>> 9
LIFE OUTSIDE LONDON
Scotland to become fintech hotspot P2P UNCOVERED
Our annual industry and investor survey
>> 12
Crowdstacker’s Karteek Patel reveals his ambitious plans for growth >> 28
ISSUE 24 | SEPTEMBER 2018
Proposed investor restrictions threaten P2P sector’s growth THE PEER-TO-PEER lending industry has blasted the City watchdog’s proposed investor restrictions as unfair, costly and damaging to the sector’s future. P2P platforms have been busy digesting the Financial Conduct Authority’s (FCA’s) long-awaited postimplementation review of the sector – released over the summer – and while most are happy with plans for heightened transparency and loanbook disclosure, there are concerns over proposed marketing restrictions and appropriateness tests for investors. These proposals would make P2P lending platforms become the preserve of sophisticated, high-net-worth or ‘restricted’ investors, akin to crowd bond providers like Abundance and alternative investment firms such as Goji. By cutting out the average retail investor, the industry fears that these changes could drastically reduce the
number of P2P investors and subsequently lessen the amount of finance available for borrowers. “It will definitely limit growth of the sector in terms of access to investing,” Stuart Law, chief executive of business P2P lender Assetz Capital, told Peer2Peer Finance News. “There will be fewer retail investors as a result of these changes, we think that’s a bad thing as it is an alternative form of income. Everybody knows this isn’t a bank account, it’s an investment and a sensible choice for those wanting a balanced portfolio with investment
at risk, the warnings are already available.” If implemented, the rule changes would mean that P2P investors would have to confirm their status as sophisticated, high-networth or ‘restricted’ – the latter meaning that they are limited to investing a maximum of 10 per cent of their net investible portfolio in P2P. Investors would then have to complete and pass an appropriateness test that assesses their attitude to risk and loss. Law warned that borrowers would also suffer from such a move, as fewer investors would
mean an increase in rates due to less supply. “If you can’t raise all the money from retail you will start to raise it through other routes, such as institutional, which creates another layer of fees,” he said. “That then takes democratisation of finance back a step and isn’t providing an alternative to the bank.” Amer Bhatti, chief compliance officer at P2P short-term loans provider Welendus, agreed that these changes would make P2P less open to everyone. “Access to P2P should be open and inclusive,” Bhatti told P2PFN. “With transparent information, individuals should be able to make decisions without rules imposed by the regulator. “You don’t want to have only the high net worth taking advantage of P2P returns as this leaves others going to bank.” These concerns have been echoed by other platforms such as RateSetter, which warned such restrictions >> 4 pose questions
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EDITOR’S LETTER
03
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 Emily Perryman Reporter emily@p2pfinancenews.co.uk Danielle Levy Reporter PRODUCTION Tim Parker Art Director COMMERCIAL Ashleigh Sadler Director of Sales and Marketing ashleigh@p2pfinancenews.co.uk Amy St Louis Sales and Marketing Consultant amy@p2pfinancenews.co.uk Tehmeena Khan Sales and Marketing Support admin@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.
M
uch of the Financial Conduct Authority’s lengthy review of the peer-to-peer lending sector was to be expected. Proposals for increased transparency and disclosure among platforms, clearer information about provision funds – these sorts of consumerfriendly measures are bread and butter for regulators. But it was the suggestion of investor restrictions that sent shockwaves throughout the industry. As our front page story shows, cutting out the regular retail investor could stymie the sector as it looks to grow and move further into the mainstream. Requiring investors to pass appropriateness tests may not, in practice, cut out anyone without a couple of brain cells, but it’s another layer of admin that the P2P sector doesn’t need. I think what is more concerning is the proposal to limit everyday investors to putting a maximum of 10 per cent of their net investible portfolio into P2P. Despite the Bank of England’s recent monetary tightening, we’re still in a poor environment for savers. So why should savvy individuals, with money they’re prepared to take a risk with, essentially be limited to property or stocks and shares? And what does this mean for the Innovative Finance ISA? This gives confusing messages to the average investor. Is P2P an ISA-friendly product that they should be encouraged to put money into, or is it a highly risky opportunity that they shouldn’t be investing in too heavily? Perhaps the governing bodies aren’t too sure themselves at this stage. They say good things come to those who wait – let’s hope the City watchdog proves this adage true when it finalises its P2P rulebook. 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
around “personal freedom, fair competition and financial exclusion”. “The proposals on marketing restrictions are disproportionate in view of the risk profile of P2P lending, at least when it is done through reputable platforms,” a RateSetter spokesperson said. “The danger is that this could set back progress on financial inclusion and competition in financial services. The proposals reflect what is already in place for equity crowdfunding, however, that type of investment has a very different risk profile to P2P lending.” The proposed changes could impact a substantial portion of the P2P sector’s private investors, many of whom see P2P as a key element of their portfolio
in an era of historically low interest rates. The newly-released Peer2Peer Finance News annual survey found that 85 per cent of investors polled have more than 10 per cent of their portfolio in P2P platforms (for full results go to page 12). The plans have also raised eyebrows in the wider investment space. Adrian Lowcock, head of personal investing at investment platform Willis Owen, said the suggested changes “would effectively limit the size of the market and the opportunities they present.” He said that many P2P investors would not be classed as sophisticated and labelled the regulator “overzealous” in its approach.
“The FCA doesn’t prevent investors from having more than 10 per cent exposure in other high-risk assets such as alternative investment market shares or emerging markets so this seems a bit excessive,” he added. However, Jake Wombwell-Povey, chief executive of Goji – which already provides appropriateness tests for investors – says the firm has not experienced any issues as a result. “The majority of our investors categorise themselves as restricted,” he said. “Everyone then has to complete a test that focuses on the specifics of the investment, looking at if they understand their capital is at risk or that there is no Financial
Services Compensation Scheme protection. “It’s not rocket science, no-one has ever failed it.” Jonathan Segal, head of fintech at law firm Fox Williams, said no-one should be cut out in theory, but investors may be put off by an extra layer of administration. “If someone isn’t capable of answering many of the appropriateness questions then they shouldn’t be investing in the riskier platforms, particularly where you self-select loans," he added. “Arguably, other more mature platforms that are more diversified and build the portfolio for you may question the need for the tests and probably feel more hard done by as the potential for loss by investors is a lot lower.”
