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DISRUPTING THE CREDIT CARD MARKET

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Elfin Market’s Mansour Bouaziz talks to P2PFN

Secured lending special report supported by

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CROWD BONDS

What investors need to know

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ISSUE 33 | JUNE 2019

P2P industry readies for investor marketing restrictions PEER-TO-PEER lending platforms are gearing up for the introduction of appropriateness tests, in anticipation of the outcome of the Financial Conduct Authority’s (FCA) review into the sector. The City watchdog is expected to release final rules on reform of the P2P sector this summer, following controversial proposals released last year which mooted the introduction of categorisation and appropriateness tests for P2P investors. The industry on the whole has supported the introduction of appropriateness tests but expressed concerns about the way they would be implemented and resulting costs. Firms are now working together on solutions. The Tax Incentivised Savings Association (Tisa) has established a working group to create a standard approach for appropriateness tests, which it will present to the FCA. The investments trade body created a similar framework in response

to the revised Markets in Financial Instruments Directive (MiFID II) – EU regulations that mandated a greater breadth of investment firms to implement appropriateness tests, although this did not include P2P platforms. “The guide will help firms and their customers determine whether and to what extent P2P is appropriate for nonadvised customers,” Jeffrey Mushens, technical policy director at Tisa, said. “This would provide an alternative to the approach of restricting investment

in P2P to investors who can demonstrate that no more than 10 per cent of their investable assets could be invested in P2P. “The working group is made up of representative industry members and we are aiming to publish a draft guide in June.” The group is chaired by Jake Wombwell-Povey, founder of direct lending investment manager Goji, and 15 P2P platforms are members including ‘big three’ lender RateSetter. “We want to have an actionable guide so firms can implement the test,” Wombwell-Povey said.

“The FCA will not endorse anything but have engaged with Tisa in the past. “We hope by developing a best practice guide, they will engage in a similarly constructive manner. “Clearly some platforms will have more resources to introduce this than others. “The objective of the working group is not to lower costs but to develop a best practice guide.” Mario Lupori, chief investments officer at RateSetter, said an appropriateness test can be “very effective in ensuring that investors understand the nature of P2P investments, while not restricting access.” Crowd bond platforms such as Downing and Abundance already require investors to pass appropriateness tests as they fall under the MiFID regime. The tests aim to ascertain investors’ knowledge on a range of issues, such as whether they understand their capital is at risk or the lack of >> 4 Financial Services


Regulation Breakfast Briefing Peer2Peer Finance News is holding a Regulation Breakfast Briefing on Thursday 27 June in London, in association with the Peer-to-Peer Finance Association and the UK Crowdfunding Association. The event will comprise a panel discussion and Q&A, delving into the current regulatory issues facing the UK’s peer-to-peer lending industry. The event, which is free to attend, is aimed at c-level executives and compliance professionals from alternative finance platforms. Please arrive at 8am for breakfast and networking, in time for an 8.30am start. The event will finish at approximately 10.30am. Spaces are limited so please email suzie@p2pfinancenews.co.uk to register your attendance. Breakfast sponsored by Supported by

For additional sponsorship opportunities please email alamgir@p2pfinancenews.co.uk for more information.


EDITOR’S LETTER

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Published by Royal Crescent Publishing

WeWork, 2 Eastbourne Terrace, Paddington, London, W2 6LG info@royalcrescentpublishing.co.uk EDITORIAL Suzie Neuwirth Editor-in-Chief suzie@p2pfinancenews.co.uk +44 (0) 7966 180299 Kathryn Gaw Contributing Editor kathryn@p2pfinancenews.co.uk Marc Shoffman Senior Reporter marc@p2pfinancenews.co.uk Andrew Saunders Features Writer Danielle Levy Features Writer Hannah Smith Reporter PRODUCTION Tim Parker Art Director COMMERCIAL Alamgir Ahmed Director of Sales and Marketing alamgir@p2pfinancenews.co.uk Tehmeena Khan Sales and Marketing Support tehmeena@p2pfinancenews.co.uk SUBSCRIPTIONS AND DISTRIBUTION info@p2pfinancenews.co.uk Find our website at www.p2pfinancenews.co.uk Printed by 4-Print Limited ©No part of this publication may be reproduced without written permission from the publishers. Peer2Peer Finance News has been prepared solely for informational purposes, and is not a solicitation of an offer to buy or sell any peer-to-peer finance product, or any other security, product, service or investment. This publication does not purport to contain all relevant information which you may need to take into account before making a decision on any finance or investment matter. The opinions expressed in this publication do not constitute investment advice and independent advice should be sought where appropriate. Neither the information in this publication, nor any opinion contained in this publication constitutes a solicitation or offer to provide any investment advice or service.

I

t is a truth universally acknowledged, that a retail investor in possession of a good fortune must be in dire need of more protection from the regulator. Or is it? Following a spate of bad press, the regulator’s warning about “high-risk” Innovative Finance ISAs and the unconnected collapse of mini-bond provider London Capital & Finance, it seems rather inevitable that the Financial Conduct Authority will implement its feted investor marketing restrictions on the peerto-peer lending sector. As our front-page story shows, the industry is, wisely, getting ready in anticipation of such changes. It will be interesting to see how appropriateness tests are implemented and whether there ends up being a great disparity between platforms. With such a wide variety of business models, there is a convincing argument for a variety of appropriateness tests, but this is likely to cause a headache for the regulator trying to assess their efficacity. One advantage the industry does have is that a range of MiFID II-compliant firms – such as crowd bond providers – are already using appropriateness tests, so P2P platforms have a precedent to work from, even if they put their own stamp on it. SUZIE NEUWIRTH EDITOR-IN-CHIEF

Have you signed up to our e-newsletters yet? You can receive P2P news straight to your inbox five days a week, or sign up for our once-a-week version that comes out on Wednesdays. Go to www.p2pfinancenews.co.uk for more information.


04

NEWS

cont. from page 1 Compensation Scheme protection. Julia Groves, partner and head of crowdfunding at Downing, said the implementation costs should be in the thousands rather than tens of thousands. “The implementation cost will vary depending on how each platform is designed, and whether you have development in house, but it should be thousands rather than tens of thousands of pounds, and certainly not six figures,” Groves said. “We have set the tech up to be able to apply a different set of questions to different bonds, so that we can double check that our members understand any changes or new features. “Most consumers pass the test, we have a failure rate of about 11 per cent. “If they have read and understood the risk

warnings and the offer document, they will find it easy to pass the test. If they haven't and they don't understand, then we don't want their money.” The Peer-to-Peer Finance Association is in discussions with Tisa about its best practice guide. The trade body said that its platform members supported the idea of bespoke appropriateness tests, adding that "a

Regulation update n THE Financial Services Compensation Scheme (FSCS) has urged customers of collapsed mini-bond provider London Capital & Finance (LCF) to register for updates as it looks at whether there are grounds for compensation. The FSCS said

it wants to keep customers up to date as it works with the Financial Conduct Authority (FCA), administrators and legal experts to decide if investors can claim compensation from the firm, which went into administration in January. It expects the

standardised approach could fail to reflect the characteristics of the wide variety of markets served by different platforms." Some industry commentators have suggested that appropriateness tests could have the additional benefit of protecting platforms from misselling complaints. “The test can also potentially be used as

investigation to be a long process due to the complexity of the case. n Business advisory firm Duff & Phelps has warned that insolvency reforms that are set to bump HMRC up the creditor list could limit the appetite for assetbacked lending. The reforms put

a shield for mis-selling cases, as the investor will have a hard time saying they didn’t understand the product when they have taken a test implying that they did understand the risks involved,” Jonathan Segal, head of fintech at law firm Fox Williams, said. However, Emily Morton, an associate at law firm TLT, highlighted that appropriateness tests do not result in blanket approval from the regulator. She cited the FCA's criticism of contracts for difference platforms in 2017, regarding the way tests were implemented. “I wouldn't expect appropriateness tests to have too much of a negative impact in the P2P lending space, but it will be important for firms to get this right,” she said.

