THE YOUNG ONES
Platforms targeting a new generation of investors CRYSTAL CLEAR
Is the industry still transparent?
The P2PFA’s new chair Paul Smee on rules and reputation >> 13
ISSUE 25 | OCTOBER 2018
IFISA providers call for tailored HMRC submissions process INNOVATIVE Finance ISA (IFISA) providers have called for a simplified HMRC submissions process that is more tailored to the tax wrapper, after the taxman revealed that last year’s data was incomplete. Peer-to-peer lending platforms and other providers of debt-based securities who offer an IFISA must submit their ISA returns by 6 June following the end of each tax year in April. But critics argue that the submissions process is not fit for purpose as it is designed for other types of ISAs. “The submissions forms are really customised for stocks and shares and cash ISAs, while IFISAs are gradually being incorporated,” said Tony Alner, EasyMoney’s chief operating officer, who has previously designed several IFISAs for other providers. “Some of the information isn’t applicable, most IFISA providers will not be making claims for tax relief and won’t be
paying interest on cash on deposit.” Andrew Adcock, chief marketing officer of P2P bonds platform Crowd for Angels, also called for a more tailored submission process. “The process itself is fairly straight-forward and has relevant guidelines,” he said. “However, because the form contains reporting on all types of ISAs there are many fields that are not necessary. “I would like to see the process digitised in-line with the advances at Companies House, this I hope would lead to greater efficiency in reporting.” HMRC’s figures for the
2017/2018 tax year showed that £290m was put into 31,000 IFISA accounts, but a footnote revealed that the data is incomplete due to not all platforms providing full information. The submission process includes a compliance report showing everyone who opened an ISA account and a separate statistics report which gives the total market value of ISA investments, the total value of deposited cash and the number of customers. EasyMoney’s Alner said that it can be harder for IFISA providers to determine the market value of their portfolio. “For stocks and shares
ISAs, the market value details the return made on invested cash and keeps cash on deposit separate,” he added. “For IFISAs, HMRC declared that the market value should consist of loans that aren’t redeemed yet and cash interest that is owed or accrued but not paid as well as separate cash on deposit. “This information is a lot harder to break down and doesn’t give an accurate market value at the year end. A bespoke box requesting loan values, defaults or unredeemed parts would make more sense as you wouldn’t have to drill down into each individual client. “Also, the market value doesn’t allow for defaulted loans or late payments of interest. EasyMoney hasn’t defaulted at all but other firms will have defaulted loans or loans that are re-financing.” He said providers offering flexible IFISAs may also face issues as a platform receiving partial funds moved from >> 5 a competitor is
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ast month we got the big news we’d all been waiting for – Funding Circle finally confirmed its plans for an initial public offering (IPO). Following months and months of speculation, the UK’s largest peer-to-peer lender announced that it is planning to float on the main market of the London Stock Exchange in October. More details trickled out during the month, including Funding Circle’s approved list of intermediaries for retail investors to buy shares from, and the price range, which shows Funding Circle is seeking a valuation of up to £1.8bn. The potential impact of the UK’s first P2P IPO on the rest of the industry has been widely acknowledged, in terms of brand awareness and credibility. But could a Funding Circle float also trigger a wave of M&A? Predictions of a consolidation boom have been swirling round the sector for years but have never really materialised. As our story on page 5 shows, validation of the value of P2P platforms could pave the way for more deals. Consolidation only occurs when industries are mature enough, and perhaps P2P is almost there. SUZIE NEUWIRTH EDITOR-IN-CHIEF
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Funding Circle IPO could trigger wave of sector consolidation FUNDING Circle’s initial public offering (IPO) could spark a flurry of mergers and acquisitions in the peer-to-peer lending sector. Industry onlookers have told Peer2Peer Finance News that the IPO gives much-needed clarity on the value of P2P platforms, thus enabling potential bidders to offer a realistic price for their target company. John Cronin, financials analyst at stockbroker Goodbody, agreed that Funding Circle’s float “will serve as a catalyst to stimulate muchneeded consolidation in the P2P sector”. He said the establishment of a valuation range will
underpin the push for consolidation, while scale will be necessary in the context of high customer acquisition costs. “In fact, I would argue that this second point is the principal reason as regards to why the space needs to consolidate,” he said. Elizabeth Delaney, partner in the corporate team at TLT Solicitors, said although an individual IPO alone
is unlikely to directly result in consolidation, it can send a signal to competitors that one of their peers has access to a war chest to make acquisitions. This, in turn, could encourage other boards to think about mergers and acquisitions. Neil Faulkner, managing director of P2P analysis firm 4th Way, said there are a lot of platforms that are similar enough to benefit from consolidation,
which brings economies of scale and, ultimately, greater profits. “It is also a quicker, although less profitable, way out for owners of smaller platforms if they allow themselves to be bought out early, or if they merge businesses with some chiefs voluntarily stepping down to a lighter advisory board role or becoming the chairperson,” he said. Matt Hopkins, head of the fintech team at business advisory firm BDO, added that the challenger lending market is still incredibly fragmented, with “a swathe of mid-sized businesses looking to consolidate to gain scale”.