Barclays to fund £1bn of invoices via MarketInvoice in coming years A SIGNIFICANT proportion of MarketInvoice’s business is likely to be funded by Barclays in the future, rather than by peer-topeer investors. Bilal Mahmood, spokesperson for the business finance platform, told Peer2Peer Finance News that its recently-unveiled strategic partnership with Barclays would fund close to £1bn-worth of invoices over the next
few years. MarketInvoice has funded invoices worth around £2.7bn since launching in 2011. Mahmood said the Barclays deal would
have no impact on its other investors, who are mostly high-networth and institutional, because there will still be a steady flow of small- and mediumsized enterprises (SMEs) who come directly to the platform. Barclays, which has one million SME customers, is introducing the MarketInvoice proposition to clients in certain regions over the coming months. A full
roll-out will come into force nationwide in 2019. “This achieves growth for Barclays because we can grow our asset base,” said Lorna Whalley, Barclays’ head of group products. “It will add additional value to Barclays and also to MarketInvoice because instead of using their P2P network alone they will also use our balance sheet to fund the customers we refer over to them.”
NEWS
05
Investors may face restrictions in P2P lender IPOs PEER-TO-PEER lenders who float on the London Stock Exchange (LSE) could introduce shareholder investment restrictions to avoid a conflict of interest. John Cronin, financials analyst at stockbroker Goodbody, said there is a risk that shareholders in P2P lenders could channel material volume through the platform, thereby supporting the company’s valuation. He suggested that if platforms such as Funding Circle and Zopa go ahead with their rumoured initial public offerings (IPO), they could include a rule in their internal company documents banning such a practice. At the very least, they
might impose “a threshold on how much incremental new lending a stockholder can channel through the site,” Cronin said. There are not thought to be any such restrictions in place among other financial companies on the LSE. Listed investment platform Hargreaves Lansdown and Share plc, which owns The Share Centre, both confirmed they have no restrictions
on how many shares a customer can buy in the company. “Various notifications, including to the Financial Conduct Authority, are needed once holdings exceed three per cent,” a spokesperson for Hargreaves Lansdown added. Neil Glover, business development director for IPOs at EY, said it is unlikely P2P lenders
will have to impose restrictions, but they might make a moral choice to do so in order to “prevent any media backlash”. He suggested the easiest way to restrict share buying from customers would be to limit the proportion of shares available to the public. “Very few companies offer up their share offering outside of the very large investment funds, and it is very rare that an investment fund would put money into a platform like this,” Glover added. “The only real threat would be if they did a retail offering, but I can’t imagine they would want to because it is more pain than it’s worth.”
P2PFA members confirm plans for loanbook data SEVERAL platform members of the Peer-toPeer Finance Association (P2PFA) have confirmed their intention to keep publishing full loanbook data, despite a relaxation of the rules by the industry trade body. The P2PFA previously required its members to make their entire loanbook available for investors to download. In June, however, the P2PFA said lenders could now either publish their entire loanbook or provide a
detailed breakdown of loans. Funding Circle immediately withdrew its downloadable loanbook and stopped publishing loan performance data on a daily basis. Neil Faulkner, managing director of P2P analysis firm 4th Way, believes fellow ‘big three’ platform Zopa will follow suit because it did not answer a direct question about it from Peer2Peer Finance News. Folk2Folk and MarketInvoice both
confirmed they plan to keep publishing their loanbook data on their websites. Crowdstacker said it does not provide a downloadable loanbook because it only has a small number of loans, which investors can view individually. The P2PFA has claimed that the loanbooks of the largest platforms are of such magnitude that their accessibility is of questionable value. But Karteek Patel, chief executive of Crowdstacker,
said investors often use data to ask more questions and find out more information. “The majority of investors can take great comfort from complete loanbook data because there will always be a slice of expert investors, as well as specialist research agencies like 4th Way, which through the internet and social media can make amateurs aware of any concerning or praiseworthy aspects of the loans,” said Faulkner.
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JOINT VENTURE
07
Hey big spender
Institutional investing is on the rise in the P2P property space. Uma Rajah, chief executive of CapitalRise, explains how big-name investors are finding their place in marketplace property lending
P
EER-TO-PEER investing has not always been closely associated with institutional investors. But to Uma Rajah, chief executive of the marketplace property lending platform CapitalRise, institutional investing and P2P lending are a natural fit. At least within the prime institutional grade property lending space where they operate. “Most institutions have historically had property lending as part of their portfolio,” she explains. “But they have generally gone around looking for direct lending or investment opportunities themselves focused on a particular grade of real estate assets. “We allow institutions to access various types of transactions without having to go through their team because essentially they can rely on our expert team to do the origination and the underwriting. So it's really a low resource, low effort way to get access to an asset class that they already actively engage with.” CapitalRise focuses
on prime institutional grade real estate, where institutional grade just describes the calibre of real estate that historically has been the focus of institutions. They focus on high-end properties in exclusive neighbourhoods – generally in and around London. Retail investors can target double-digit returns by investing a minimum of £1,000 in luxury property loans, but multi-billion-pound institutions tend to take a different approach. According to Rajah, many institutions prefer senior or “super senior” levels of debts, although the seniority of the loan will vary from investor to investor. Banks are typically happy to target single-digit returns in return for a lower loan-tovalue (LTV) investment of 45 per cent or less, she says. By contrast, family offices like to spread their investments across a range of different types of loans, while funds tend to target the double-digit returns offered by higher LTV opportunities. Rajah notes that seasoned institutional investors are already very familiar with
property risks, which may explain why her platform has seen such an increase in interest from institutional investors recently. “One reason why we are seeing an increase in institutional funding partners is because they recognise that we, particularly in Prime Central London, are currently either at the bottom or near the bottom of the property cycle,” she says. “Our valuations tend to be very conservative, because the valuers are already pricing in uncertainty in the market.” CapitalRise hasn’t always been so focused on institutional investment. The first few loans on the platform were 100 per cent crowdfunded, and
the majority of the firm’s lending power still comes from retail investors. In fact, Rajah believes that retail investors will ultimately benefit from the rise of the institutional P2P property investor. “The added bonus for retail investors is that that they get the added security of having a big-name investor on board.” she says. Rajah adds that it is her belief that “the crowd” will be the cheapest source of capital in the long run. But in the immediate future, she expects to see even more institutional funding coming into the P2P property sector. “Over the next 12 months the split between retail and institutional investors will shift a bit as we put more high-value transactions through the platform,” she says. “We believe that ultimately the crowd will be the cheapest source of capital and that our direct lending business model will disrupt the old traditional business models in the future. Institutions help us to do much larger loans and grow our loan book faster but they will never totally replace the crowd.”