HMRC ahead of creditors that have a floating charge as security, which will include some peer-topeer lenders. Duff & Phelps claims this change could deplete the security available for lenders and make them less willing to provide finance.


NEWS

05

Will new institutional products drive out the retail investor? A NUMBER of purely institutional products have been unveiled recently in the peer-topeer lending sector. Is this to the benefit or detriment of the retail investor? In April, Funding Circle announced that it was winding down its dedicated investment trust and would be launching two new institutional products in the UK: a UK private direct lending fund and a UK bond product. The platform is hoping to bring in over £200m from institutional investors over the next few years. “[The new products] will further expand the universe of investors that can access loans on our platform and continue to diversify our sources of funding, in line with the strategy we set out at initial public offering,” chief executive Samir Desai said at the time. The following month, Assetz Capital revealed that it had launched a Luxembourg-based institutional fund to help scale up its lending. The fund “further expands the universe of investors that can access the Assetz Capital marketplace, alongside our valued retail lenders,” said the platform’s chief executive Stuart Law. There has been a steady rise in institutional flows into the P2P space

over the past few years, as platforms look to diversify their sources of funding and secure bigger volumes to scale up loan originations. Even retail-focused platforms have started to carve out room for institutional money. Ethical crowd bonds platform Abundance recently accepted some funding from a building society, but co-founder and director Bruce Davis said that he hopes that an influx of institutional investors could ultimately benefit everyday investors. “We’ve always grown through retail investors and our whole philosophy is built around the retail investor,” Davis told Peer2Peer Finance News. “We’re not against the idea of institutional investors coming in but only because that would enable us to do more projects

and therefore offer more choice for our retail investors. “We can see a real benefit there. We certainly wouldn’t want institutional investors to be taking the lion’s share of any particular project but rather being an enabler – someone who is helping create the market for our listed securities and working alongside the retail.” The rise of institutional funding has led to some innovative new investment structures. Several platforms, such as Loanpad, use institutional money to provide a safety net of sorts for retail investors. Loanpad refers to its institutional investors as ‘lending partners’, and they cover the first 20 per cent of every loan. ThinCats, which is majority owned by City firm ESF Capital,

has raised more than £700m from institutions over the past two years, compared with £100m from retail investors. However, both retail and institutional investors invest on the same terms, and chief executive John Mould said that individuals can be reassured by the added due diligence which comes with institutional investment. “It depends on the specific model deployed,” said John Cronin, an analyst at Goodbody. “Therefore, on balance, in certain circumstances, I believe that an increase in the proportion of institutional funding will be beneficial as it would likely reduce retail investors’ exposure to P2P. “However, the consequential widespread availability of capital as well as the potentially higher risk appetite among institutional investors arguably increases the risk of high profile failures, which would be damaging for overall sentiment towards P2P lending propositions.” As institutional money continues to flow in, it will be interesting to see how retail investors respond, and whether they agree that the addition of institutional money will improve their P2P experience.


For even more peer-to-peer finance news, go to our website at www.p2pfinancenews.co.uk. With real-time news and exclusive insights, www.p2pfinancenews.co.uk is your indispensable portal into the world of peer-to-peer lending. Go online to sign up to our e-newsletters, for a comprehensive digest of the latest peer-to-peer finance news sent straight to your inbox. You can choose our weekday e-newsletter, which comes out by 7am Monday to Friday, or sign up for our once-a-week version that is sent out at noon on Wednesdays. www.linkedin.com/company/peer2peerfinancenews/ @p2pfinancenews

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NEWS

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P2P industry yet to see wave of consolidation THE WAVE of M&A activity that was expected to engulf the peer-to-peer lending sector has yet to materialise. Industries which have a proliferation of smaller players fighting to grow market share are typically prime candidates for takeovers and mergers, so why hasn’t it happened in P2P? And can all the small P2P platforms survive and thrive, or will many fall by the wayside? Late last year, Zopa cofounder James Alexander predicted consolidation would be a feature of the P2P landscape, with just “a few big winners” emerging afterwards. The industry already has a ‘big three’ – Zopa, RateSetter and FTSE 250-listed Funding Circle – commanding the greatest market share. Matt Hopkins, an audit director at BDO specialising in fintech, said the market landscape has changed in recent times. He predicts the two halves of the marketplace will go in different directions. He does not expect to see much consolidation within consumer-to-business lending platforms – their options will be “to be a niche player with a differentiated product, collaboration with a marketplace provider, or disappearance”. He noted there is a significant group of

small players but they are unlikely to become M&A targets. If they are to survive, they will need a unique model which sets them apart from competitors. “If small, mono-product P2Ps are expecting advances from other players as part of an exit event strategy, they are likely to be disappointed,” he said. “Since the collapse of mini-bond provider London & Capital Finance, I do not see a strong demand from the retail investment market and this, coupled with increased regulatory attention, is likely to restrict growth outside the existing large players in this market.” Business-to-consumer and business-tobusiness lenders, on the other hand, are likely to see much more sustained demand from institutional and highnet-worth investors, Hopkins suggested.

One senior industry source, who wished to remain anonymous, said the involvement of institutions in P2P lending has already removed what originally made them different. As intermediation creeps in, P2P platforms are becoming more like banks and asset managers that find deals for institutions. The source argued that consolidation has not happened because there is little incentive for a platform to buy another platform. They would only be acquiring the database of investors and the staff, the source said, along with less desirable things like the platform’s history and problems. “The only asset a platform has is its ability to marry investors and borrowers,” the source continued. “You're not buying the borrowers, because they come along each week or each month. If you've got a lot

of institutional money you're trying to find a home for, the constraint on growth is finding new deals. So it would be better to invest your money in a network of people finding deals than it is buying another platform. Their software won't be compatible with the software of the existing platform. You won't be able to combine them, so you're effectively running two platforms. There's no real benefit in it.” While the P2P lending industry has matured more rapidly because of technological changes, it is still a young industry, and consumers are treating it with caution, Hopkins suggested. As the newer companies in the sector begin to come of age, they will need more than just a profitable model. “Funding Circle and Zopa tapped into an unserved customer base at the right time, which enabled them to build both brand and scale,” he said. “Key success indicators for the next wave of maturing fintechs are likely to be customer acquisition, culture and governance, and operational effectiveness, in that order, not shortterm profitability. Those who achieve the latter will achieve the best valuations, whatever the exit event.”


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NEWS

One quarter of authorised managers are yet to launch an IFISA ALMOST a quarter of HMRC-authorised Innovative Finance ISA (IFISA) managers do not offer the product. Peer2Peer Finance News research has found that 93 firms are authorised by the taxman to offer an IFISA, but 22 of these firms are yet to make use of their permission. Among the firms with dormant IFISA permissions is challenger bank Monzo, who did not respond to requests for comment regarding its IFISA manager status. In some cases, these ISA authorisations date back three years, without any IFISA product launches. Greyfriars Asset Management went into administration in

October of last year but still holds IFISA manager authorisation. Peer Funding is no longer trading, but maintains its IFISA permissions. Several IFISA managers, including Edaid, Transcendent Real Estate and More Lending

Solutions appear to have paused their IFISA progress, with redirect or error messages appearing on their websites. However, a few of the 22 firms are in the process of rolling out an IFISA. Peer2Peer Finance News understands that

Fitzrovia Finance will be launching its first IFISA later this year. Madiston LendLoanInvest is also in the process of planning its first IFISA offering. Among the firms that are already using their IFISA authorisation, some are managing the wrapper for other platforms. For instance, Gallium Fund Solutions is the IFISA manager for PropertyCrowd, and Copia Wealth Management operates the Absolute IFISA and the Westway IFISA. Meanwhile, Hilbert Investment Services and Platform One both operate white label businesses for investment managers, which include IFISA management.