The taxman faced criticism in the first year of the IFISA – the 2016/2017 tax year – as providers questioned how it calculated just £17m of tax-free savings across 2,000 accounts. That figure was later revised to £36m across 5,000 accounts. “For newly-authorised ISA managers who have never completed the return before, it’s expected there will be challenges for them to overcome,” said Carol Knight, chief operating officer at trade
body the Tax Incentivised Savings Association. “Regardless of this, the summer stats showed a significant increase in the number of accounts subscribed to and the amounts in them. “So, if there were a significant number of IFISA managers who submitted their 2017/18 annual return late, then the numbers would be distorted somewhat and the increase would be even more significant. “Of course, we will have to wait and see what the
April 2019 figures show, as these will include any late submissions and will provide a clearer view of the current situation.” HMRC said it was working with providers on fulfilling their obligations. “IFISAs are a relatively new offering so some managers of these accounts may not be used to the ISA reporting requirements,” a spokesperson said. “We are working with these providers to make sure they know what their reporting obligations are.”
cont. from page 1 relying on them to provide an accurate value. IFISA provider Kuflink has suggested more automation would be helpful rather than having to fill in the forms manually, while another, HNW Lending, has queried the relevance of having to provide the date of the first payment into each IFISA. HMRC’s ISA data is released each August and revised the following April for anyone who submits information late or makes corrections.
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P2P lenders target a new generation of investors
EER-TO-PEER lenders are expanding their investor demographic through new advertising campaigns and products that appeal to younger people. P2P lending has previously been the preserve of the over-50s, predominantly male and living in the South East, but this is starting to change. People under the age of 30 now make up 11 per cent of CapitalRise’s investor base, but this rises to 22 per cent of under-35s. At Wellesley, meanwhile, under-34s make up more than 10 per cent of its investors. Narinder Khattoare, chief executive of Kuflink, said while there is still a sway towards older males this is changing fast and it has seen a huge amount of diversity coming into the market this year. “As the sector matures and the public hear P2P success stories, we’re pleased to welcome many different types of people who may never have considered investing through traditional means,” he said. Platforms are spreading the word through marketing campaigns that target a new generation of investors. Wellesley launched an advertising campaign on the London Underground,
which naturally reaches a younger, working audience. Kuflink, meanwhile, sponsors Ebbsfleet United FC, Gravesend Rugby Club and a number of junior sports teams. “We’re working on some exciting products right now that will be attractive to new investors, show them the possibilities, unravel some of the myths about P2P and share our knowledge,” said Kuflink’s Khattoare. “We believe great returns shouldn’t be reserved for the wealthy and our future plans all centre around making that a reality.” Uma Rajah, chief executive of CapitalRise, claimed the platform is attracting a diverse range of investors through making its investments accessible from £1,000; outlining the risks and rewards of each investment,
thereby making things as clear as possible for first time investors; and diversifying its marketing and advertising partners outside of the more traditional personal finance outlets. Typically, younger people invest a small amount of money upfront before investing more when they reap the higher returns available. “We see this on our platform as the average investment from under 30s is under £5,000 whereas for over 30s this jumps up to over £30,000,” said Rajah. “Of course, this is somewhat skewed by some high-net-worth individuals.” Karteek Patel, chief executive of Crowdstacker, believes P2P lending and crowdfunding appeal to the next generation because they eschew “some of the less attractive elements of traditional
banking, allowing for greater transparency”. “We would encourage younger people to start an investment portfolio as soon as their finances allow it,” he said. “And the best portfolios are balanced with some riskier and some less risky investments.” There are still some lenders, however, for whom the traditional older investor is their primary target. Giles Cross, chief executive of Folk2Folk, said its lenders are typically mature people in their 50s and beyond, which is in part due to its investment entry point of £20,000. “We are primarily focused on the ‘at retirement’ market and are interested in more experienced investors seeking income rather than growth. We do not currently target younger investors,” he said.
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Landbay reaps rewards of BTL tax changes LANDBAY has seen its lending volumes triple in recent months thanks to the fall-out from the buyto-let (BTL) tax changes and a major hiring spree. John Goodall (pictured), chief executive of the peer-to-peer BTL mortgage lender, said lending volumes for the third quarter are averaging around £17.5m to £18m a month, up from £6m to £7m a month in the first half of the year. Goodall said although the BTL mortgage sector is still growing, high street banks are losing market share to specialist lenders like Landbay following the tax changes introduced in April 2017.
“The tax changes affect people who hold BTL property in their own name, so it has resulted in a shift towards borrowers who are portfolio landlords and who hold properties in limited companies,” he said. “High street banks are not typically suited to lend to that sort of borrower.” Goodall also claimed the wider property market downturn has been limited to London’s super-prime sector, which Landbay does not get involved in. “Although the property market is not booming, prices are still going up,” he added. “People look to BTL for income, so
actually if prices are not rising as fast as rents the yields improve and the investment case is stronger because the return on capital is better.” Within Landbay, the biggest driver of growth has been its recruitment drive. In May, the platform revealed plans to increase its headcount by 70 per cent this year.
“We moved offices in May and getting that bigger space has allowed us to grow our team so we can process more loans,” said Goodall. “We’re also making a far bigger investment into technology, both from an origination and processing and operational capability.” Once it has built sufficient scale, Landbay intends to follow in the footsteps of Funding Circle by launching an initial public offering (IPO) in the medium term. Goodall said Funding Circle’s IPO is “proof that P2P lending is increasingly becoming a mainstream, formal lending channel.”
