P2P NOT TO BLAME FOR DEBT CRISIS
P2PFA chair Christine Farnish speaks out IFISA SPECIAL REPORT
Our update on the transformational tax wrapper
Funding Circle’s Samir Desai on his global ambitions >> 22
ISSUE 14 | NOVEMBER 2017
Checkmate over IFISA data
HMRC is facing claims that it is understating the popularity of the Innovative Finance ISA (IFISA) and displaying a lack of urgency in responding to contradicting figures. In August, the taxman released data which showed the IFISA took £17m in subscriptions, equating to 2,000 accounts, in its first tax year since its April 2016 launch. Even though the ISA tables only account for new money, not transfers, separate figures announced by the providers themselves have contradicted this. Ethical peer-topeer bonds platform Abundance claims it was the biggest IFISA provider of the last tax year, having seen 1,436 IFISA accounts opened, equating to a total investment of £10.5m. Abundance said that £2.8m of its £10.5m figure was from ISA transfers, giving it £7.7m of new subscriptions for the 2016/2017 tax year. But Crowdstacker also
claims it was the biggest, with £15.6m taken over the tax year across 1,548 IFISA accounts, £6.5m of which was transfers. This suggests the P2P business lender had £9.1m of new ISA subscriptions. Just the numbers from these two platforms alone takes new IFISA subscriptions to £16.8m, close to HMRC’s figure of £17m, and shows a total of 2,984 accounts, already
above the 2,000 claimed by the taxman. This also leaves little room for the other players who were in the market at the time. Business lender Crowd2Fund claims 983 individuals opened accounts in the 12 months to March, while Lending Works says it had 815 investors providing £9m. Property P2P lender Landbay says it took
£1.7m, although none have provided a breakdown of how much was transfers or new subscriptions. Confusingly, HMRC says its figures are compiled from the companies’ submissions, raising questions about where the discrepancy emanates from. One source told Peer2Peer Finance News that a government official had >> 4
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t is a good time to look back on the progress of the Innovative Finance ISA (IFISA), now that it has been existence for just over a year and a half. The providers already in the market have done a great job of kicking off the IFISA story and as our special report on page 14 shows, we’re just at the beginning. Interestingly, while the big three platforms will have a substantial impact on the IFISA market, they’re in no rush. Zopa has launched its wrapper purely to existing investors, while Funding Circle and newly-authorised RateSetter have said they plan to launch their IFISAs in this tax year. Bearing in mind that Lending Works’ IFISA received £1.5m in just 24 hours in February, perhaps they are right in being a little cautious about managing the influx of funds. With interest rates so low, cash ISA transfers are likely to be a key driver of IFISA uptake in the coming years, even if the Bank of England does bring the base rate up a notch. When the better-known firms do get going with their IFISAs, it will undeniably benefit the industry as a whole, by widening its customer base and boosting awareness. 2016 was the year the IFISA launched, 2017 was the year it gathered momentum, will 2018 be the year it truly hits the mainstream? I certainly hope so.
SUZIE NEUWIRTH EDITOR-IN-CHIEF
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“shrugged” when they had raised the disparities over the IFISA numbers. The source expressed frustration over HMRC’s lack of urgency over the issue. Another industry source said they had held back from raising the contradictory figures with HMRC through fear of damaging their relationship with the government department. In the case that providers have got their figures wrong, they could be
exposed to burdensome HMRC audits and penalties of up to £3,000. "It is less likely that HMRC has its numbers wrong as HMRC bases its numbers on the annual reports provided by platforms,” Jake WombwellPovey, chief executive of Goji, which provides administration for some IFISA providers, said. “I think it is much more likely that platforms have reported their numbers incorrectly.
“Ultimately we won't know unless HMRC does an audit of IFISA managers. From what we have seen, some platforms have less robust systems than others, so I think platforms should be careful what they wish for. “If they shout too loudly, HMRC may well undertake quite substantial platform audits and that will be both time consuming and potentially financially painful
if platforms are not administering IFISAs to the standards HMRC expects." HMRC insists its figures are accurate and says they are based on figures that ISA managers provide when they submit returns to the taxman in June. “HMRC is committed to publishing accurate information, if we receive any updates from ISA providers, we will revise these statistics as quickly as possible,” an HMRC spokesperson said.