The best from the web

We round up the biggest stories from www.p2pfinancenews.co.uk over the past month • Assetz Capital made a few bold moves last month, announcing an institutional fund and launching a £1m Seedrs fundraising round which could pave the way for an initial public offering (IPO). Chief executive Stuart Law revealed that the peer-to-peer lender is evaluating the possibility of an IPO as the platform had

achieved critical mass and proven its business model. Its next phase of growth will involve doubling its headcount from 100 to 200. • Our readers are always interested in a personnel change, and last month was no exception. One of our most-read articles was about the resignation of Folk2Folk chief executive Giles Cross.

Cross was promoted to the top job in January 2018, and has left to “pursue other opportunities”, leaving Roy Warren, the company’s head of loans, risk and portfolio, to fill in as interim managing director. • Both LendingCrowd and CapitalRise announced multimillion-pound funding lines last month, piquing

the interest of our readers. LendingCrowd welcomed £18.75m through a partnership with the Scottish Investment Bank and Dutch entrepreneurial bank NIBC. Meanwhile, CapitalRise secured a £30m funding line from an unnamed institution, to fund new loans and launch larger projects.


JOINT VENTURE

09

The compliance change all regulated firms need to know about Most FCA solo-regulated firms will have to implement SMCR by the end of this year. David Sims, employment partner and head of the SMCR practice at law firm DAC Beachcroft, tells you everything you need to know

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EGULATION NEVER stops, and this can make it hard for smaller financial companies to stay on top of the latest developments. This may explain why the upcoming Senior Managers and Certification Regime (SMCR) has gone largely unreported among peer-to-peer platforms and other fintechs. But with an implementation deadline of 9 December, and an estimated three-to-four-month integration period, there is no time to lose. David Sims, a partner in the employment group at law firm DAC Beachcroft, has already started working with some larger firms to prepare them for the new regulatory requirements, and he has some advice for P2P platforms and fintech firms that have yet to make a SMCR plan. “The first thing you need to know about SMCR is that its aim is to drive cultural change,” says Sims. “It requires firms to assign responsibility for every aspect of the business, gives firms more responsibility for ensuring that key staff are fit and proper, and applies conduct rules to virtually every staff member.” SMCR was born out of the Parliamentary Commission on Banking Standards, which was created to investigate the reasons behind the financial crisis. “They

concluded that the current regime wasn't fit for purpose,” says Sims. The commission found that it was difficult to identify who was responsible for the various problems faced by UK banks during the financial crisis. So they decided to create a new regime which would hold senior managers accountable in a much more easily identifiable way. Under SMCR, it is the firm’s responsibility to ensure that senior managers, certified persons and other members of staff can carry out their roles effectively and in compliance with the regulation. This will involve ongoing training,

and the implementation of new processes and internal systems. “For most small firms, it ought to be relatively easy to implement the responsibilities mapping requirements of SMCR,” says Sims. “A greater challenge for those smaller firms is the requirement to set up new systems and procedures that perhaps they don't have at the moment, for example to satisfy the new fitness and propriety requirements of SMCR.” Some of the larger firms have already started putting SMCR planning into place, and Sims says that “if you’re a large firm, my advice would be if you haven’t started doing this yet, start now.” For smaller fintechs, Sims recommends budgeting at least three or four months to get all of the systems and processes in place. “If you are a small firm with a relatively simple governance structure then a couple of quarters should leave you with enough time to implement,” he says. “There are HR aspects, legal compliance, governance issues and a number of policies and procedures to create and update. “From a regulator's perspective this is about cultural change, so firms need to buy into that. Plan early, don't be afraid of it and it could have a positive impact on your business.”


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JOINT VENTURE

11

Poised for growth

Flender has hit its €10m lending milestone, and a new equity raise will help the Irish platform to cement its place in a growing market. Chief executive Kristjan Koik reveals all…

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EER-TO-PEER LENDERS have been winning market share from UK-based banks for several years now, and now the trend has made its way across the Irish Sea, where Flender is leading the charge. The Irish P2P platform recently hit the €10m (£8.78m) funding milestone, less than two years after its launch. And €8m of that was raised within the past six months alone – an achievement which chief executive Kristjan Koik is pleased to credit to his staff. “We did €2m in funding within the first 14 months of the business, and then we did €8m in just a few months, despite December and January being very slow months,” says Koik. “This is down to the hard work of our new head of sales Barry Hickey, and head of partnerships Colin Canny.”

“ There really is a lot

of growth opportunity for non-bank lenders

Flender may be a relatively young platform, but it is already making its mark. Since it was founded in June 2017, the platform has received more than 11,000 investments, 40 per cent of which have come from

outside of Ireland. It specialises in loans to small- and mediumsized enterprises (SMEs) across a variety of sectors, with each individual loan worth between €15,000 and €150,000. The average loan value is around €60,000. Koik believes that his platform has tapped into an exciting new area of growth in Ireland, as business-owners become fed up with banks and start to seek out alternative funding instead. “We can see this happening globally, where non-bank lenders are gaining market share from traditional banks,” he says. “We’re smaller and more nimble and we have innovative technology, so we are able to provide a much better customer experience than a traditional bank.” In Ireland, as in the UK,

borrowers are flocking to alternative lenders due to the relative speed of execution. “Banks can take weeks to respond to a customer with a slow no or slow yes,” explains Koik. “Flender can do the same as quickly as the same day due to lean processes and having the latest technology.” This efficiency has helped Flender to carve out an enviable position in Ireland’s SME lending market, with the promise of further growth on the horizon. “Origination volumes for P2P platforms are on the rise, yet the top three banks in Ireland have 90.3 per cent market share,” says Koik. “There really is a lot of growth opportunity for non-bank lenders. Banks have most of the market share and most of our customers come from banks.” Up next for Flender is a series of new product launches, and a push to increase originations even further. “We have just started our latest equity fundraising round,” says Koik. “We are looking to raise £3m, and it is open for existing and new investors in both the UK and Ireland.” This new funding round will help Flender to keep chipping away at the market share of Irish banks, and win over new lenders and borrowers alike – a sign of things to come in the Irish P2P market.