Brexit to increase farmers’ demand for alternative funding PEER-TO-PEER lenders could see more demand for funding from the farming industry after Brexit. Folk2Folk, which specialises in providing finance to rural and farm businesses, said that reduced subsidies and a small pool of workers will put pressure on farmers’ income. “We are having more and more conversations about how farming can be ‘fit for business’ during the Brexit transition and
beyond and how we can help by providing finance to enable this,” said Ian Bell, head of farming and rural engagement at Folk2Folk. UK farmers currently receive more than £2bn in subsidies from the EU. Although the Department for Environment, Food and Rural Affairs has suggested this will continue to be paid on a reducing taper for four to seven years, it is unprecedented for a government to commit to
funding beyond a current parliament, which ends in 2022. “Other issues may include the potential decline in migrant labour on which our horticultural sector is so reliant, and the potential for import/ export tariffs which would have such a detrimental impact on sectors such as the UK sheep industry and upland farms,” said Bell. Bell suggested that inefficient farm businesses that rely on EU subsidies will be forced to diversify
or cease trading, while a lack of skilled labour will require more investment in technology. “We will see more farmers looking to invest in their business, to grow and diversify in order to thrive,” he said. Financing for agricultural businesses wishing to diversify tends to be in short supply, meaning farmers will be forced to look at alternative methods of funding such as P2P lending, he added.
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The ultimate collateral John Butler, chief executive of Lend & Borrow Trust Company, explains how an innovative type of secured peer-to-peer lending could provide greater reassurance in a downturn
HE RAPID GROWTH of peer-to-peer lending in recent years has been nothing short of astonishing, with new platforms being launched regularly. The UK’s largest P2P platforms have cumulatively lent out more than £11bn. While still regarded as an ‘alternative investment’ by many, it is worth remembering that lending out one’s savings is the most fundamental of all financial activities, one that is documented in some of the oldest stone, clay and papyrus texts ever discovered. P2P is simply a modern, elegant technical solution to facilitate this ancient way of putting your money to work. For all its technical elegance, however, there is a darkening cloud hanging over the P2P industry: It is yet to be tested during a major credit cycle downturn or a financial crisis. No one really knows what future default rates on P2P platforms might be and, thus, whether
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At the coalface
Paul Smee is steering the helm of the Peer-to-Peer Finance Association at a pivotal time for the industry. He speaks to Andrew Saunders about his new role, best practices and how to negotiate with regulators
S A LIFELONG cricket fan, the Peer-to-Peer Finance Association’s (P2PFA’s) new chair Paul Smee has probably had less time to relish the thwack of leather on willow in this summer’s England vs India test series than he might have wished. Because like everyone else in the peer-to-peer lending industry, he has spent a good deal of time digesting the Financial Conduct Authority’s (FCA’s) long-awaited post-implementation consultation paper on the sector, published in July. It’s a crucial document, he says, not only because of its potential impact on the sector overall, but also because it will inevitably shape the development and future role of the self-regulated industry trade body, whose chair he acceded to in March this year. “Under [predecessor] Christine Farnish the Association was a pioneer for high standards in the market,” says Smee. “It has set itself up as having the gold standard for disclosure and that’s a very
good role for a trade body to have, but we will have to see how that is affected by the fact that the FCA is now coming out with much more detailed and potentially intrusive regulation. The recent 140-odd page document will have some effect on our gold standard and
we have to work through what that is.” Although the Association is still working on its detailed response to the paper, Smee is broadly positive about the FCA’s approach to the sector. “I think they are open to dialogue, there is the opportunity
to engage with them on the detail and get it in the right place,” he comments. The FCA consultation – which is inviting responses until 27 October – is an important milestone in the growth of P2P lending, he adds. The experimental early years of ‘nursery’ regulation which date back to the FCA’s initial involvement in 2014 are giving way to a more grown-up approach akin to that applied in the wider financial services arena. Like any coming of age it’s a potentially tricky time and the FCA is right to want to handle it with care, he says. “I do understand where they [the FCA] are coming from. The reputation of the industry should go from strength to strength because we are performing an enormously important economic function. But in such a rapidly growing market, any player is vulnerable to a disaster involving another. “From what I have seen, a lot of people in the industry want to do the right thing, but it’s really important to remember
that the reputations of all can be damaged by the actions of one.” As the consultation paper makes clear, fears that retail investors may not understand the capital risk involved in P2P products remain high on the FCA’s to do list. So more stringent requirements on transparency and disclosure can be expected – something that Smee believes will be less painful for platforms which are already members of the P2PFA. “As a trade body we are already saying that to be a good P2P lender you have to be into transparency,” he explains. “So our members will find adjustment to the new regulatory regime considerably easier than those who have gone down a different path.” But caution needs
to be balanced with pragmatism, too. “The agenda you have to keep the FCA to is proportionality. Nobody is going to say that we shouldn’t have a risk strategy, for example. That’s very important and lot of lenders already do. But if [the FCA] then say that the best risk strategy is several hundred pages long and requires tier upon tier of committees, that’s when you get disproportionality.” Amongst the FCA’s least welcome proposals within the industry are restrictions on marketing to only sophisticated or high-net-worth investors, and the so-called 10 per cent rule, limiting investment in P2P to 10 per cent of an investor’s total portfolio value. That would bring P2P neatly into line with the rules which already apply to
equity crowdfunding – but in a sector such as P2P with its wide variety of business models, neatness isn’t always the best policy, he warns. “Almost inadvertently they [the regulator] can put barriers in place that make business models very difficult to run, because they want a neat and tidy regulatory system,” asserts Smee. “What we will be saying is ‘OK, we’re not new kids on the block anymore, but we’re also not major financial institutions with 300 years of history, and your regulation should reflect that’.” Having begun his working life in the Civil Service, most of Smee’s career has since been with trade bodies in the financial sector. He started the Association of Independent Financial Advisers in 1999 and led
the organisation until 2004. “That’s a notoriously difficult market with lots of very small firms to represent,” he says. He then moved on to what was then known as APACS – the Association of Payment Clearing Services – where he oversaw the introduction of the faster payments system. Something which everyone who remembers the time when even electronic bank transfers took three days to clear has reason to be grateful for. “If I want something to go on my tombstone, that would be it – so far,” says Smee. Next stop was director general of the Council of Mortgage Lenders, where his achievements included the introduction of a series of standard definitions for mortgage fees. “When I am in one of my more pretentious moods, I say that the function of trade associations is to make markets work well, and I think that helped the mortgage market to work well,” he says. It’s experience that may come in handy in his P2PFA role, as the sector faces calls for greater standardisation of terms – there is no single accepted definition of a loan default, for example – and for ratings systems to simplify the comparison of offerings on different platforms to one another.