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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NEWS
09
Lenders flock to Scotland as P2P sector takes off SCOTLAND looks set to become a peer-to-peer lending hotspot despite fears about the potential impact of Brexit and another independence referendum. This year has seen lenders such as Assetz Capital and The House Crowd opening up offices in the country, while professional services firms Pinsent Masons and Deloitte have formed partnerships with Fintech Scotland to drive the financial technology sector’s growth. LendingCrowd already has its headquarters in Edinburgh, as does ShareIn, which provides a white label crowdfunding technology solution. Scotland is regarded as having real potential in the P2P lending sector. Andrew Berry, director of risk advisory at Deloitte, said its greatest strengths include its wide connectivity both inside and outside Scotland, and its ability to link all parts of the P2P ecosystem: potential borrowers, lenders, technology companies, skilled expertise, a supportive public sector and investors. Scotland also has a demand-supply funding imbalance. According to LendingCrowd chief executive Stuart Lunn,
there are over 360,000 small- and mediumsized enterprises (SMEs) operating in Scotland, accounting for more than 99 per cent of the business population, but many have struggled to secure the finance they need to expand. “Three big banks – Royal Bank of Scotland, Lloyds Banking Group and Clydesdale – control more than 80 per cent of the SME banking market and provide some 90 per cent of Scottish business loans,” he said. “However, the Scottish government’s council of economic advisers last year highlighted the ‘persistent funding gap’ facing SMEs who are seeking loans in the range from £20,000 to £1m.” Scotland is emerging as a leading fintech hub more generally, housing firms such as ZoneFox, Money Dashboard and
the newly Aim-listed Nucleus Financial. “Scotland is really wellplaced to be an attractive location for fintech and is in pole position to be the leading centre outside of London,” said Yvonne Dunn, partner at Pinsent Masons. Dunn said Scotland’s universities have a fantastic pedigree in maths, computer science, engineering and technology, while the country offers a supportive environment for start-ups. “There is government support for fintech as a high-priority industry and some great incubator/ accelerator options such as CodeBase in Edinburgh and RBS’s Entrepreneur Accelerator as well as Tontine in Glasgow,” she added. Stuart Law, chief executive of Assetz Capital, said Scotland
has great businesses that the lender wants to back. He said these do not necessarily stand out over the rest of the UK, but tend to be overlooked by others because Scotland is “too far away”. “And you need people on the ground to understand a location well,” he added. The biggest challenges facing Scotland’s P2P sector are Brexit and the possibility of another independence referendum. Frazer Fearnhead, chief executive and co-founder of The House Crowd, warned the uncertainty around accessing EU markets is already affecting investment which, in turn, hinders businesses’ ability to grow. “And then, of course, there’s the potential economic impact of Brexit (whatever that may be), which the fintech industry won’t be immune to,” he said. “A Scottish independence referendum would risk similar uncertainties, although the experience of the 2014 referendum suggests that the Scottish government will produce an outline plan that will at least allow businesses to prepare for either outcome – something that’s sorely lacking in the Brexit process.”
JOINT VENTURE
11
The importance of good regulation P2P regulation has been in the spotlight lately. But for Narinder Khattoare, chief executive of property-backed P2P platform Kuflink, good regulation has always been a priority
R
EGULATION is vital for the success of any industry, but it has been particularly important in the peerto-peer sector. However, as the sector evolves, many platforms have struggled to cope with the increasing presence of the Financial Conduct Authority (FCA). Earlier this year Collateral went out of business after failing to secure full FCA approval, while numerous other platforms have complained about being forced to wait two years or more for FCA authorisation. But property-backed P2P platform Kuflink believes that good regulation is absolutely worth the wait. “We embrace the FCA,
and I think the FCA does a fantastic job.” Kuflink works “very closely” with the FCA – “and we need to,” says Khattoare. This close relationship is particularly important for P2P lenders in the wake of the FCA’s recent consultation paper, which promises to make some changes to the sector in the near future. These upcoming changes do not concern Khattoare, who has had plenty of experience dealing with the complexities of regulating propertybacked P2P loans. “One thing I did notice was when most of the P2P platforms were going through their authorisation process
“ FCA regulation gives the retail investor a bit more security”
because they've got to do the relevant checks on the businesses to make sure they're sustainable,” says Kuflink’s chief executive Narinder Khattoare. “At the end of the day, people’s money is at risk,
with the FCA, the majority were offering small- and medium-sized enterprise (SME) loans only,” he says. “And those SME-focused lenders got through the authorisation process faster than those
of us who were offering property-backed loans. “I think the set-up of a property-backed P2P platform is different because there's a bit more due diligence to be done on the vetting of the properties,” he adds. “The underwriting process has to be different to make sure that the structure and the placement of the loans is correct. And it's different again for someone like us because we've got skin in the game too, so the structure that we have to put in place from the outset is totally different.” In fact, Khattoare says
that he would welcome more interaction with the regulator, either through regular workshops, person-to-person meetings or simply via consultation papers, like the CP18/20 document which was made public earlier in the summer. Ultimately, Khattoare knows that good regulation is essential when it comes to winning the trust of investors who can still remember the impact of the global financial crisis just 10 years ago. “FCA regulation gives the retail investor a bit more security,” he says. “OK, so there is no Financial Services Compensation Scheme. However, it gives users a bit more security knowing that the FCA has thoroughly vetted us. This allows investors to make better decisions when they deploy funds on the platform.” If enhanced regulation means that more investors start considering P2P lending, then ‘embracing the FCA’ could be the smartest strategy for every platform.
