independent financial adviser would, as Daniel Rajkumar, chief executive of Rebuildingsociety, explains. “Robo-advice has an important role to play. With many retail investors unwilling to
The same limitation is true of robo-advisers, which may support the sales process, but are unlikely to give a holistic, unbiased industry view. “Developers of roboadvice solutions will be encouraged to optimise the robo for maximum profitability for the firm. So, the concern is that questions could be loaded to encourage customers to make investments which they might not ordinarily undertake.
a robo-advice algorithm for this,” he argues. He also highlights that many of those already investing in the sector on behalf of investors, such as BondMason and investment trusts, have started moving away from pure P2P.
pay for personalised advice, anything that helps deliver targeted information is a good thing,” Rajkumar says. “Advisers who represent a company must declare to their prospects that they are only able to advise on their products.
“The link of algorithmic investing with robo-advice has the potential to be a recipe for success as well as disaster.” He suggests this is where aggregators have a role to play, by using their holistic overview of the industry to provide
“ At the platform level, I think it’s a bit dangerous”
better informed and less biased advice. The keyword, as with any asset class, seems to be choice for the investor. “An investor could easily, with relatively little knowledge, self-select a basket of six to 12 lowcost passive share funds to invest in, which will see their money spread across hundreds of shares,” Faulkner adds. “In P2P the situation is arguably even better, in that you can opt for auto-diversification at no extra cost. However, I think it is important to offer robo-advice and full advice to those who want it, so the options need to be on the table.” The human touch is still alive in P2P lending but there have been signs of a move towards autoinvestment services, with some of the biggest brands such as Funding Circle now purely offering autobid functions. However, autolending is different to robo-advice as there is less personalisation and risk assessment, which in a world where the consumer wants more control of their finances, may become more important. But this then raises the question of whether the public is expected to ditch the banking intermediary in favour of eventually letting the robots take over.
Risky business Credit risk is an unavoidable component of peer-to-peer lending, so platforms have many ways of managing it, as Andrew Saunders investigates
HE PEER-TO-PEER lending industry’s reputation for doing things better, faster and cheaper than banks is often attributed to slick tech platforms, greater transparency and a friction-free customer experience. But success in the longer term also depends on the equally crucial if less glamorous discipline of good credit management.
If you are going to lend money, you have to deal with the fact that some borrowers will not be able to pay it back. “For any lender, managing credit risk is the number one priority,” says Michael Hoare, head of risk analytics and retail credit at one of the largest P2P lenders in the UK, RateSetter. “If you don’t manage it well then you won’t last very long.”
Managing risk, he adds, is not the same as minimising risk. Although the perils of reckless lending may be fairly obvious, excessive caution can also bring its own difficulties. Credit risk needs to be balanced against investor returns and the growth imperative. “You have to be commercial about it, you can’t always say no,” says Hoare. “You have to
maintain a balance or you can stop a lot of business.” RateSetter uses the tech that fintech is famous for to speed up loan processing and improve the customer experience - but the prospects who don’t pass with flying colours then get the personal treatment before a decision is made. “Our decision engine makes automated decisions, a very high
The death of the credit report is significantly overplayed
proportion of our loans are decisioned in under 60 seconds,” Hoare explains. “But then there is a chunk that is passed to underwriters. Experienced people play the vital roles.” Referrals to the underwriters are made on the basis of RateSetter’s credit scorecard model, which is itself based largely on traditional data but with a dash of the contemporary thrown in. “The data we use is from the application form itself, credit bureaux, have we had a relationship with the lender before?” says Hoare. “We also use some contextual data, such as what browser are they using?” That’s because Mac users have been shown by some metrics to be more credit worthy than those who use PCs. Ratesetter has dabbled with third-party data looking at everything from psychometric and behavioural profiling to social media monitoring. Hoare remains interested in these areas but is as yet unconvinced that they make a big difference to lending decisions. “It won’t replace the traditional data any time soon,” he asserts. “The death of the credit
report is significantly overplayed.” Good credit decisions matter not only to the success or otherwise of individual platforms but are also a vital part of the wider economy especially when lending to small- and mediumsized enterprises (SMEs), says Vicky Pryce, board member at economics consultancy CEBR. “Lots of SMEs survive on lending, and alternative providers are important to them,” she comments. But there are those who fear that the credit management of some - P2Ps among them may be found wanting if economic trouble
strikes. “There have been concerns that some [alternative lenders] are not doing their due diligence properly and may collapse in a downturn,” Pryce adds. There are signs that such a downturn may be on the way, she cautions. “There has been a substantial slowdown in the UK economy in the first quarter, will it continue? SMEs are more exposed and so are SME lenders. Households are borrowing less and mortgage approvals are down 20 per cent.” Any P2P platform failures as a result of inadequate credit management would be very damaging to the reputation of the sector, even though the alternative lending market is still too small and
heterogenous to pose a wider risk, she adds. “Alternative lenders don’t pose a systemic risk, the lenders are mostly SMEs themselves,” she says. “But they could certainly suffer as a result of a systemic failure elsewhere.” One SME lender which goes to great lengths to make sure it does plenty of due diligence is Crowdstacker. Not least because it is in the business of making a small number of larger loans (in excess of £1m at a time) to more established businesses. Its credit process is very thorough, if relatively low-tech. “How do we manage risk? By stringent due diligence and active monitoring,” says chief executive and co-founder Karteek Patel.