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PROFILE

Untapped potential Mansour Bouaziz, founder of new P2P consumer lender Elfin Market, tells Andrew Saunders how he’s going to revolutionise the credit card market

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HE CREDIT CARD IS one of the most successful consumer finance products of all time – there are 60 million of them in the UK alone, accounting for around £17bn of spending every month. What if the peer-to-peer business model could do for credit cards what it has already done for personal loans – bring down prices, democratise availability and streamline the application and approval process? That apparently simple idea inspired Mansour Bouaziz, founder of P2P credit platform Elfin Market, to quit his job at Goldman Sachs – a job that many in the financial services sector would regard as the pinnacle of their career – and go it alone. “I was looking for an opportunity to do something that had not been done before,” he says. “So I studied retail finance to see which products were already being covered by successful start-ups and which were still only in the hands of legacy banks and providers. “Credit cards were the one thing that the start-ups were missing. I couldn’t find anyone who had tried to do it, not only in the UK but anywhere else in the world either.” But it’s one thing to have a great idea, quite another to make it happen. The received wisdom on financing consumer credit is that it can’t be done without a substantial balance sheet buffer – the sort of balance sheet that only banks and

major financial institutions enjoy. “I understood fairly quickly that the reason it had not been done is that it is a bit more complicated than personal loans for example,” Bouaziz explains. “In credit there is a liquidity element – you don’t know when customers will use their line of credit, or how much. So as a P2P it is harder to match your funds and get good returns for your investors.” So what makes Bouaziz confident that as a brand new entrant to the market he can make P2P work where the established players have feared to tread? “At Goldman Sachs I spent a lot of time on credit risk and liquidity, I was comfortable that I could solve these problems for investors in credit

derivatives, it was just a question of translating that into the retail market,” he states. “The skills required exist in the institutional space at investment banks, it’s just that no-one has bothered to port them to the retail sector to make credit cards much cheaper until now.” Elfin’s product is an online credit account called the Elfin Wallet, similar to a commercial revolving credit facility but aimed at consumers. Currently in the beta phase, it is being rolled out to the platform’s 2,000 strong waiting list with a ‘soft target’ for full launch in the summer once testing is completed. Offering a representative APR


PROFILE

of only 5.8 per cent compared to typical current credit card rates of around 19 per cent, there is likely to be no shortage of demand from the borrower side. But can Elfin provide decent returns for its investors, as well as a margin for itself, at such low prices? “We’re confident in our risk management capabilities,” Bouaziz asserts. “Our rates for lenders range between 3.8 per cent for smaller amounts over six months

When it comes to the thorny problem of managing liquidity, Bouaziz says that while Elfin won’t have a bank-style balance sheet, it will have a buffer – composed partly of the lenders on its waiting list, and partly of back-up lenders ready to step in to cover unexpected surges in borrowing. “Like all P2P platforms we have a queue of new investors who don’t see their money being invested straight away – there is a delay of

“ I was looking for an opportunity to do something that had not been done before”

to 5.8 per cent for three years. We’re comparable to but slightly higher than the main P2P lenders, and we hope that small difference will encourage people to try us out.” His confidence is based, he says, on two main advantages over the competition – targeted lending and smarter processes. “Across the whole credit card population, about half pay their balances off every month and effectively get free credit, the other half carry a balance and pay interest monthly. The latter end up subsidising the former and that’s one of the big reasons that credit cards are so expensive.” Elfin’s product is aimed firmly at the balance carriers, those borrowers who actually use the credit rather than simply enjoying the benefits of card payment. “Our product doesn’t come with a grace period so we are targeting people who want to borrow money not just accumulate miles,” he explains. “They don’t subsidise anyone else, and that alone allows us to cut the rate by almost half. The rest is just being more efficient about technology and credit risk management.”

a few days or maybe a week. That money allows us some room for manoeuvre. “The second thing is that we want to have some back-up institutional investors. These emergency lenders will allow us to handle the situation until we get new retail investors in.” This back-up function is currently being provided by a number of high-net-worth investors but the intention, says Bouaziz, is to replace them with hedge funds or other institutions in the “not-too-distant future”. All the same, the issue of matching funds is likely to be a pinch point. “We’re aware that this is easier to solve for borrowers than it is for investors, and that in the first year at least the number of investors is going to be the limiting factor on our growth.” To help boost that flow, Elfin will offer an Innovative Finance ISA. “Clearly it’s a way to attract more investors. We want to give them that [tax-free] option, and there has been a fair bit of interest.” The platform has raised £500,000 so far from angel investors

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and contacts via two rounds of funding, and Bouaziz says it has enough in the kitty to see it through to launch. He anticipates another ‘friends and family’ raise, and there is the possibility of a crowdfunding round in the offing too. “Fundraising is now a way of life. It’s hard and time consuming, but we are getting better at it.” The hardest thing of all to date? “Without doubt getting our Financial Conduct Authority (FCA) authorisation,” he says. “It took over 18 months and was difficult because we have an innovative business model.” The legal and other expenses – paid for out of savings from his banking career – were another major hurdle. “Not all founders would have been able to go through the process without having to raise outside money,” he acknowledges. “It is easier in the UK than in many other places – the FCA does care about helping innovative startups get to market. But I do admit that I would have liked it to be faster and especially cheaper.” A mobile app is under development, as is a deal with a third-party provider to offer an actual card alongside the online wallet account, transfers into which are currently made via bank transfer. “It’s quite fast but we are aware that it’s not quite as user friendly as a card,” he says. “So we want to offer that option too.” Although it’s early days for Elfin, Bouaziz has growth plans to match the ambition of his bold new business model. “In consumer lending the big P2Ps like Zopa and RateSetter account for about five per cent of the total market. We hope it will be the same one day for credit cards and we’d like to be one of the big players.”


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JOINT VENTURE

15

The changing world of buy-to-let

The buy-to-let market is undergoing some big changes. Narinder Khattoare, chief executive of Kuflink, explains the opportunities and challenges that these changes present

B

UY-TO-LET (BTL) property has been a popular investment for decades. However, recent regulatory changes have threatened the profitability of these properties. BTL investors can no longer offset their mortgage interest against their profits, meaning that tax bills have risen substantially – particularly for higher-rate tax payers. Narinder Khattoare, chief executive of property peer-to-peer platform Kuflink, has warned that some people could find their BTL profits dwindling by 2020, when they are unable to keep as much of their profit from the income they receive from the property. As a result, a lot of BTL entrepreneurs have opted to put their property portfolios through a corporate structure, which is more tax efficient and should help to sustain profitability through the upcoming period of regulatory change. “I think has there been a slight downfall in terms of BTL purchases,” says Khattoare. “But there are a lot of people in the BTL market who are selling up because in the short term it's not generating enough income. “But long term there's always going to be capital growth on properties in high-demand areas. And for the people who don't need the income now but are looking for long-term capital growth, there's always going to be

a margin for it in a BTL portfolio. Right now there's a lot of movement in purchases happening in a corporate structure.” Kuflink’s property lending platform offers BTL loans alongside property development loans and commercial projects. But it is the BTL offerings that offer the highest target returns. According to Khattoare, this is purely down to the fact that the platform is earning a higher return on these properties. “If we’re making a margin there, we're offering that margin back to investors,” he says. “Some BTL deals come to us with very tight completion dates, so we may charge a little more out to the clients if the in-house team really has to push to achieve that. “The loan-to-value (LTV) may

also be a little higher so there may be a little bit more risk involved with that type of transaction because potentially you could be working with a borrower who is going into their first deal. They might not yet know the market very well, so you've got to price that kind of product accordingly.” Knowing the market is what Kuflink does best. Khattoare has assembled an experienced team with diverse expertise. Each member of the team has the ability to see risk in a new way, which means that Kuflink can make the best decisions about a range of prospective properties. “Everyone comes from a different background, so ultimately as a team you can work together and catch something that another person might miss,” says Khattoare. “That’s why it's crucial to have a full team on your side when you are making a decision. When there's only one or two people involved in it, it's bound to be more risky.” For Kuflink’s lenders, the expertise of a large team of experts means that they know that they are only investing in BTL properties which have been fully vetted and managed. Kuflink has recorded no losses to date, either through its residential, commercial, development or BTL portfolios. With a steady flow of new deals and an interest-seeking customer base, the platform is in a great position.