“No individual firm will stand up and say it has a mission to standardise terms, but it’s the kind of thing that a good trade body can do well,” he adds. He was attracted to the P2PFA partly by the prospect of getting back to representing small businesses – “small businesses that are growing and are at the cutting edge are exciting” – and partly because of the strong regulatory agenda. “I know how government works and some of my thinking is based on how people used to approach me when I was a civil servant,” he comments. “Too many negotiations with regulators start from the premise that what is good for us must be what the regulator wants. “You have to understand their remit and objectives, and show them how they can achieve that. And if you can bring answers as well as problems, that often works.” He also believes that there is work to be done spreading the word about what P2P investing is: “We have a role in education and explaining what the sector is all about, and its contribution to the economy.” But running a successful trade body is not just about regulation and education, important as those functions are. He will also have to deal with criticism
of the Association, some of which has come from within the industry itself. Not least the controversy over the recent decision no longer to require its members to publish a complete downloadable loanbook on their websites – regarded by some as a retrograde step in terms of transparency. Was it really a coincidence that – in the run-up to its imminent stock market flotation Funding Circle ceased to publish its loanbook so shortly after the P2PFA rule change? The decision was taken in response to concerns from the members, Smee concedes. But it is not about reducing transparency so much as making sure that the information provided remains useful to investors. “As the sector grows
in economic standing – particularly now some of the members are quite big – the membership could see how that level of granularity could work against a sensible market,” explains Smee. “People can play games with data – you want to provide enough information to be useful to a reasonable investor, not to help people who are going to play the market.” It’s probably true that very few retail investors ever delve into the details of a platform’s full loanbook. But pragmatism may also have played a part; having already lost one of the ‘big three’ founder members RateSetter, back in August, could the Association could really afford the departure of yet another big fish from its membership roster?
Smee is certainly keen to ensure that the Association is as inclusive as possible. Its membership currently comprises nine platforms – Crowdstacker, Folk2Folk, Funding Circle, Landbay, Lending Works, MarketInvoice, ThinCats, Zopa and new entrant CrowdProperty – representing more than 50 per cent of the total market. It also has eight further associate members, comprising professional services firms such as Equifax, Fox Williams and Orca Money. “I would like to see new members joining and an increase in our market share,” he says. “It means wearing out a bit of shoe leather going round and talking to people. Giving a clear pitch to the industry and saying, ‘This what we can do for you’.” Fortunately, he also believes that the FCA review and the new grown-up era of regulation it presages presents a great opportunity to do just that. “Clearly the membership proposition changes in the light of the new FCA regime,” Smee says. “I want to be a constructive – but critical - friend to the regulator. One that isn’t afraid to say, ‘You’re going over the top’. Regulators tend to want to provide the questions, and then all the answers too. If you want to make a market work, the regulator has got to be prepared to let it.”