Corporates use P2P for cash management
BUSINESSES are starting to see the benefits of peerto-peer platforms for cash management. Lending through a limited company has become a way for investors to earn interest on money usually left sitting in a business account. “The corporate lenders are using our kind of P2P as part of cash management, as they can
earn interest on balances that they couldn’t get at the bank,” said Michael Lynn, chief executive of bridging and development P2P lender Relendex. “Obviously it is a different risk profile. “If you are lending on secured assets and there is a secondary market where you can dispose of your holdings if you need cash, then there are advantages.”
Lynn added that there are other benefits of investing through limited companies such as the business relief inheritance tax exemption that reduces the value of a business or its assets in a deceased person’s estate. However, there are certain criteria and firms that purely engage in investing or lending are not eligible. “It is all part of tax planning,” he said. “Using a limited company means you can keep the money in a corporate bucket and decide when you take the income and have
to pay tax.” Other P2P lenders such as Funding Circle, Zopa, Landbay and LandlordInvest also accept limited companies as investors, subject to certain conditions. In most cases they must not be set up specifically to lend money. However, there are downsides to lending through a corporate structure. “Lending through a company does have tax implications and other implications such as the requirement to file accounts with Companies House and may therefore increase the administrative burden,” said Filip Karadaghi, co-founder and chief executive of LandlordInvest. “Also, a company cannot open an ISA account as only individuals can open an IFISA.”
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Capital invested in bonds is placed at risk and interest payments are not guaranteed. Investors should note that it could take the time it takes to liquidate an asset held as security, such as selling a property, in order to get money back at an acceptable price. Basset & Gold Limited is an appointed representative of Gallium Fund Solutions Limited, which is authorised and regulated by the Financial Conduct Authority.
Crowd2Fund: The IFISA pioneer
Chris Hancock, founder and chief executive of business lending platform Crowd2Fund, explains why the Innovative Finance ISA is going from strength to strength
rowd2Fund is proud to have provided tens of millions of pounds in much-needed debt finance to hundreds of fastgrowing small businesses here in the UK. By connecting innovative companies with likeminded investors, we aim to enrich the experience of investing and fundraising for everyone, thus enabling businesses to grow by nurturing collaborative relationships. A key component of our success has been the Innovative Finance ISA (IFISA). We were one of the very first platforms to become IFISA approved and have been offering the tax-free product since April 2016. Recent data from HMRC showed that 2,000 IFISAs were opened in the last tax year, with a total of £17m invested across all providers. Since our launch in
the last quarter of 2014, more than £10m has been invested in Crowd2Fund’s IFISA, which represents a significant proportion of the entire market. IFISA investments into the platform since January 2017 have increased exponentially, with 28.5 per cent monthon-month growth. 983 of the individuals who opened up an IFISA in the last tax year did so through Crowd2Fund. The appeal of our IFISA product is enhanced by the competitive 9.2 per cent average annual rate of return and no defaults to date. In contrast, cash ISAs currently offer returns of around one per cent, which is likely a key factor in why millions of pounds have been transferred from existing ISAs into Crowd2Fund’s IFISA. This trend is set to accelerate, considering that recently-released data showed cash ISA investments are falling by a third year on year. With the big three peer-to-peer lenders not offering manual lending options, we believe that individuals are being drawn towards Crowd2Fund due to the
ability to choose their investments. People can specifically invest in businesses and sectors in which they have an interest and build a portfolio that matches their own risk appetite. So far, 189 businesses across a diverse range of sectors including retail, clothing and manufacturing have received funding from private investors on Crowd2Fund. Another advantage that Crowd2Fund offers is liquidity through its secondary market. The Exchange widens the choice of projects for individuals seeking to use their tax-free IFISA allowance, whilst enabling existing debt investors to sell their funds. On the Exchange, the prices of loan parts are set by the sellers. This means that the more competitive the price is, the faster the debt is bought. Businesses which have a history of successful repayments are sometimes sold at a premium and allow sellers to bank profits. The popularity of Crowd2Fund’s IFISA offering is growing at a rapid rate. Volumes have
increased by 215 per cent in the five months to August 2017 and September was another record-breaking month. Whilst this data is encouraging, it is just the tip of the iceberg. In 2016, the total amount of funds invested across all ISA products was £61bn, with the IFISA representing less than half a per cent of that amount. Looking ahead, the IFISA’s popularity is like to increase across all providers, as investors realise the generous returns on offer outstrip cash ISAs and that the product is less risky than stocks and shares ISAs.