16

SECURED LENDING

A sense of security

Security provides reassurance for peer-to-peer platforms and investors alike that there may be a way to recover capital in the event of a defaulted loan. But is security always an effective way to mitigate risk? Marc Shoffman investigates

F

ROM PROPERTY TO porches, there is a peer-topeer lending platform for almost any sort of underlying asset. The concept sounds great on paper. A borrower gets a loan secured on an asset, while an investor has slightly more reassurance that money may be able to be recouped if things get wrong, as the platform can sell the asset. This is often promoted by secured P2P lenders as a way of mitigating risk. But in reality, things haven’t always played out as they should. Administrators of collapsed P2P lending platform Collateral – which offered loans secured on property and personal items such as jewellery – have spotted mistakes in valuations, while

others have struggled to sell the underlying asset or faced legal claims from borrowers. “Secured lending should in theory be safer than unsecured and that is reflected in the rate, but doesn’t mean investors can be passive about it,” says Frank Wessely, partner at insolvency firm Quantuma. “They should enquire how the value of the security is assessed and the exit strategy that shows how prepared a platform is in case the loan fails.” So how are P2P platforms ensuring their security is secure? The type of asset Assets that can be used as security for P2P loans range from property to business equipment to high-networth items such as classic cars or art.

Platforms take a different approach to the asset depending on the type of security. For example, loans secured on an invoice or business machinery would be backed up by legal documentation or a charge taken on the firm. In contrast, lenders who take physical items, such as HNW Lending or Lend & Borrow Trust, will usually store items in their own vaults until the loan is repaid. The idea is that these assets could be sold should a loan default, which would then repay lenders. “It is extremely important for the P2P sector to have secured loans,” says John Butler, chief executive of Lend & Borrow Trust. “Unsecured lending is subject to potentially big swings, but secured


SECURED LENDING

lending helps reduce that risk. “There are lots of different examples of assets across the risk and return spectrum.” The underwriting process Secured lending brings another facet into the underwriting process as a platform must assess the risk of both the borrower and the asset. Ben Shaw, founder of HNW Lending, which offers loans secured on property as well as personal items such as classic cars, says it is important to get to know the borrower. “You have got to look at the borrower and their reasons for borrowing,” he explains. “Somebody starting a technology business with no assets is higher risk than someone using a security to buy a house.” P2P business lender Rebuildingsociety offers loans secured by a personal guarantee or business assets or property. Michael Lawther, the platform’s legal and operations manager, says the security offered in support of a loan application forms a distinct but important question in the lending decision. “As a platform, we encourage our investors to look at security separately to the credit risk of the

business,” he explains. “The overall risk of a business defaulting on a loan is not directly related to the quality of collateral offered in support of the loan. “Investors should consider the risk of default as a separate risk to the risk of their capital being unrecoverable in default and declared as bad debt. “The former is dependent on the

17

steps such as asking a borrower to put up more collateral if the value of the asset drops.” Lend & Borrow Trust applicants must also get an accountant to verify that they are high-net-worth individuals with a minimum income of £150,000 or assets worth £500,000. Another way investors can be reassured of the underwriting

“ We encourage our investors to look at security separately to the credit risk of the business”

credit risk of the investment and the borrower’s ability to repay, whereas the latter is dependent on the quality of the security provided.” However, Butler argues that the credit risk of the borrower is of less importance if there is a viable underlying asset underneath. “The loans we arrange are heavily over collateralised,” he explains. “We will only arrange loans of up to 75 per cent of the value of gold and 65 per cent of the value of silver. “There has to be a huge decline in market value to result in the value of the collateral falling below that of the loan. “However, we do take additional

process is if a platform has skin in the game. HNW Lending’s Shaw, for example, invests his own money in each loan. “When I have 10 per cent of my own money being lost before an investor, I am suddenly more focused,” he says.

Valuation Platforms need to consider how much money they could recoup from an asset if the loan defaults. Quantuma’s Wessely warns that in some cases the asset may need to be sold at a discounted price to its open market value if there is a rush to repay investors.

THERE ARE THOSE SHOUTING ABOUT BEING THE BEST SECURED LENDER. TRY US. ABLRATE.COM STRAIGHT TALKING, TRANSPARENT LENDING FOR QUALITY BUSINESSES

Capital at Risk


18

SECURED LENDING

However, platforms are more bullish about valuations. Butler says there is an open market for bullion prices so you will always know the price you are going to get. Similarly, Shaw says he would avoid getting into the loan if it looked like an asset would be hard to sell and says indices can be used to track the price of assets such as cars or fine wine. However, there are other factors beyond valuation. Angus Dent, chief executive of business lender ArchOver, says the most important aspect of security is not value but appropriateness. “It’s no good securing a business loan with the chief executive’s house – that tells you nothing about the health of the company or its ability to repay its debts, which is the point of security in the first place,” he explains. “A house is hardly a mobile source of funds – if the borrower folds and you’ve got lenders rightly clamouring for repayment, the last thing you want to do is wade into the torture of house-selling chains. “Investors should seek out loans that are secured with assets that actually relate to the business itself.” Type of charge There are different ways that an asset can be secured, such as

go to paying the administrator, followed by any fixed charge, which could be on a business asset or property. The next preferential creditors are employees, who will get their wages paid from any funds left, followed by those with a floating charge. HMRC is currently an unsecured creditor and gets paid last, but this will change from April 2020 and

“ It is extremely important for the P2P sector to have secured loans”

through a fixed or floating charge, with the former giving more rights to the platform should the loan default. Currently, when a business goes into administration, the first funds

it will rank just after employees as preferential creditor and ahead of those with a floating charge. Wessely says a platform should ideally take a first charge as other forms have a higher degree of

risk as you are further down the list of creditors. The type of charge the P2P platform is taking will often be disclosed in the loan documentation and you can see this reflected in the borrower’s financial details with Companies House. This would only be accessible if it were a limited company taking a loan, as partnerships and high-networth individuals do not have the same reporting requirements. Recovery In the event of missed loan repayments, platforms will typically enter into dialogue with the borrower at first to try to establish a solution, but as a last resort they will need to take possession of and sell the underlying asset. However, Wessely warns there is


19

SECURED LENDING

no such thing as an easy realisation. “Recovery and realisation are never easy and straightforward, although it is implied in that way,” he says. “It is often a slow and protracted process that creates more concern the longer it goes on. “There are always difficulties

depending on the type of asset and the market conditions prevailing at the time of recovery. “The chances of recovery can depend to a large degree on the cooperation of the debtors, some have their own agenda and can cause difficulties and delays for the platform.” Shaw says having an asset such as a classic car in its own storage vault makes the recovery process easier in the event of a default. “We have the asset in our possession,” he says. “If we need to enforce our rights we don’t have to go out and find it. “If the borrower’s business fails as you have an asset to sell.” Similarly, Butler says Lend & Borrow Trust can quickly sell the gold it has been storing as collateral. Lawther says Rebuildingsociety works with a team of collections agents, credit control agents, solicitors and insolvency practitioners to arrange for the enforcement of the security. “As all of our loans must be secured by a minimum of a personal guarantee from the directors or shareholders, we always have two avenues to pursue the debt – the business itself and the director,” he explains. “The latter is often more

“ Recovery and

realisation are never easy and straightforward

important when lending to small businesses, as many companies do not own sufficient assets to be confident of a recovery to unsecured creditors in the event of default. “Therefore, having the extra assurance that the directors will remain personally liable for the debt even if the business is wound up or liquidated is an effective tool to obtain a positive result.” He concedes that there will be times when the value of the security will not be sufficient to gain a full recovery of the capital and interest. “In these situations when all available legal means have been explored, the loan is declared as bad debt or unrecoverable,” he adds. Secured lending may appear to fall onto the safer side of P2P, but it is still an investment. There are always going to be risks in P2P lending and feeling reassured by the promise of returns from underlying assets is no substitute for due diligence.