12
ANNUAL SURVEY
Annual survey
Peer2Peer Finance News questions the industry and investors about the state of the peer-to-peer lending sector. Analysis by Marc Shoffman
T
HE 2018 Peer2Peer Finance News annual survey comes at an interesting time for the sector, with the long-awaited release of the Financial Conduct Authority’s (FCA) post-implementation review and an economic environment dictated
by Brexit and interest rate speculation. It has been a busy 12 months since our last survey in September 2017, with the main P2P brands now fully regulated and offering Innovative Finance ISAs (IFISA), while the City watchdog’s resolve
was tested by the collapse of Collateral. Our survey sheds light on how platforms and investors are responding to the ever-changing P2P world, and while the sector will continue to provide a viable alternative to the mainstream for both
investors and borrowers, it looks like pricing may start to get tighter. The majority of industry professionals surveyed do not expect borrower rates to decrease. 41.67 per cent of respondents predicted rates to go up in 12 months and >> 14
ANNUAL SURVEY
INDUSTRY SURVEY
Broadly speaking, how do you expect P2P borrowers' rates to change over the next 12 months? Increase
41.67%
Decrease
16.67%
No change
41.67% 0
10
20
30
40
50
How do you expect P2P investors' rates on the whole to change over the next 12 months? Increase
25.53%
Decrease
25.53%
No change
48.94% 0
10
20
30
40
50
How do you anticipate default rates across the industry to change over the next 12 months? Increase
62.50%
Decrease
6.25%
No change
29.17%
Other*
2.08% 0
10
20
30
40
50
60
70
* The standardisation of the term "default" by the FCA will result in a decrease in defaults on some platforms and an increase on others
13
14
ANNUAL SURVEY
cont. from page 12 another 41.67 per cent said there would be no change, while just 16.67 per cent said rates would increase. Ultimately, this suggests the cost of P2P borrowing will not get any cheaper, although it
may still be compared to mainstream banks where rates are also increasing off the back of the Bank of England base rate hike. On the other side of the P2P spectrum, investors may already be getting
decent returns from P2P, but just 25.53 per cent of industry respondents expect rates to increase over the next 12 months. Another 25.5 per cent expect investors’ rates of return to go down and
48.94 per cent said there would be no change. This approach to rates may be reflective of increased default expectations and more economic uncertainty amid platforms. Almost
What is the largest challenge facing the P2P industry? Economic downturn
25.00%
Platform failures
14.58%
Finding suitable borrowers
16.67%
Regulation
10.42%
Lack of awareness
27.08%
Low rates
0.0%
Other*
6.25% 0
10
20
30
* Lack of confidence; lack of understanding of different underlying loans/investments
INDUSTRY VIEWS “Increased regulation is critical if the industry is to continue to operate. There has been no significant downturn in the financial markets which will cause wholesale defaults yet, but when this happens
the P2P industry may well experience significant issues which it is not currently ready for or able to withstand.” “Industry response to the FCA review has been
weak to date. Industry representative bodies should be more vocal and proactive.” “Stick to facts, data and transparency and the sector will flourish.”
ANNUAL SURVEY
two thirds, 62.5 per cent, said they expected defaults to increase over the next 12 months, and a similar 66.67 per cent said they expect the wider credit markets to tighten. The P2P sector has also become more concerned about its own business growth. The majority of industry respondents, 70.83 per cent, said they are confident about their business growth over the next year, but more have expressed uncertainty about their future compared with last year’s poll. Almost 10 per cent said they were either slightly or extremely unconfident about their prospects this year, while no-one expressed such concern in the 2017 survey.
Some of this uncertainty could be placed at the door of the FCA. A fifth of respondents warned that the City watchdog’s postimplementation review would result in platform closures and 22.92 per cent anticipated lower interest rates as a result of the proposals. However, the majority, 60 per cent, still believe the changes will create higher standards across the industry. Any drastic changes to interest rates could deter P2P enthusiasts, especially as 77.92 per of investors surveyed cited yield as the main reason for investing in P2P. Interestingly, despite many P2P platforms using their IFISAoffering as a key
Do you expect the credit market to tighten over the next 12 months?
No 33.33% Yes 66.67%
marketing tool, just 9.09 per cent of investors cited tax-free earnings as their main reason for using P2P. Another 10 per cent said they used P2P for diversification. This was reflected in how P2P investors said they choose their platform. The most popular factor was whether loans were secured. The second biggest factor was the use of provision funds, while having an IFISA ranked third. Many are taking diversification seriously, with 40.38 per cent of investors putting money into two to four platforms and 32.05 per cent using five to seven. Only 5.77 per cent use just one. P2P platforms may still
15
have their work cut out in retaining investors though, with almost half, 43.87 per cent, more wary of the sector since Collateral’s collapse. Separately, a fifth said they may move their funds to a rival platform due to lack of trust in a company, while 26.45 per cent were seeking more diversification. P2P platforms have spent the previous 12 months getting regulation and ISAready, but have remained competitive for investors and borrowers throughout. The test now is for them to maintain that service as they head toward an environment of rising rates, tighter credit markets and evolving regulation.