Avoiding borrowers in the high-risk early stages is also a form of credit management. “We prioritise quality over quantity, and focus on medium-sized businesses that are not in the start-up phase,” he explains. After automated prescreening which weeds out “70 to 80 per cent”, the better prospects are treated to a full financial health check, plus interviews with the management team. “It’s important to be able to judge the character of the individuals,” says Patel. It can take two or three weeks to complete but is a vital part of Crowdstacker’s USP. “Medium-sized businesses are not all the same, that’s why banks fail them,” Patel adds. “We take the time to understand a business well.” Over at Zopa - best known as the P2P consumer lender which is turning itself into a bank - chief product officer Andrew Lawson says that the firm’s wellknown “obsession” with customer service has driven the search for newer, better ways to take credit decisions. “We were the first prime lender in the UK to offer pre-approval on Moneysupermarket - a huge win for the borrower,” he states. “To do that we need to
We prioritise quality over quantity
take a great credit risk decision, and to do that better than the others we need to use more advanced techniques.” 20 years ago, he says, the technique that almost all lenders used was logistic regression. “With a bunch of variables and
some coefficients to the variables, that would give you a likelihood of the customer defaulting,” he explains. “But analytical techniques have expanded, and the availability of them has expanded through things like machine learning, too.” At least if you have the tech to run them on. “If you are a big bank whose tech is based on a 1970s Cobol mainframe - it’s just too difficult for them to
execute,” he asserts. The raw material - the data - remains familiar however, including credit bureau files and the loan application form. “We have to be quite careful so we use fairly traditional data sources,” says Lawson. “The variables in a bureau file have not changed much in the last 20 years, but along with some of the application form data they have historically been the strongest determinants of
“ The risk in any asset class
will still be there and has to be addressed
someone’s ability to repay a loan.” What about new data sources like social media? “They can be useful for things like fraud, but less so for credit risk because they tend not to be stable long term,” he says. So for example, your data might tell you that iPhone users are a better risk than those with an Android phone, “but if Samsung brings out a new Galaxy tomorrow, that could all change”.
The type of loan being offered also has a substantial impact on the way in which the risk should be assessed, says Neil Faulkner, founder of P2P analysis firm 4th Way. “On some property development loans, for example, loan monitoring is as important as loan assessment,” he says. “Has the development increased in value enough that you can deliver the next tranche?” Nor is the provision of
security against a loan as cut-and-dried a get out of jail free card as it can appear. “What about liquidity risk? That is something that many P2P platforms don’t mention much,” continues Faulkner. “But if you are lending to a farm, that is not going to be as easy to sell in an emergency as a two-bed flat in a city centre. “Or on a bridging loan, often it’s the exit that matters, not the cash flow. All the interest can be rolled up so that the exit pays the whole lot. “Lots of retail investors don’t really know what they are doing with risk. You don’t need to be super expert to succeed, but you do need to know enough.” As an institutional investor in the likes of MarketInvoice and EstateGuru, German bank Varengold runs its slide rule over a lot of alternative lenders. “The main role of our credit team is the assessment of other people’s credit assessment,” says Alison Harwood, senior vice president in the firm’s London office. And while it is undoubtedly true that
great tech can play an important role in facilitating lending, it’s not the first thing they look for when they are examining a prospective investment. “Do they have management team experience? Do they know the asset class and its pitfalls? And do they have a track record of results?” she adds. Taking stock of a prospect is a major undertaking, Harwood explains, involving interviews with the head of credit and other key execs, plus live examples and demonstrations of their credit processes. All that facetime and on-site due diligence helps to avoid the temptation to place too much emphasis on high-tech bells and whistles, and focus instead on the underlying fundamentals. “We see a lot of capable tech guys and fantastic systems, but the risk in any asset class will still be there and has to be addressed,” she affirms. That way the P2P sector should stay hale, hearty and able to keep beating the banks for a long time to come.
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