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Stay on top of the property cycle It is important for would-be investors to understand the role the property cycle plays in lenders’ credit risk processes. Andrew Turnbull explains the Wellesley approach
HERE ARE TWO things that Brits are supposedly famous the world over for being obsessed with – the weather and property prices. This summer, there has been plenty of opportunity to talk about both – the holiday heatwave being balanced by a decidedly chillier turn in house prices, at least in London and the South East. The government may still be falling substantially short of its target of 300,000 new homes a year, but overall housebuilding statistics do not give an accurate picture of the variation in the market, both regionally and in terms of value. All of which makes it especially important, says Andrew Turnbull, cofounder and managing director of alternative finance property lender Wellesley, that potential investors have a good understanding of the property cycle and its potential impact on their returns. “There are many different views, but the most widely accepted one
is that a cycle normally lasts eight to 10 years and that it describes how the prices of the entire British property market fluctuate over that time,” he says. “It’s the process by which you see property go through a boom in pricing, the inevitable recess afterwards followed by stability and then the repeat of the cycle.” The key influences,
“ Affordability is key for us” he adds, are supply and demand, and conditions in the wider economy. So rising interest rates, falling consumer confidence and shifts in mortgage provider sentiment can all have a big impact. “The global financial crisis was the trigger for the last significant fall we saw in 2007-2008,” he explains. For lenders – and investors – in property development, how much a house is likely to be worth once it has been built is a key part of making a successful loan. But the property cycle is very
hard to call at present, according to Turnbull. “Something that makes it challenging to define where we are in the cycle right now is the amount of government intervention we have seen over recent years,” he comments. “Quantitative easing has kept interest rates incredibly low. Help to Buy has provided significant support at the lower end of the market, while stamp duty increases have hit prices at the upper end. These are significant policy changes that have been made for good reasons, but they distort the market and interfere with the normal property cycle.” The key to managing these tricky conditions, says Turnbull, is to seek out the parts of the market where decent returns can be made, whatever the economic weather. And that’s precisely what Wellesley does. “Affordability is key for us, we look for where the demand is not being serviced and where the greatest stability is to be found,” he states. “Areas which we think will perform the best in any given climate.”
That means providing development loans ranging between £10m to £20m to underserved medium-sized builders, not for luxury flats sold off-plan to speculative investors but rather “houses that the everyday man and woman can afford”. These homes are typically outside the capital in cities such as Manchester, Birmingham and Leeds, selling for £200,000 to £350,000 once completed. Overall it’s an approach which unites lenders and borrowers by achieving positive results for all, says Turnbull. “We bring together investors who can’t get the returns they hoped for from a bank and developers who are frustrated by banks that don’t really like to lend to smaller firms,” he affirms. “The result is sensibly priced housing in parts of the market that really need it. We think that’s an attractive financial and social outcome.”
DATA AND TRANSPARENCY
An open book
From the very beginning, peer-to-peer lenders have pledged to be more transparent than the banks. But will this be viable as regulation and platforms evolve? Andrew Saunders reports
ROM ITS INFANCY, the peer-to-peer sector has been built on a promise to be more open, and to share more ‘warts and all’ data with investors, than its established – and more reticent – rivals, the big banks. It’s a commitment shared by many industry leaders, and is down to the wish to treat all customers equally and be better and more accountable lenders, says Giles Cross, chief executive of West Country-based property lender Folk2Folk.
“The commitment to transparency and superior customer outcomes is still at the heart of the sector,” he explains. “The world has seen enough irresponsible lending.” But as the industry matures and becomes more mainstream, can it maintain that youthful openness, or will new constraints and more complicated relationships with the wider world result in a reduced, or at any rate, more nuanced, approach to what information is shared, when and with whom? It’s a question that
“ There has been a big push from the industry on transparency, and that momentum seems to have dissipated
has been prompted by a number of recent – and apparently conflicting – developments. One the one hand, the long-awaited Financial Conduct Authority (FCA) review, published over the summer, seems to point to a new, more consistent, perhaps less forgiving regulatory regime. One
based on tougher scrutiny and stricter requirements for compliance. On the other hand, the actions of some influential platforms seem to be taking the sector in a different and arguably less transparent direction. Specifically the decision by the UK’s largest P2P lender, Funding Circle,
DATA AND TRANSPARENCY
to cease publishing a downloadable loanbook on its website, in the runup to its pioneering and eagerly anticipated initial public offering (IPO) scheduled for October. Cross believes that Funding Circle’s decision is entirely legitimate in the light of the impending IPO – companies which are about to float are obliged to manage the flow of information and get the best price they can. “It’s a commercial decision – not to do something that might affect the value they create for their shareholders,” he says. “The success of their IPO is important to all of us.” But, he adds, Folk2Folk will continue to publish its own loanbook, even though he’s not convinced that it is of great practical use. “What does the
retail customer really understand from looking at the whole loanbook? We will continue to publish our loanbook in the spirit of transparency, although I am not sure what value it really offers.” Funding Circle itself says that the decision was taken because of the dwindling numbers of investors who actually used its loanbook data and not because of any desire to pull back on transparency. In a written response for this article, the platform says that only 0.3 per cent of its investors accessed the online loanbook in the final month of its availability. The statement goes on to say that it is “committed to the highest possible levels of regulatory compliance
and transparency” and points out that it has launched a new and improved statistics page “to provide investors with accessible and digestible loan performance information”. Commercially justified or not, any move by such a major player in
decision in support of its IPO, but I do think it’s a little bit sad,” she says. Although Varengold is not an investor in Funding Circle, Harwood thinks the decision has contributed to a change in the mood music coming out of the sector as a whole.