“ Some great innovations are taking place”
16
ANNUAL SURVEY
How confident are you about the growth of your business over the next 12 months? Extremely confident
39.58%
Slightly confident
31.25%
Neither confident nor unconfident
20.83%
Slightly unconfident
6.25%
Extremely unconfident
20.08%
0
10
20
30
40
What impact do you think the FCA post-implementation review will have on the industry? Higher standards and increased trust among public
60.42%
Lower rates of return due to increased regulatory costs
22.92%
Firms will increase headcount to cope with extra responsibilities
14.58%
Firms will reduce headcount to offset increased regulatory costs
2.08%
Platform closures
20.83%
No change
8.33%
Other*
2.08% 0
10
20
* Cowboy operators should lose FCA licence and FCA should technically audit platforms
30
40
50
60
70
ANNUAL SURVEY
17
INVESTOR SURVEY What are your main reasons for investing in P2P? Yield
77.92%
Diversification
10.39%
Tax-free earnings through an IFISA
9.09%
Other*
2.60% 0
10
20
30
40
50
60
70
80
* Seems more ethical than traditional banking
How many platforms do you invest in? 1 5.77% 8+ 21.79% 2-4 40.38% 5-7 32.05%
What proportion of your investment portfolio is in P2P platforms? 0-10%
14.84%
11-20%
25.81%
21-40%
23.87%
41-75%
26.45%
76-100%
9.03% 0
10
20
30
18
ANNUAL SURVEY
Yes 43.87%
Has Collateral’s collapse made you more wary of P2P investing?
No 56.13%
Please rank these platform features in order of importance: (figures aggregated from rankings) Offers secured loans
5.42
Has a provision fund
4.88
Has an IFISA
3.94
Offers manual lending
4.15
Offers auto lending
3.56
Is part of the P2PFA
3.62
Downloadable loanbook
2.59 0
1
2
3
4
5
6
19
ANNUAL SURVEY
Are you planning to change the platforms you invest through?
No
37.42%
Yes – better rates elsewhere
4.52%
Yes – lack of trust in the company
19.35%
Yes – default rate
12.26%
Yes – want more diversification
26.45% 0
10
20
30
40
No 15.38%
If P2P investments were to become covered by the Financial Services Compensation Scheme, would it change how much you invest?
Yes 84.62%
INVESTOR VIEWS “It’s the Wild West at the moment - albeit that you can obtain good interest rates, but it’s not a mass consumer product by many miles.” “It seems in robust health and some great innovations are taking place.”
“If Brexit is a total disaster, it will have a huge negative impact on the UK’s finances, but especially on P2P. Borrowing and repayments will become harder, and the economic circumstances under which loans were made will have significantly changed.”
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SPONSORED CONTENT
It’s all crowdfunding David Swanson, head of lending at ArchOver, delves into the evolution of the sector
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T’S ALL crowdfunding. The difference is in the formality of the arrangements and the size of the crowd. When Kickstarter launched, the premise was that a like-minded community of supporters with small amounts of money might fund the next big thing. A bit like the lottery, you knew that the biggest value was probably entertainment (although more than a few cool products have emerged). This very large like-minded community evolved into peer-to-peer lending. The change from concepts to gadgets to loans has enabled many small- and mediumsized businesses to secure working capital,
being determined by the cash flow derived from that asset. What’s changed since then is the acceptance of other non-traditional assets as investable, the regulations governing banks and the availability of immense data on borrowers and lenders. And, of course, technology, to sift through all that data. There’s nothing new about lending money. How many ways can there be to lend it? The answer is, not many. There’s always an asset and an expectation that it produces cash. On the other side, there’s got to be a lender or, as with crowdfunding, many lenders. Crowdfunding or P2P
enabling expansion and job creation. What may have once seemed like financing on the fringe has become mainstream. Assets used as collateral may not be viewed as traditional, but they are absolutely in keeping with the value of an asset
has been thought of as individual-focused but it can also be a carefully balanced business lending platform with a distinct financing model. The UK has taken the lead in introducing the idea to institutional investors. Is P2P reaching a
“ What will improve is the ability to quantify risk ”
level of maturity and recognition as an alternative asset class? It’s easy to say yes based on the Financial Conduct Authority’s (FCA’s) recent consultation paper. Rightly, the FCA is wary of the evolution of this type of crowdfunding, from its informal origins to the more structured approach of lending platforms. What other indicators might there be? Awareness is increasing. Volumes are growing. New lenders and borrowers both seem satisfied with this new avenue of finance. With these indicators, we’d best be prepared for more cash entering the market. What’s next and what can P2P participants do to manage expectations? Investors will continue to seek the highest returns at the lowest level of risk. This will not change. What will improve is the ability to quantify
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risk. The improvement will come from access to useful data, allowing credit analysts to look directly into the business records of companies, starting with bank details. In journalism and credit analysis, the key is to follow the money. If standards can be recognised and implemented for useful data, there ought to be fewer barriers to lending cross-border. One complication that’s been evident historically is the tendency of participants to create terminology which obfuscates rather than clarifies. Terminology can be difficult if firms succumb to techno-babble to differentiate themselves. More often than not, this results in confusion for the consumer and that’s not good for anybody. It’s essential that the industry protects its reputation while protecting lenders and borrowers in all its dealings. Any negative impact on P2P will reflect poorly on the entire industry. In today’s world, people are less inclined to own things. Subscription models are everywhere, from tunes to Volvos. If someone is using assets while paying subscription fees, someone else owns the assets and is getting paid, making the future bright for lending.