The popularity “of Crowd2Fund’s IFISA offering is growing at a rapid rate
Furthermore, investors on platforms such as ours can enjoy the added benefit of supporting the economy at the same time. By building a fairer, more accessible financial system, we aim to deliver generous returns on investments, whilst helping to strengthen the British economy from within.
P2P lenders are not to blame for debt crisis THE UK’S ongoing consumer debt crisis is not the fault of alternative lenders, according to the ex-regulator at the head of the Peer-to-Peer Finance Association (P2PFA). Speaking exclusively to Peer2Peer Finance News, P2PFA chair Christine Farnish (pictured) said that it was wrong to link skyrocketing levels of consumer credit with the rise of peer-to-peer lending and instead pointed the blame at high street banks. However, she warned P2P lenders that the high-profile topic only proves that they must be “absolutely scrupulous about their operating.” “It is a high-profile issue at the moment and
there have been some things going on out there - particularly among bank lenders and the car industry but maybe some alternative lenders as well,” said Farnish. “It does need looking at. “The important thing for P2P lenders is to be absolutely scrupulous about their operating. It’s something that we don’t major in at the moment so it will be interesting to see if the Financial Conduct Authority (FCA) might cover this.” Earlier this year, the FCA revealed that unsecured consumer credit had hit £200bn for the first time since the global financial crisis. According to the FCA’s
chief executive Andrew Bailey, this comprises £68bn of credit card debt, £58bn in motor finance, £15bn in various forms of higher cost credit, and £7bn in overdraft credit. The rest is mostly unsecured personal loans. In response, the Bank of England’s Financial Policy Committee said that the rapid growth of consumer credit was “a pocket of risk” in an otherwise benign domestic credit environment, and warned that banks could face bills of £30bn as a result of loan defaults. “I don’t think it's specific to alternative lenders at all, but I think the regimes do need to tighten up elsewhere in the market,”
said Farnish. “I really don’t think that P2P lenders are the culprits here. It’s the mainstream lenders that have perhaps been too relaxed about some of their products and we need to get the evidence and get the facts out there.”
Brexit will benefit us, says Twino chief
BREXIT may be causing uncertainty in the UK but the chief executive of one of continental Europe’s biggest peer-to-peer lenders is excited by the prospect. Jevgenijs Kazanins, chief executive of Latvia-based consumer lender Twino,
says Brexit will be good for his business as it may delay betterknown brands such as Zopa or RateSetter expanding across Europe. “Brexit is good for us,” said Kazanins. “Before this there could have been bigger players coming from the UK. “It would have been easier for Zopa or RateSetter to scale up as they have a big platform behind them and
Zopa has gone through securitisations. They are ready for scaling across Europe but with Brexit it is more of a challenge for them.” The P2P platform funds personal loans across Europe in countries such as Poland, Russia, Georgia and Kazakhstan and has proved popular with UK investors, although it does not originate loans in the UK. The platform has funded €200m (£177m) of loans since launching in 2015, backed by 10,000 investors,
with interest rates of around 11 per cent. Currently, the platform is not regulated as there is no such regime in its headquarters of Latvia. However, Kazanins says he would welcome a regulatory regime. “There are plans for regulation in Latvia,” he said. “The trouble is working out a pan-European system as every country has a different approach to consumer lenders and there is no passporting system like you have with banking.”
Open banking set to benefit P2P lenders OPEN banking could bring benefits for the peerto-peer lending sector by opening up information about borrowers’ creditworthiness and creating new product opportunities, it has been claimed. Banks will have to share their customer data with other firms, including alternative lenders, when a European directive the Payment Services Directive II - comes into effect next year. The UK’s Competition and Markets Authority is pushing through similar
legislation, referred to as open banking, will which enable third party providers to view transaction information and use it to recommend other bank accounts and loans to consumers and small businesses. Speaking at the LendIt Europe conference in London in October, Zopa’s chief product officer Andrew Lawson said the legislation would create new product and customer validation opportunities in addition to opening up data on pricing.