“ Without transparency,
P2P would be a much weaker proposition the sector is bound to reverberate, according to Alison Harwood, London-based senior vice president of institutional investor Varengold Bank – which backs P2P lenders including MarketInvoice. “I can see the reasons for Funding Circle’s
“Previously there has been a big push from the industry on transparency, and that momentum seems to have dissipated,” she comments. “It feels a bit like the big platforms think they have done enough and don’t need to do any more.” For others, the real question over transparency comes after Funding Circle – and potentially others like it – have floated, rather than before. “Once it is public, there is a real question over loanbook disclosure,” says Andy Davis, industry watcher and author of two influential reports on P2P for the Centre for the Study of Financial Innovation. “If [Funding Circle] provides detailed information to some third parties but not to all investors, there is a risk it will create opportunities
DATA AND TRANSPARENCY
for people to trade with inside knowledge based on market-sensitive information.” Consequently he believes that normal service – in the form of a downloadable loanbook on the Funding Circle site – will be resumed in due course, and that we shouldn’t read too much into its having been withdrawn in the first place. “I think it will be temporary,” he says. “Funding Circle is a kind of special case that we can’t extrapolate much from.” The industry body, the Peer-to-Peer Finance Association (P2PFA), has also been in the spotlight for its role in the loanbook saga. It changed its ‘principles of operation’ so that a downloadable loanbook was no longer a requirement for membership, conveniently just before founder member
explains in this issue’s profile interview (page 13) – because of fears that the very detailed information they contain could be used by speculators to game the system. Not everyone agrees with that point of view. Stuart Lunn, chief executive of Edinburghbased platform Lending Crowd, wrote of the Association’s decision in a June blog post that “investors deserve better”. He said that Lending Crowd (which is not a member of the P2PFA) would continue to publish its loanbook and remains “firmly opposed to any reduction in transparency”. “My criticism was more about the way the decision was handled than the decision itself,” he says now. “A trade body should be mindful of the broader base within the industry and we’re not convinced the P2PFA does that. It
“ It’s very important that investors have the data they need ”
Funding Circle made its change. The P2PFA maintains that its rules changed because the usefulness of the loanbook to retail investors diminishes as some of its members get larger and more complicated. And also – as new chair Paul Smee
would be better for sector growth and the different stakeholders to have greater transparency and access to information. That’s why we’re supportive of the FCA’s stance.” And while the Association has to be pragmatic when it comes
to accommodating the needs of its larger members, the vital importance of transparency to the sector’s appeal should not be forgotten, says Neil Faulkner, founder of P2P analysis firm 4th Way. “Without transparency, P2P would be a much weaker proposition,” he asserts. “There is no plausible reason that investors want to hear for reducing the standards of transparency.” Meanwhile, what of the FCA review and its potential impact on transparency and
growth? This document is likely to be more influential than the actions of any one platform, however high profile. “We take the view that markets grow with transparency, and we agree with the FCA proposals in this area,” says John Battersby, head of policy and communications for RateSetter, the UK’s thirdlargest P2P platform. “It’s very important that investors have the data they need to make decisions.” RateSetter publishes
DATA AND TRANSPARENCY
a wide range of information, from daily updated market rates and statistics to monthly analysis and investor emails – and a full loanbook, updated quarterly. It also supports the FCA’s suggestion of an appropriateness test – essentially a check to ensure that would-be investors understand that P2P is not risk free like a bank account and may not be the right place to invest your entire life savings. But in common with many other platforms,
RateSetter has one big gripe with the review. “There is one thing that we don’t agree with, and that’s the marketing restrictions proposal,” says Battersby. “The whole point of RateSetter is to open up this asset class to everybody, and we think the restrictions are disproportionate given that investment with us is not no risk, but it is low risk. They would put people off unnecessarily.” The proposed rule changes would limit the marketing of P2P to sophisticated or high-net-worth
investors, or to regular investors who certify they will not put more than 10 per cent of their portfolio into P2P. Not only could that put quite a crimp in the growth plans of many platforms, it also goes against the egalitarian ethos of the sector, says Folk2Folk’s Cross. “It’s very patronising to say that P2P is not for a certain kind of person,” he states. “My desire is not that the industry becomes about demonstrating your financial status but rather about being transparent about what the risks are. “The sector has been good for its customers and I would be very disappointed if any of my investors were stopped from taking advantage of what it has to offer them.’” Any such ruling would bring P2P into line with the regime already operating in the equity crowdfunding sector – perhaps attractive from a regulatory consistency point of view, but controversial with those who believe that lending is inherently less risky than any form of equity investing. Lending Crowd’s Lunn says that if the restrictions are introduced and are seen to work, he expects that the FCA will seek to apply them more widely. “It’s not necessarily wrong, but is it
appropriate that the restrictions should only apply to P2P, or should they be broadened to include stock market investors?” he says. “I can’t see the restricted class remaining in P2P in isolation. In three to five years I think it will be applied to other asset classes too.” Overall, he believes that that the review is positive and will help the sector to move into a new stage of growth by opening P2P to new and relatively untapped sources of capital. “The FCA report shows that a continuous evolution in regulation can only help growth and help attract other types of money,” he adds. “Particularly mediated money. “There is not a significant level of engagement with P2P in the wealth management and IFA market. The FCA review addresses the concerns of those intermediaries and if the outcome is that their trust in the sector improves, that is a good thing.” So perhaps those apparently-conflicting messages on transparency are not so conflicting after all, but rather a sign that the sector is simply growing up. And surely that is a transition to be welcomed by industry, regulators and customers alike.
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Brand management can be a challenge for peer-to-peer lenders. Narinder Khattoare, chief executive of property-backed lender Kuflink, shows the competition how it’s done
EER-TO-PEER finance has a branding problem. “People don't know what P2P lending is,” says Narinder Khattoare, chief executive of Kuflink. “If you walk down any high street, I guarantee you, you speak to a hundred people and there'll only be a handful of people that will understand what P2P lending is.” This puts P2P platforms in a unique situation where they are not only trying to promote their own brands, they are also trying to explain the concept of P2P to a population that is more used to low-interest cash accounts and equitybased stocks and shares portfolios. “It's about educating the masses,” says Khattoare.