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INSTITUTIONAL INVESTMENT
The might of the Square Mile
The attractions of the peer-to-peer lending sector are obvious to retail and institutional investors alike. But will the latter’s financial firepower push out the former as platforms look to scale up? Danielle Levy investigates
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HE PEER-TO-PEER lending sector was borne out of a need to connect individual lenders and borrowers. The concept took off in the UK in the wake of the credit crisis, as banks curtailed lending activity and interest rates tumbled. This resulted in paltry interest rates on savings accounts, which encouraged disappointed savers to look elsewhere for income. Fast forward nine years and the sector is
thriving. By the end of March 2018, the UK’s largest P2P platforms were responsible for almost £9bn of cumulative lending, according to the Peer-to-Peer Finance Association (P2PFA). This represented a 57 per cent year-on-year increase. While the sector continues to expand, so too does the role of institutional funding. In the US, institutional money accounts for more than two thirds of P2P funding - and
although the UK remains some way off, it is fast making up ground. The Cambridge Centre for Alternative Finance found that institutions were responsible for 32 per cent of P2P consumer lending, 28 per cent of P2P business lending and 25 per cent of P2P property lending in the UK in 2016. Since then, institutional involvement has grown. For example, the British Business Bank has invested £135m through a number of
P2P platforms in recent years, including Funding Circle, Zopa, RateSetter and MarketInvoice. What’s more, the statebacked development bank is currently in talks to provide Funding Circle with £150m for SME lending. MarketInvoice is one of the platforms that has piqued the interest of institutions. In early August, Barclays took a minority stake in MarketInvoice and said it would provide funding
INSTITUTIONAL INVESTMENT
to the business finance platform. As part of the deal, the high street bank will also roll out the platform’s invoice financing technology across its network. “It’s exciting to
to move away from its original intention of helping savers to earn an attractive income on their savings. In addition, there are concerns that institutional money may come with
“ I like the idea of proper P2P,
which is about individuals lending to businesses they like be combining the knowledge and footprint of a 325-year old British banking institution with MarketInvoice’s tech-led online finance solutions,” said MarketInvoice chief executive Anil Stocker when the deal was announced. In addition, MarketInvoice secured £135m of fresh funding from Portuguese bank Banco BNI Europa and Germany’s Varengold Bank to support larger invoice finance deals in March. This followed a tie-up with Investec, announced last December, which saw the bank commit £50m of funding during the first year of the partnership. Institutional funding provides platforms with scale and allows them to balance lending and borrowing activities. However, critics warn that a growing reliance on institutional investors is causing the P2P sector
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strings attached, with pressure applied to platforms to cherry-pick the best loans. RateSetter represents a P2P platform that is not reliant on institutional money, with around 96 per cent of funding coming from retail investors. “If corporations or an institutional investor
wanted to invest with us, they could do so and we would be happy to talk to them, but the requirement is there can’t be different treatment for one type of investor compared to another,” explains John Battersby, RateSetter’s head of policy. He said the platform is looking to diversify its funding and is open to all types of investors – retail, corporate and institutional – who will be treated fairly. “We think a deep, liquid market is advantageous to all of our investors,” he says. “We can achieve a more liquid market in different ways. Number one is to attract more retail investors. Another is to diversify the type of investors as well. They are both things we are open to.”
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Even if RateSetter attracts more institutional investors in the future, Battersby said the platform is keen to ensure that retail investors continue to gain access to the asset class. “We want to open up the asset class in a way that is very simple and easy for investors of all types to access,” he adds. “This lies at the heart of what we are about.” ArchOver, which specialises in P2P business lending, currently has an 80:20 funding split in favour of retail investors. Chief executive Angus Dent hopes that retail investors will continue to provide the majority of loans via the platform. “ArchOver’s ethos has always been to give the ordinary person access to a higher rate of interest,
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INSTITUTIONAL INVESTMENT
a higher return on their money, as well as access to this asset class,” he explains. “Therefore, the majority of the lending we have over the platform is from individuals, smaller family offices and familycontrolled companies.” Dent is concerned that the growing involvement of institutions runs the risk of blocking ordinary savers from investing in P2P. “I like the idea of proper P2P, which is about individuals and smaller family offices lending to businesses they like,” he says. “That’s the power that the internet brings and the ability to have that matching. I think ultimately that is the way forward. “If it goes down the route that the US has gone down, there is a risk of getting lost. Businesses like ArchOver will just become another institutionally-funded lending house. We have had those for hundreds of years. There is nothing
ArchOver’s platform may increase to 30 per cent over the coming years. Carl Posern, a structured finance partner at law firm Pinsent Masons, believes the positives outweigh the negatives when it comes to institutional involvement in the P2P sector. He describes the pre-funding of loans by institutions as a “common-sense approach”. This is because it is not financially effective for platforms to pre-fund loans using their equity, particularly as this can prove expensive. With this in mind, cash-rich institutions provide a logical solution. “Currently with low interest rates, it becomes attractive for a platform to fund itself not through peers but through cheaper institutional funding,” he adds. Jake Wombwell-Povey, chief executive of P2P investment manager
new in that.” While he is keen to keep the retail investor at the heart of ArchOver’s proposition, he adds that diversification of funding is important. To that end, he suggests that institutional funding on
Goji, agrees that it is expensive for platforms to rely solely on retail investors for funding. “It helps these guys [platforms] to get big ticket funds under management – rather than going to investors asking
“ It helps platforms to get big ticket funds under management ”
for £1,000 a pop, which takes a lot longer and can be quite expensive,” he explains. If a platform receives institutional backing, Wombwell-Povey says it should be viewed as a sign of credibility. This is because the institutional investor has undertaken extensive due diligence and tested the platform’s systems and controls. Neil Faulkner, founder of P2P analysis firm 4th Way, believes institutional investors are essential
to the future success of P2P. If there were no institutional involvement in the sector, he says this would represent a “massive warning sign” to retail investors, indicating an unattractive riskreward trade-off. “Institutional investment is also essential for some platforms to work properly,” he asserts. “They need to attract large amounts of money in order to be profitable. They have to get to a
INSTITUTIONAL INVESTMENT
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“ Often, the loudest critics…have been unable to get institutional funding themselves
certain scale, and without institutional money a lot are simply not going to do it.” Faulkner notes that institutional funding helps platforms to balance investors and borrowers at any one time, providing stability. If there is any kind of imbalance, this can hold back a platform’s future growth. John Goodall, chief executive of buy-to-let P2P lender Landbay, believes it isn’t simply a question of institutional
versus retail funding in the sector because both have a place. “We still give retail investors the opportunity to invest in buy-to-let loans, so nothing has changed there, but we can also get additional sources of capital into the buyto-let mortgage market which didn’t exist in the past,” he says. When Landbay first started, it was exclusively funded by retail investors. Over time, the platform has attracted institutional
funders and today they account for a significant proportion of lending via the platform. “My general view is from our borrowers’ perspective, diversification of the source of capital is a good thing,” he affirms. “It means as a business we are more stable and consistent through the cycle.” He believes it is important to consider where criticism towards institutional backing is coming from. “Often, the loudest critics of platforms that take institutional capital are those platforms that have been unable to get institutional funding themselves,” he says. Goodall explains that loans are allocated randomly on Landbay, so preferential treatment cannot be given to any type of investor. “In terms of P2P businesses, we need to get to a certain scale to become profitable,” he adds. “Helping us to scale means we can get there earlier and quicker, which is also reassuring for retail investors.” As institutional funding continues to pour into the sector, what lies ahead? Faulkner expects institutional involvement
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will continue to increase, with the potential for further investment trust launches. “It [the industry] will become more institutional and I think there will be a lot more investment funds,” Faulkner predicts. “The platforms will do it themselves and there will be more funds available on the stock market. That will occur as the industry scales.” Goodall agrees that institutional funding in P2P represents an inexorable trend. “I would expect to see different types of institutions funding loans,” he comments. “From where we sit, we see quite a lot of potential interest in the types of loans we are doing from institutional investors. We would certainly expect to attract more institutional capital over the next 12-24 months from different types of institutions.” The growing presence of institutions in the P2P sector appears to be unstoppable – whether this will benefit or disadvantage the retail investors who helped build the industry into what it is today is yet to be seen.