THERE ARE THOSE SHOUTING ABOUT BEING THE BEST SECURED LENDER. TRY US. ABLRATE.COM STRAIGHT TALKING, TRANSPARENT LENDING FOR QUALITY BUSINESSES

Capital at Risk


THERE ARE THOSE SHOUTING ABOUT BEING THE BEST SECURED LENDER. TRY US. BUT FIRST WE HAVE TO BE UPFRONT WITH YOU... YES WE ARE A FINTECH FIRM BUT; we have no slides, no pool tables, we don't even have a gaming console. There is no coffee machine (to be fair it broke) and no bean bags. We have no piercings (that we know of.. er hmm), we have one tattoo between us and there are no exposed bricks in our office, or metal posts, or concrete pillars, or neon signs.

We have rented a real office in a real building and we don't share desks. The only 'hot desk' we have is in the corner of the main office when the sun comes in it gets sweaty. We do have an air conditioner for those times, we call it 'Pengu'. We take real security against real companies and we don't call this an 'algorithm'

Yep. As a Fintech firm we are pretty rubbish at being hipsters. Sorry. What we do have is a great platform, giving returns of over 11% to lenders, an Innovative Finance ISA and ÂŁ48 million in loans under our belt. We have a great team that can understand your business and get it financed and if things don't go to plan, we know what to do. So if you are looking for slides, exposed bricks and avocado on toast when you visit, we are not for you. Sorry. (Our CEO does have a beard if that helps?)

ABLRATE.COM - STRAIGHT TALKING, TRANSPARENT LENDING FOR QUALITY BUSINESSES Up to 15% in interest Innovative Finance ISA available online Secondary market where you can buy and sell with ease keep an eye on your portoflio with credit reports available online updated monthly

FCA AUTHORISED AND REGULATED Instant Returns, earn money from the moment you bid Underwriter program for HNWI

WHERE LENDERS COME TOGETHER WITH BORROWERS FOR ASSET BACKED TRANSACTIONS Your capital is at risk and interest payments are not guaranteed even where security is available. Investments not covered by the Financial Services Compensation Scheme. Selling on the secondary market is based on demand and there is no guarantee you will find a buyer for your loans. Tax rules are based on individual circumstances. Past performance is not a guarantee of future performance (We also cannot guarantee our CEO will keep his beard).


JOINT VENTURE

21

Assessing the assets

David Bradley-Ward, chief executive of Ablrate, explains what investors should look for when choosing to fund secured loans

S

ECURITY CAN BE A great way of mitigating risk when it comes to peer-to-peer lending, but it is only effective if the platform uses it correctly. For David Bradley-Ward, chief executive of asset-backed peerto-peer lender Ablrate, stringent checks are the best way to assess security – and the more stringent, the better. “We do everything in-house now as far as registering the charges on assets, unless there are specific legal requirements,” he explains. “One of the things we insist on if we’re doing a second charge is a deed of priority. Without it, you’re literally at the mercy of the first charge. “Platforms and investors should look carefully at what that deed of priority says. Does it require a minimum sale price of the assets so that the holder of the first charge cannot hold a fire sale to recoup their money? Does it restrict the administrative charges and the rollout of default interest? “If it doesn’t, your second charge is not very good.” Bradley-Ward says that P2P investors should make sure to read any relevant documents that platforms provide regarding security before they make any investment decisions. On Ablrate’s website, there is a documents section where customers can access detailed information about any charges against assets and potential risks.

“Within our borrowing proposal, we provide details about general marketplace risks but also specific risks of the deal and what the mitigants are within the deal,” Bradley-Ward explains. “If you’re going to have a selfselect product like we do, you have to be as transparent as you possibly can, in order for people to be able to make an informed decision. If you don’t, you’re just relying on the platform to have done the job they say they’ve done.” Bradley-Ward also highlights an important point – debt investing is different to equity investing. When assessing potential borrowers, it is essential to consider not only the company’s growth prospects but what will happen if things go wrong. “How saleable is the asset in question? Is there a potential buyer, such as a competitor? Can we get a valuation directly from a valuer that allows us to complain

on professional indemnity insurance if that valuation is wrong? It’s looking at that security stack all the way along.” In uncertain times, security can help to reassure investors that there may be a way to recoup their money if things go wrong, but it is by no means a guarantee, he adds. “Not every asset is going to secure you 100 per cent,” BradleyWard states. “There are all sorts of factors that can weigh in, such as a decline in property prices or weaker demand for certain types of assets. “That’s why it’s so important for platforms to have a secondary market. “At the end of last year, amid the spate of bad press about certain P2P platforms and Brexit uncertainty, we traded £12m on our secondary market in six months. “Those who were super risk averse got out and those who were prepared to take more risk came in, giving us the opportunity to rebalance our portfolio.” As Bradley-Ward explains, security provides a “backstop” for platforms and their investors if things go wrong. “I think we are small and agile enough to understand the customers we have and the security we’ve got,” he adds. “In a secured marketplace, there is at least a floor. Depending on the assets you’re secured on, and how you’re secured, there is at least a backstop.”


For even more peer-to-peer finance news, go to our website at www.p2pfinancenews.co.uk. With real-time news and exclusive insights, www.p2pfinancenews.co.uk is your indispensable portal into the world of peer-to-peer lending. Go online to sign up to our e-newsletters, for a comprehensive digest of the latest peer-to-peer finance news sent straight to your inbox. You can choose our weekday e-newsletter, which comes out by 7am Monday to Friday, or sign up for our once-a-week version that is sent out at noon on Wednesdays.

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23

Leading the charge

In the first of a two-part series, Mike Bristow, chief executive of CrowdProperty, explains the huge importance of first charge security

O

NE OF THE THINGS that defines CrowdProperty is its insistence on always holding first charge security on every one of its property projects. And for chief executive Mike Bristow, it is the only way to significantly reduce risk and deliver the best possible value to investors. “First charge security is exactly the same as the rights that a mortgage company might have with a mortgage over your own residential home,” says Bristow. “Everyone knows that if they have a mortgage, they are obliged to keep up repayments or the property may be repossessed. And I think that proxy is the best way of articulating what first charge security really means.” The first legal charge holder is listed on the Land Registry as the primary senior debt holder against that asset, and they are entitled to exercise their legal right to repossess the asset to protect the interests of that first charged secured loan.

“ We’ve proven that

we can expertly manage a full recovery

For CrowdProperty’s investors, this means an extra layer of protection against a default, and Bristow knows from experience that the process works.

“We have only had to take legal action on one of our projects,” he says. “We recovered in full all of the lenders’ funds and all of the interest, and there was even a little left over for the borrower. “We’ve proven that we can expertly manage a full recovery, and in the rare instance it happens, we leverage the senior security and control to most effectively repatriate lenders’ funds.” When it was founded in 2014, CrowdProperty was one of the first property-backed peer-to-peer lenders on the market, and this five-year track record means that it is one of the few platforms to have completed a material proportion

of full loan cycles. It targets rates of up to eight per cent per annum, and to date none of its investors have experienced any capital or expected interest losses. Bristow credits part of the platform’s stability and success to its first-charge rule, but he is careful to emphasise that it is treated as a last resort, and the vast majority of CrowdProperty’s loans will never have to get to the point where a contract is being enforced. CrowdProperty works closely with its borrowers to ensure good progress of its quality projects and Bristow’s team of property experts are always on hand to proactively tackle any potential issues, working closely with borrowers, as all parties want to see the successful completion of the project. “You've got to look at every single factor but the overriding question that we ask is: Are we acting in the best interests of our lenders and the recovery of their funds plus owed interest?” says Bristow. “The answer is yes and we will always uphold this absolute priority.” This enviable track record and wealth of expertise has helped the platform win more than 7,500 investors, with 100 per cent of projects completely paid back – a true endorsement of its insistence on the first charge rule. Next month: The second part of our series on first charge security, as Bristow explains CrowdProperty’s approach to the ‘capital stack’.