Paul Riddell, head of marketing and communications at Lendy, said it is too early to predict how exactly P2P platforms will benefit, but the ability of the sector to innovate and find solutions where traditional banks have struggled means it has “a strong future”. He added: “Even though we are still awaiting a final workable framework, the revised policy statement from the Financial Conduct Authority does give alternative finance disrupters valuable
clarification on its vision of implementing what we believe will be an open banking revolution.” Bruce Davis, co-founder and managing director at Abundance, said open banking may be harder to implement in the investment-based P2P space than in the loan space because the former requires appropriateness tests and an investment in specific projects. But he said integrating the full range of products is important because UK consumers are “still overexposed to cash”.
ETHLend raises £450,000 in token pre-sale
ETHLEND, the cryptocurrency-backed peer-to-peer lender, has raised $600,000 (454,862) in a pre-sale of tokens that can be used to pay admin fees for the transactions, with two borrowers already posting investment opportunities. The P2P platform, founded by Finland-based
Stani Kulechov, funds business and personal loans in the Ethereum digital currency. “With the use of cryptocurrencies and blockchain technology, a borrower in UK is not restricted to local banks and P2P lenders,” Kulechov said. “Instead, the borrower can place a loan request, which can be funded from any part of the world. Such global liquidity pools might pressure the interest rate on local lending markets and additionally create more opportunities for local lenders to fund loans abroad.
“All data is stored in the distributed ledger, which means that the system is more resistant to security vulnerabilities and human error compared with traditional P2P lending platforms, which are open to server attacks and human error or fraud.” Borrowers post other digital currencies as collateral as well as paying interest on the loans. For example, one borrower is currently seeking 0.5 Ethereum or 0.5ETH, worth £121 as of 17 October, and will pay a premium of 0.1ETH, or £25. They are putting 250 Dogecoin, worth £0.20,
down as collateral. Ethereum is worth more than Dogecoin, with 1ETH worth £242, so the borrower is getting cryptocurrency that is worth more while the investors makes money back from their share of the 0.1ETH premium, and the Dogecoins, plus any increase in value of these digital currencies. The platform is being expanded through an initial coin offering, which started with a pre-sale that met a 2000ETH limit within 77 hours, with LEND tokens going on full sale between 25 November and 9 December.
Using your assets
Brian Bartaby, founder and chief executive of peer-to-peer property lender Proplend, explains why investors are flocking towards the platform’s Innovative Finance ISA
RIAN Bartaby had been raising finance for property investors and developers for more than a decade before he launched Proplend, so he knew better than anyone that there was a gap in the market for commercial real estate investments under £5m. “I was at the coal face during the financial crisis, when the banks retreated from the sub-£5m commercial property market and left a vacuum,” Bartaby recounts. “That segment makes up almost a quarter of the commercial real estate debt market in the UK, so it’s a significant part of lending.” With this in mind, Bartaby saw an opportunity to provide much-needed funding to commercial property owners, while offering attractive returns to investors desperately looking for yield. Launched in 2014, Proplend enables lenders to fund commercial property investments, separated into three risk tranches based on different loans-tovalue (LTV). The lowest risk is tranche A at zero to 50 per cent LTV, tranche B is 51 to 65 per cent LTV and tranche C is 66 to 75 per cent LTV. Investors can enjoy returns ranging between five and 12 per cent, now with the option of tax-free earnings from the Innovative Finance ISA (IFISA). Proplend launched its wrapper to pre-registered investors in May and to new investors in August. “It’s a flexible ISA, so people can
withdraw money and put it in again within the same tax year,” Bartaby says. “This is an important function that our lenders are already making full use of.” Savvy investors are already wising up to the attractions of the IFISA. 67 per cent of new accounts funded since Proplend's IFISA launch have been ISA accounts, with 45 per cent of funding coming from ISA transfers. “The IFISA is a really interesting market for us and for any platform,” remarks Bartaby. “There’s around £260bn of cash sitting in cash ISAs and around £240bn in stocks and shares ISAs, of which 40 per cent may be sitting in cash as investors are unsure what to do. “Now cash ISAs are paying around one per cent and people are desperate for yield. “So this is money that people have already allocated within that ISA wrapper. The ability to earn decent, tax-free returns on that money is very compelling.” The platform’s data shows that its IFISA investors have been attracted to lower-risk investments, with 79 per cent opting for tranche A since launch, 14 per cent choosing tranche B and seven per cent opting for tranche C. With this in mind, a new product is on the horizon. Proplend purely offers manual lending at the moment but is planning to launch an auto-invest product for its least risky tranche A