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JOINT VENTURE
Northern star
Some of the most interesting property investments are currently to be found in the North of England. Jay Patel, relationship director at Wellesley, explains why
“W
E LIKE the North,” says Jay Patel, relationship director at Wellesley. “It's a nice part of the world and investment-wise and homeowner-wise there's a strong market there which serves a very real need.” It has been three years since the government launched its Northern Powerhouse initiative, aimed at driving new investment and transport links into the ‘core cities’ of Manchester, Liverpool, Leeds, Sheffield, Hull and Newcastle. Already the region is reaping the benefits of new investment from the public and private sectors.
higher-paying jobs to incentivise the market. “What’s more, there are some great universities in the north of the country and there are now more people willing to stay in those university towns after graduation. So, you’re getting and retaining a higher percentage of professional staff. Those people are obviously needing places to live, be that by renting or purchasing and it's feeding through to the property market.” According to the latest house price data, property values in the North East and North West are rapidly outpacing price growth in London and the South
“ Experience is key” “We're seeing an influx of larger firms,” says Patel. “And there's investment from various different firms to move personnel up to the northern part of the UK and by virtue of that you're creating a larger number of professional jobs, a larger number of
East, and Patel expects this trend to continue, even after Brexit. So why aren’t more property lenders looking towards the North? “It’s banking 101,” says Patel. “You invest in what you know. So, if you’re based in London, you lend to
areas around London. “We were probably a little ahead of the curve and that's why we have a Manchester-based individual who's purely focused on Manchester and the northern parts of the UK. But I'd imagine that competition will start heating up soon.” Wellesley has had a head start when it comes to investing in property in the Northern Powerhouse. The property lender has already built strong relationships with a number of well-known, high-quality developers in Manchester and
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beyond, who have undergone rigorous vetting processes. “What we typically look at is the quality of the borrower, so their experience, their reputation, their financial standing and the team they have around them,” explains Patel. “The ability to go out and see some of their previous projects first hand is always quite key – it’s the little things you can see from walking around a site that you can't tell from a photo. “We are very hands on - we go out and see sites, we go out and see our clients’ previous projects as well as ongoing projects that we’re funding, just to create a fuller picture of how they're operating.” Last year, Wellesley provided £39.9m in funding to Manchesterbased developer McGoff for the construction of an apartment complex on the River Irwell. The project is now nine months ahead of schedule, and more than 90 per cent of the apartments have already been sold. Patel sees this as a triumph of his team’s focus on logistics and relationship building. “Experience is key,” says Patel. “We have the experience in the Northern Powerhouse, and we intend to remain there.”
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PROFILE
The next stage
Crowdstacker was one of the first platforms to launch an Innovative Finance ISA, but it is not resting on its laurels, as chief executive Karteek Patel tells Danielle Levy
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ROWDSTACKER may represent one of the smaller members of the Peer-to-Peer Finance Association (P2PFA), but what it lacks in size it certainly makes up for in ambition. Chief executive and co-founder Karteek Patel has big plans for the rest of 2018, which involve the peer-to-peer business lending platform diversifying its model. The platform, which was one of the first to launch an Innovative Finance ISA (IFISA), is currently developing a cash ISA and plans to launch a stocks and shares ISA later down the line. This will enable Crowdstacker’s customers to manage their traditional and alternative investments across the same platform. For example, they will be able to see the returns that are being generated by their IFISA, stocks and shares ISA and cash ISA in one place. “Hopefully, it allows investors to better diversify their risk because they can visualise what
their portfolio looks like and what they are earning across their portfolio,” he explains. While Patel wasn’t able to divulge further details at this stage, he said the team hopes to launch the cash ISA over the next six months. More than three years since launching the business, the entrepreneur says the plan to offer a cash ISA and stocks and shares ISA were always part of Crowdstacker’s “road map” – hence why the business already has regulatory permissions to launch both. Nevertheless,
he says secured business lending will always remain at the core of the business. “As liquidity grows, it [Crowdstacker] can become a place where you can manage more of your pot and cash,” Patel says. “You can flexibly change risk across your ISAs or different investments. “Naturally, the goal is that liquidity in the alternative part of that portfolio increases, which allows us to target bigger businesses that are looking for larger sums of money.” With one eye firmly focused on the future,
Crowdstacker is currently in the process of raising money via crowdfunding platform Seedrs. It has a target of £800,000 and has so far raised more than £600,000. The plan is to develop technology to automate processes, increase headcount, and invest in the business in order to attract new investors and borrowers to the platform. Up to launch, the company was funded by Patel and co-founder Mark Bristow. It then received £1.2m in funding via a combination of debt and equity from institutional investor Omni Partners. “Historically as a business, we have probably taken the least amount of investment in the first three years of our existence compared to our competitors, but we are probably achieving on aggregate one of the best revenue figures,” Patel notes. “We have done a great job in terms of laying core foundations and we have a great model, so we want to accelerate that process.” In Crowdstacker’s last financial year it generated revenues of £1.3m, bringing total accumulated revenues up to £3m over the past three financial years. Patel adds that the business is currently breaking even. Since launch in June 2015, Crowdstacker has
PROFILE
raised £50.1m for UK medium-sized businesses via the platform and has repaid £13.4m in capital and interest. The platform does not charge fees to investors, who can invest from £500 upwards. Patel notes that 70 per cent of inflows have come from IFISAs, which is an
gained a head-start on competitors who faced regulatory hold-ups. Looking ahead, Patel expects the number of IFISAs to grow significantly, given that they currently account for such a low proportion of the total ISA market. In this environment, he
area where Crowdstacker has gained traction amongst investors. As one of the first platforms that was able to launch an IFISA product in May 2016, Crowdstacker
thinks that different P2P business models will have the scope to flourish. “There is enough room for all of us to carve out niches in what we do,” he says.