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CROWD BONDS

Spot the difference

Crowd bonds occupy the same space as peer-to-peer loans, yet they are almost completely different. Or are they….? Kathryn Gaw reports

W

HEN THE Innovative Finance ISA (IFISA) was first introduced in 2016, it provided individuals with the opportunity to gain tax-free earnings from their peer-to-peer investments. But later that year, the Treasury opened up the wrapper to include debt-based securities such as crowd bonds.

Many industry figures have spoken at length about the differences and similarities between crowd bonds and P2P loans. Yet there is still a fundamental lack of understanding around the two investment products, which share a home under the IFISA tax wrapper. The differences largely come down to regulation and access to

diversification – two issues which any investor should prioritise. “I think investors do understand the difference between crowd bonds and P2P loans – or at least the more experienced ones do,” says Jake Wombwell-Povey, chief executive of direct lending investment manager Goji. “And I actually think that crowd bonds and P2P loans are


CROWD BONDS

quite similar from an economic point of view.” It’s true that the returns offered by crowd bonds and P2P loans are largely the same – in both cases, target returns start at around three per cent and can rise above 15 per cent, depending on the risk attached to the project. Likewise, in both crowd bonds and P2P loans, investors can choose to either fund individual projects or diversify across multiple loans, although admittedly it is easier to diversify through P2P than via crowd bonds. “Investors either invest into a single project or they invest into a range of projects,” explains Wombwell-Povey. “So if you look at Zopa or Funding Circle – they do diversified lending, while other P2P platforms operate on a project-byproject basis. “If you look at crowd bonds, it’s pretty similar - Downing does single projects, but they also do things like Downing Development Finance, which lends to a number of different projects. And in both cases, fundamentally the investor is investing in a project and the yields that come from that.” Neil Faulkner, founder of P2P analysis firm 4th Way, agrees that

“ Diversification is

one of the barriers to growth

these fundamental similarities can make it difficult to break through the confusion that retail investors may feel when deciding whether to put money into P2P loans or crowd bonds. “Neither ‘crowd bond’ nor ‘P2P loan’ are regulated phrases,” he says.

“If you show me a non-convertible bond in this space, I can probably find you a loan that works in the same way, as far as investors are concerned, including the risks, the maturity, repayment frequency, interest rates, secured/unsecured, and so on.” So where do crowd bonds and P2P loans differ? It seems to be a matter of regulation, diversification, and loan origination. Some relatively young crowd bond platforms won full Financial Conduct Authority (FCA) approval before longer-established P2P platforms. But this had less to do with favouritism and more to do with the simpler regulatory structure of crowd bonds compared to P2P loans. While both types of products are regulated by the FCA, crowd bonds are also subject to extra

25

scrutiny. For instance, in January 2018, all EU-based crowd bond firms became subject to MIFID II, which requires all platforms to issue potential investors with an ‘appropriateness test’, and to adhere to certain capitalisation requirements. Interestingly, in its recent consultation paper, the FCA suggested that these same rules should also be applied to P2P platforms. And then there is the confusing issue of Financial Services Compensation Scheme (FSCS) protection. “The same phrase – FCCS – is used for both deposit protection in a bank and investment protection for MiFID firms such as ourselves,” says Bruce Davis, co-founder and director of crowd bond provider Abundance. “It’s very confusing and we’re always challenged a bit


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CROWD BONDS

in how we can talk about it in a way that is compliant - what is protected? It is the platform rather than the investment.” However, Davis adds that variation in the regulation should not be the driving force behind an investor’s decision to invest in crowd bonds rather than P2P loans. “The main decision should be: what is my money doing and how am I getting my return, and what’s the risk of not getting my capital back?” he says. For most crowd bond investors, the attraction lies in the target returns and the type of project that is being funded. Several platforms have opted to focus on ethical or green investment opportunities, where investors are invited to help fund clean energy and socially aware projects. According to TGI data, approximately seven million investors consider themselves to be altruistic or socially motivated investors, and this represents a significant portion of the UK’s overall investor community. The Amberside Asset Lending Platform invests in high-yielding private debt in infrastructure projects, including solar parks, grid support facilities and hydroponics projects. And at green lender Abundance, investors can help fund clean energy projects such as hydro-power and geothermal plants. Last summer, ethical bank

of these bonds, investors can only invest in one project at a time. This flies in the face of the number one rule of investment management: diversification. “Diversification is one of the barriers to growth,” says Davis. “If we want to be a significant part of what people are doing with their money then we need to offer a range of different risks on a range

“ Investors should be interested in not only the returns but what the underlying loans are”

Triodos used crowd bonds to help fund one the UK’s largest solar panel projects. However, with the vast majority

of different investments, and I think that’s the case across the whole industry.” Davis adds that diversification is

the main request from Abundance’s customers, who want to see more projects being promoted, and more variation in the types of projects that they can invest in. Of course, investors are free to split their money across several projects at a time, but this is a stark contrast to the 100+ loans that can be accessed through a P2P platform with an auto-lending function. Diversification is going to be hard for crowd bond providers to achieve, at least until they can scale up to the point where they are issuing scores of new loan opportunities per month – a prospect which would require a huge investment in loan originations, credit checks and marketing. But instead of competing


CROWD BONDS

27

“ Crowd bonds

and P2P loans are quite similar from an economic point of view

with P2P lenders on a like-for-like basis, crowd bond providers seem to be focusing on what makes their offerings unique. Crowd bond providers have clearly demonstrated that there is plenty of room for innovation in the space. Downing Crowd broke new ground in 2017 when it launched two regular access bonds – The Bagnall Energy Regular Access Bond and the Pulford Trading Regular Access Bond – which allow investors to withdraw their money before the 10-year maturation date. Meanwhile, positive investing platform Lendahand Ethex has combined real-world altruism with inflation-beating returns; generating five per cent per annum by

creating solar panels for 2,500 rural Rwandan households. And Crowd For Angels has set itself apart by offering short-term crowd bonds, with a maturation period of just one or two years. These are unique selling points that will certainly appeal to a lot of retail investors, who prioritise innovation and returns over instant diversification. In fact, with an annual IFISA allowance of £20,000, there is no reason why investors should not diversify their own IFISA portfolios, by spreading their allowance across a mix of bonds and loans. Frequently, the differences between crowd bonds and P2P loans come down to sheer semantics. “Platforms usually have their

own marketing standpoint that puts unique or special benefits on their offer purely because of what it is called or how it is structured,” says Faulkner. “While it is usually just a marketing difference, the platforms can get quite irate and typically insist there is a real, substantial difference from an investor's point of view, because they call it a bond or they call it a loan or a debenture. “But despite their protestations, frequently the only difference for investors in reality is the word they choose to use. We don't consider what platforms are calling their products to be of any use. It's how it works that matters.” Wombwell-Povey believes that investors should focus less on the type of product that they are investing in, and more on the expertise behind each platform. “What it depends on is the quality of the manager,” says Wombwell-Povey. “Investors should be interested in not only the returns but what the underlying loans are.” In this sense, crowd bonds and P2P loans are practically identical – in both cases, investors need to look past the returns, the diversity of offerings and the regulatory structure, and focus on doing detailed due diligence on each individual project instead.


Finding ways to make your money more interesting

Competitive fixed rate bonds Invest The Wellesley Way

The Wellesley Way

Desktop www.wellesley.co.uk

Your capital is at risk and interest payments are not guaranteed. Investment in any Wellesley Listed Bonds are not covered by the Financial Services Compensation Scheme.