For Kuflink, this means taking a highprofile approach towards advertising. The firm advertises on LBC radio, as well as maintaining a strong presence in online and print media. Kuflink has also made a splash through its sponsorship of
“You've got to go out and get your brand out there more than anything. “We want to be the trendsetter when it comes into marketing and the way we do it.”
Ebbsfleet United Football Club. When the club was relaunched in 2008, it was one of the first mainstream examples of a successful crowdfunding venture – members of
“ You've got to have something that differentiates yourself ”
the public were invited to buy a stake in the club for as little as £35. Now, the club is on the up with ambitions of reaching the Championship some day. Khattoare says that sponsoring the club was an easy decision as they have similar growth plans. “They're probably the same size of business in terms of employees and the ambitions that we have over the next couple of years,” he says. “I can only see it going one direction and that's going up because they've got the infrastructure, the right senior management in place as have we.”
Khattoare believes that the best form of advertising is a strong track record and brand stability. Kuflink has been in the market for years – first as a bridging loan provider, and then as a property-backed P2P platform. It is one of the few platforms to offer “skin in the game” by investing alongside its lenders, and it has posted no losses to date. “We have learned a lot of things since we evolved from bridging,” says Khattoare. “We learned the hard way there that we can't just come into the marketplace. You've got to have something that differentiates yourself from everyone else otherwise what's the point of entering the market?” As a result of this differentiation, Kuflink can leverage its own brand to promote the wider P2P sector and help bring alternative lending into the mainstream. “We think we need to have a reality check on where individuals really are,” adds Khattoare. “And educating people is the key.”
Attracting advisers The peer-to-peer lending industry is maturing and considering new ways to interact with financial advisers, as Marc Shoffman reports
EER-TO-PEER lending in the UK has grown into a billionpound industry, offering superior returns to mainstream providers, yet many independent financial advisers (IFAs) are still steering clear. The two industries may make strange bedfellows. The P2P sector emerged with the intent of cutting out the intermediary, but in a world where origination is key, IFAs can be an important source of business. “The P2P model fits well with the goals of advisers seeking to create a balanced investment portfolio for their clients,” Jonathan Hodge, director of operations for RateSetter, explains. “RateSetter already has a number of active investors that are advised by IFAs and we want to help IFAs understand our products better so that they can consider them appropriately. “IFAs are very valuable and can help open access to P2P to their large client base. RateSetter aims to be suitable for all investors, both those at the start of
their investment journey, and those with established portfolios.” Paul Stallard, commercial director of P2P property platform The House Crowd, says lenders have so far been helped by “healthy numbers” of selfdirected investors, but
are launched, as this could dilute the quality, especially if we move into a more challenging environment. “P2P is a risk for IFAs, and for their clients, to invest in an asset which supposedly gives a secure return but could be subject to capital losses and there
“ IFAs are very valuable and can help open access to P2P to their large client base
would be boosted by the IFA market. Despite the rapid growth of P2P, many IFAs remain sceptical about the sector. Patrick Connolly, chartered financial planner for Chase de Vere, says his firm does not advise on P2P due to the lack of Financial Services Compensation Scheme (FSCS) protection. “This means that money put aside to provide a consistent return could potentially be lost,” he says. “This is a bigger risk as the market grows and more investments
is no protection in place if it all goes wrong. “For those who are prepared to take the risks of investing in this asset class, we would suggest that they invest an absolute maximum of 10 per cent of their portfolio and that these investments are diversified into different P2P holdings.” The lack of FSCS protection is just one gripe among advisers. Anthony Carty, group financial planning and business development director at Clifton Asset Management, says risk profiling tools that many
advisers use may also exclude P2P due to its low track record. “Most IFAs rely heavily on risk profiling tools whose output rely on decades of past performance from various asset classes,” he explains. “Direct lending is a relatively new asset class and whilst it is most closely correlated to the fixed income sector, IFAs would be hesitant in recommending an asset class that hasn’t yet been tested through a full economic cycle.”