“ Our model will always be quality over quantity ”
Crowdstacker’s niche lies in medium-sized UK businesses – and this was the opportunity that Patel and co-founder Bristow initially spotted when they set up the company in 2013. “At the time, the likes of Funding Circle, RateSetter and Zopa were doing amazingly well servicing small- and medium-sized enterprises (SMEs) and personal lending,” he explains. “Where we saw a gap was medium-sized businesses that needed larger fund raises of up to £50m, which is the largest we have done. “We saw that the standard approach taken by other platforms
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would not work for these businesses. As companies evolve through their lifetime, they get a bit more stable but also more complex. I think our due diligence process and structuring process accounts for that.” Crowdstacker’s credit process involves an automated stage, which is used as a filtering mechanism. After this point, Patel says the rest of the process is bespoke and he likens it to the work that is carried out by corporate finance firms. A by-product of the platform’s thorough due diligence process is to produce 20-to-30-page documents about each
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PROFILE
underlying company and loan. This provides investors with detailed information to base their investment decisions on. Patel adds that the team is highly selective about the companies they lend money to, which means that Crowdstacker tends to feature less loans on its platform compared with competitors. “Our model will always be quality over quantity,” the chief executive adds. The platform currently offers investors access to 10 loans from a host of different businesses, with interest ranging from four per cent to 7.5 per cent per annum. Loan maturities also vary but do not typically exceed five years. Today, the platform is seeing the highest demand so far in its history from businesses that are seeking funding for growth and development. While this should be viewed as a positive, Patel says Crowdstacker’s key objective is to maintain credit quality.
As the UK approaches the March 2019 deadline to leave the European Union, Patel has noticed that medium-sized businesses are reevaluating their funding. “In 2009, many banks
‘we don’t want to be in the same position, we want diverse funding lines and we don’t want to be reliant on one bank or partner’.” Rising interest rates represent another trend that has implications for
“For us, we are trying to focus on medium-sized businesses which are well through the start-up stage and have experienced management teams who have operated through cycles,” he affirms.
pulled out rapidly in terms of lending to SMEs, which caused that market to really suffer,” he explains. “People who survived that period and have grown their businesses are looking at that and saying,
businesses and the P2P industry. While savers are yet to see the benefits of the 0.25 per cent interest rate hike in August which brought the base rate up to 0.75 per cent, Patel believes the attractions of
“ Our focus is to create an industry which makes investing easy to access and easy to use ”
P2P platforms are unlikely to diminish in the future. “Businesses are coming to the P2P or alternative finance space not only for the cost of finance, but also the ease of accessing finance, processing and dealing with alternative finance platforms,” he says. “That demand will remain. “On the investor side, as spreads narrow [between government and corporate debt], it might be that some rates start to push up on the alternative finance side.” In late July, the Financial Conduct Authority (FCA) put forward a number of
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investors and borrowers alike,” he asserts. “A large part of this is about ensuring transparency, so that the basic ethos of P2P lending – to create a direct relationship between borrower and lender – can be preserved.” In light of the proposals, Patel believes that
between the lender and borrower. So in that sense we think there are less areas the FCA could target for our model. “My other concern is the reputation of the industry. “In the future, we might have a platform go under – and that is always a worry.” Although the vast
Crowdstacker remains in a strong position, given that several of the items mentioned by the FCA (including an appropriateness test) are already part of the company’s existing processes. Looking ahead, the entrepreneur expects to see tighter regulation, but hopes that the FCA can avoid adopting a “one-size fits-all” approach. “Our model is much simpler, so I’d hope that a certain amount of future-proofing has already happened,” Patel says. “For example, we are not making any lending decisions on behalf of investors and there is a direct connection
majority of platforms do a good job, he says a small minority could let the side down. With the Seedrs crowdfunding campaign well under way, what is the future likely to hold for Crowdstacker? “We want to accelerate the business,” Patel states. “We are doing around £20m per year in terms of investment and that is growing. We want to be doing £100m to £200m by 2021. “This is an exciting moment for us as a business. We are raising funds and that is going well. The next stage of our growth will be more of the same, but also some different things coming through the pipeline.” With its big growth ambitions and plans to expand across the ISA market, Crowdstacker may not remain one of the smaller P2PFA members for long.
“ This is an exciting moment for us as a business ”
proposals concerning the regulation of the growing P2P industry. Suggestions included only making P2P lending available to sophisticated investors or high-net-worth individuals who are fully aware of the risks, that investors should be limited to investing a maximum of 10 per cent of their net
investible portfolio in P2P, and imposing marketing restrictions. Patel welcomes any moves by the FCA to ensure regulation is kept up-to-date and relevant. “Our focus, like our colleagues in the P2PFA, is to create an industry which makes investing easy to access and easy to use, for
Future focus: Crowdstacker’s three-year targets ◆
Grow members from 7,900 in 2018 to 30,000 in 2021
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Increase amount raised from £50.1m in 2018 to £300m in 2021
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Repay £70m in capital and interest by 2021
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Grow revenues to £9m by 2021