JOINT VENTURE

29

An interesting new ISA concept Wellesley’s new stocks and shares ISA is set to combine competitive returns and simplicity. Managing director Luke Madden explains how...

W

ELLESLEY HAS BEEN teasing a major new investment product for the past few months, but it is finally time for the big reveal. The platform’s first ever stocks and shares ISA will be released to new and existing customers in the very near future, and it truly offers something different. Unlike many other stocks and shares ISAs, the Wellesley offering will hold just one type of product – Wellesley listed bonds. This means that the ISA will effectively allow Wellesley investors to benefit from competitive rates from bond products, but via a tax-free wrapper. “We worked really hard to develop an ISA offering from Wellesley which is simple and straightforward, focusing on what our customers really want,” says Luke Madden, managing director of Wellesley.

“ We feel that our

ISA offers the best of both worlds

“Our stocks and shares ISA will only hold our regulated, listed bonds, with all the fixed interest element of the bond set in advance. You can hold the investment in a tax-efficient wrapper and you can do it all on our own platform.” Wellesley’s stocks and shares ISA was created purely in response to

customer demand. According to Madden, the platform’s investors asked for a tax-efficient product that would offer above average returns, while still allowing them to benefit from Wellesley’s diverse property portfolio. Earlier this year, Wellesley received new regulatory permissions that allow the platform to distribute its own investments and arrange to hold them in ISA wrappers, and a new investment concept was born. At the time of writing, the fixed interest rates were still to be confirmed, but Madden says

that they will certainly be “the competitive rates which our customers are used to”. “Our ISA product will be offered on a fixed rate, fixed term basis and we will share these benefits with our existing customers as well as our new customers,” says Madden. “Stocks and shares ISAs can often be seen as quite complicated, but it depends on the underlying product and the investments that are held within them,” he adds. “What we are offering is very simple.” Wellesley plans to roll out its stocks and shares ISA within the coming weeks and shortly thereafter all of its existing mini-bond customers will have the opportunity to switch like-for-like into the regulated, listed bond products. “We feel that our ISA offers the best of both worlds as it has the simplicity associated with a cash ISA, but the added value associated with stocks and shares or an Innovative Finance ISA,” says Madden. “It offers less volatility than most stocks and shares ISAs as the product itself will only hold our regulated, listed bonds. These new authorisations enable us to put this all in one place on our platform to make it really straightforward and a wonderful experience for the customer.” Pre-launch demand is already high, and the Wellesley ISA is sure to be greeted with plenty of interest from alternative finance fans of all stripes.


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DIRECTORY

INVESTMENT PLATFORMS

The BridgeCrowd is a well-established bridging lender that offers two simple products: a low-rate facility, catering for straightforward cases, and an exclusive ‘valuation only’ product which provides a solution for hard-to-place bridges, e.g. severe, adverse credit or no exit. In short, if something has a value, the BridgeCrowd can lend against it. www.thebridgecrowd.com T: 0161 312 56 56 E: borrowers@thebridgecrowd.com E: investors@thebridgecrowd.com Downing designs products that help investors look after their financial wellbeing, while its investment partnerships support businesses in their ambitions. Its crowdfunding platform, Downing Crowd, allows people to lend directly to small UK businesses, typically through bonds offering returns from three to eight per cent per year. www.downingcrowd.co.uk T: 020 7416 7780 E: crowdfunding@downing.co.uk Flender advances loans to well established, cash generative Irish SMEs. To date, the 17-strong team have originated and completed 161 loans, over 10,000 transactions with a cumulative total loan value of €10m in the Irish market. https://flender.ie T: +353 155 107 16 E: info@flender.ie FundingSecure was one of the first FCA-regulated peer-to-peer platforms, with over £300m loaned to date. It connects borrowers and lenders, specialising in loans secured against assets such as property, cars and jewellery. Lenders receive returns of up to 14 per cent per year, with an option to invest in an IFISA. www.fundingsecure.com T: 0118 324 3190 or 0800 690 6568 E: info@fundingsecure.com MoneyThing is a peer-to-business lending platform that offers better deals to lenders and borrowers. It offers individuals great returns on IFISA-eligible investments backed by property or business assets. MoneyThing’s investors have helped businesses across the UK to buy property or fund growth. The platform is FCA regulated and committed to responsible lending. www.moneything.com T: 08000 663344 E: support@moneything.com Proplend is an FCA-regulated property lending platform and HMRCapproved flexible ISA manager that matches investor demand for inflationbeating income with demand for commercial mortgages and bridge loans. Security includes first legal charges for all loans with a choice of risk-adjusted returns from up to three LTV-based investments. www.proplend.com T: 0203 397 8290 E: admin@proplend.com E: borrower@proplend.com


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Simple Crowdfunding connects property professionals and the general public through property in the UK, providing access to all. Invest into peerto-peer, IFISA-eligible loans offering on average eight per cent per year, secured on property. Equity investments are also available, with projects ranging from basic planning gain opportunities to multi-unit new builds. www.SimpleCrowdfunding.co.uk T: 0800 612 6114 E: contact@simplecrowdfunding.co.uk ThinCats is dedicated to funding growing and ambitious UK SMEs across all industry sectors using pioneering data, personal relationships and a pragmatic lending process. It aims to simplify the traditional bank-dominated commercial lending model by connecting SMEs directly with institutional and retail investors providing them with attractive potential returns. www.thincats.com T: 01530 444 040 E: admin@thincats.com Wellesley is an established property investment platform that issues bond investments to the UK retail market. Its core objective is to provide investors with higher rates of return than can be accessed through traditional investment routes, whilst simultaneously providing financing to experienced commercial borrowers within the UK residential property market. www.wellesley.co.uk T: 0800 888 6001 E: info@wellesley.co.uk

SERVICE PROVIDERS

Fintech and associated specialisms – banktech, insurtech and regtech – are focus areas within international law firm DAC Beachcroft’s expert technology team. DAC Beachcroft has a proven track record in advising financial services businesses and peer-to-peer finance platforms on technology, data, regulation and corporate matters. www.dacbeachcroft.com T: 020 7894 6978 E: p2pfinance@dacbeachcroft.com Fox Williams is a City law firm with a specialist fintech legal team. Fox Williams delivers commercially-focused and up-to-date fintech, legal and regulatory advice on various business models. A key focus area is P2P lending and it acts for several of the largest P2P lending platforms. www.foxwilliams.com T: 020 7628 2000 E: jsegal@foxwilliams.com

Our magazine is read by peer-to-peer lending professionals, investors and more. If you'd like to be included in our directory, please email Tehmeena Khan on tehmeena@p2pfinancenews.co.uk for details and pricing.


FUNDING THAT’S MORE ON YOUR WAVELENGTH The funding solution for growing SMEs Only by fully understanding a business’s ambitions can we provide a funding solution that’s right for its specific needs. It’s why we’ve built a team of experts across the UK ready to engage with you and your clients in person. It’s how we’ve helped fund businesses with more than £400 million so far – with a further £800m standing by. Whether your clients are looking to fund growth, an acquisition (including Management Buy Outs or Buy Ins), capital expenditure or refinance existing loans we share the same goal: helping UK entrepreneurs realise their potential.

Bespoke business loans from £250k up to £15m

Visit thincats.com or call 01530 444 061 ThinCats is a trading name of Business Loan Network Limited (BLN). Registered in England & Wales No. 07248014. BLN is authorised and regulated by the Financial Conduct Authority (No. 724062).

Profile for Peer2Peer Finance News

Peer2Peer Finance News June 2019  

Peer2Peer Finance News June 2019