He also questions whether P2P platforms have the capacity to attract IFAs. “As most P2P platforms are still yet to make a profit, the question of IFA distribution is simply one of cost prioritisation,” Carty says. “In order to ‘break into’ the IFA market, these platforms would need to employ a fairly substantial business development team. “Considering the apathy amongst the IFA community as a whole
It’s mostly an issue of education and track record
towards the asset class, I would imagine most P2P platforms would rather spend their money elsewhere in terms of marketing and client acquisition.” Phil Young of advisory business consultancy Zero Support says IFAs are also cautious of P2P because of its comparatively short loan terms. “Advisers tend to get
involved in long-term investing, P2P is still perceived as short- to medium-term by most and, as a result, gets left to clients to make their own choices directly,” he says. Some advisers also cite concerns about professional indemnity insurance, which comes with higher premiums for P2P due to the perception that it is high
risk. There are also issues surrounding the inclusion of P2P investments in self-invested personal pensions due to concerns that it could breach the ‘connected parties’ rule, whereby the individual lender may be connected to the borrower. Despite these concerns, there are P2P platforms making this relationship work. P2P property platform Octopus Choice launched in 2016, an offshoot of City institution Octopus Investments, and was
created with IFAs in mind. The lender works with more than 1,000 advisers. “For them and us it’s mostly an issue of education and track record,” a spokesperson for Octopus Choice explains. “Financial advisers – unsurprisingly and justifiably – are going to take a conservative approach. They’re not in the business of taking unnecessary risks with their clients’ money and will want to see that a provider has pedigree. “There’s also a practical point around how easy platforms are to use, and how they integrate into the broader advice process. Advisers will take a holistic approach to their clients’ wealth – and if it’s not easy for them to set up and administer investments, then they’ll look for other more practical alternatives. “The P2P market is very diverse, spanning everything from unsecured credit card
suggests Octopus has been successful due to its existing relationship with IFAs. He says if others want to follow suit, they may be better off approaching discretionary fund managers rather than advisers themselves. P2P investment managers appear to have better relationships with IFAs. Firms such as BondMason and Goji successfully work with advisers who recommend their portfolios. BondMason invests in a range of P2P loans and other alternative finance opportunities, while Goji focuses purely on the P2P sector, building a diversified portfolio for investors across a range of platforms through a bond structure. “We use the term ‘P2P’ infrequently as IFAs don’t understand it or are very cautious about it,” David Beacham, head of distribution at Goji, explains. “Every time an adviser
seem misplaced in a world where most P2P platforms are regulated by the Financial Conduct Authority and many offer Innovative Finance ISAs (IFISAs), suggesting the industry is becoming more mainstream. But Beacham says advisers view the
“ As most P2P platforms are still yet to make a
profit, the question of IFA distribution is simply one of cost prioritisation debt to secured residential property lending, so it’s very important to carry out due diligence to look at the underlying asset.” Zero Support’s Young
gives advice they put their career on the line, so we need to provide a lot of comfort for them to advise in this space.” Such trepidation may
regulatory situation differently. “The P2P platform that someone is investing in may be regulated today, but the underlying
structure, the loan, isn’t,” Beacham adds. “IFAs would say the IFISA is aimed at ‘bedroom investors’ so is irrelevant to them. “Advisers need transparency to know what is in those loans. Our bond structure is regulated so an adviser is advising on that rather than the loans, while we do the due diligence. “It is vital advisers can access P2P in a truly regulated structure, every bond we issue has more than 1,000 loan parts, which provides diversification and should provide comfort for advisers.” Beacham says more awareness is needed
rather than platforms that allow individuals to selfselect their investments. This is an approach supported by RateSetter. “Platforms that can
advisers for advisers. “We designed and piloted it in co-operation with hundreds of them around the country and have a functioning
“ The profile of a typical P2P
investor is the same as that of a typical IFA client
among IFAs, especially as many investors are becoming attracted to DIY investment, which could hit their business. “The lack of knowledge and understanding in this space is enormous,” he says. “People think we are a lender and that we could be accessing payday loans. They will automatically pigeonhole you if you are not an opened-ended investment company, unit trust or quoted instrument.” So, what more can platforms do? Beacham says IFAs are more likely to be attracted to transparent pooled structures that diversify across a number of loans
articulate risk and return in a similar manner to IFAs’ own analysis will be better placed to offer their service and product,” Hodge says. “The P2P industry must continue to build understanding with all parties so that insurers, as much as others, view P2P as a sensible part of any investor’s diversified portfolio.” Access to data may not solve all the issues though. Octopus says any offering for advisers needs to be built with the sector in mind rather than as a ‘bolt-on’. “At Octopus, we’ve spent nearly twenty years working with thousands of advisers up and down the country, and that trust has undeniably had a major and positive impact on our uptake,” the spokesperson said. “But it comes down to more than just brand. It’s about the product as well. Unlike probably any other platform, we’ve built Octopus Choice with
platform that allows advisers to easily set up and manage multiple client portfolios. Not to mention, importantly, facilitating the adviser fees that they will expect to earn from their client in the process. “You can’t just bolt on an adviser page to a website and call it an adviser offering. It needs to be part of a fully integrated service, with face-to-face support.” Stallard says The House Crowd is looking to boost its IFA distribution and agrees that an IFA portal could be a good way of attracting advisers. “If P2P platforms want more business from IFAs, the first thing everyone must realise is the profile of a typical P2P investor is the same as that of a typical IFA client,” he says. “Platforms must give IFAs access to a level of education and information about P2P assets that is as good as – if not better than – the information investors
can access themselves. They should do this by creating a specific IFA portal where analysis and consideration of P2P investment opportunities is made easy. This includes enabling the IFA to match client needs, objectives and their appetite to risk with various P2P investment opportunities. “A specific portal will also permit IFAs to complete their due diligence more quickly, help with education, training, access to detailed investment information, and allow for automated investment processing and on-going investment performance monitoring.” There is clearly more work to be done to attract IFAs, and the regulatory clampdown by the Financial Conduct Authority may well help provide the transparency that advisers require. P2P platforms have done well to make their propositions so attractive to investors, but adapting their offering for IFAs could dramatically increase their customer base. The benefits would be reciprocal: by including P2P in their smorgasbord of investment options, IFAs would be offering their clients inflationbusting returns and greater diversity for their portfolio.
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