loans, offering target returns of five to 5.5 per cent. As well as attracting investors directly with the IFISA, Proplend has been working with wealth managers to facilitate investments from individuals looking to take advice. Proplend Wealth is an online portal for advisers and wealth managers, enabling them to register, monitor and provide advice to their clients on their Proplend investments. “We sat down with some local wealth managers to discuss how they could engage with P2P as their clients were asking about it,” says Bartaby. “We’ve built something that works, as those wealth managers have now put about £3.5m through the platform into loans and continue to invest on behalf of their clients.” With larger platforms starting to launch IFISAs and a raft of rivals out there, what does the future look like for Proplend and for the wider P2P sector? "We believe the future is bright there's a lot of ISA money out there for healthy competition, particularly considering investors will be looking to diversify across platforms,” affirms Bartaby. “With the FCA raising concerns over the levels of unsecured consumer debt, we believe platforms like Proplend, offering more stable and reliable returns from asset-backed lending, are well placed.”
A suit for all seasons Raja Daswani, the head of Hong Kong bespoke tailor Raja Fashions, reveals the winter trends among his UK clients
ITH summer in England firmly behind us, it’s no surprise that coats and jackets have been high on the list among Raja Fashions’ customers here in the UK. The Hong Kong-based tailor, which counts the UK as its largest market, has been touring the country over the past couple of months to meet with customers looking to update their winter wardrobes. “Generally speaking, people start buying their winter clothes from September onwards because the whole process takes four to six weeks,” explains Raja Daswani, the head of Raja Fashions. “So if they buy in October they can receive the item in December, but people often tend to purchase their winter garments earlier. “At the moment people are buying coats and jackets. We sell a lot of heavy tweed jackets in the UK at this time of year.” Raja Fashions has customers all over the world, attracted to the tailor’s selection of designer fabrics and bespoke garments at highly competitive prices.
With 20,000 fabrics to choose from - including designer textiles from the likes of Holland & Sherry and Ermenegildo Zegna in a vast range of colours, even the pickiest customer would be satisfied. “Demand has been increasing more and more quickly, because people are aware that it’s often cheaper or the same cost as buying a suit in a department store,” Daswani explains. “So why buy readymade when you can buy something that’s customfitted to your size and looks better?” Bespoke suits start at £350 for lightweight fabrics and £435 for 100 per cent wool. Raja Fashions’ premium suits go up to £2,500, but the same garment could cost £12,000 on Savile Row, the tailor explains. Raja Fashions is also promoting several special offers at the moment. Customers can buy two suits and two shirts from £580, six shirts or blouses from £298 and a bespoke suit with fabric by Ermenegildo Zegna from £850. The biggest demand for Raja Fashions’ bespoke
Why buy ready-made when you “ can buy something that’s custom-fitted to your size and looks better?”
items in the UK comes from London, although interest is growing in other parts of the country such as Manchester, Birmingham and Cardiff. When it comes to style, it completely depends on the individual, Daswani says, although he has noticed some UK-specific trends. “Our younger customers in the UK like a very tailored look with narrow trouser bottoms,” he says. “But when it comes to lawyers and bankers they want a more traditional silhouette, with a slightly less fitted look. “And women in the UK often opt for trousers too as it’s cold. “The winter colours are
very popular right now – grey, black and navy.” Bespoke tailoring is not limited to three-piece suits, Daswani adds. Sports jackets or trousers are often bought on their own, while other customers come in for cashmere wool coats. “Shorts to trousers to waistcoats, you don’t have to buy a whole suit,” he says. “People are learning that they can buy a wide variety of outfits that are tailor made.” Visit Raja Fashion’s website at www.rajafashions.com or email email@example.com to book an appointment. Hong Kong main shop: 34-C Cameron Road, G/F, TST, Kln, Hong Kong.
Platforms warned to shape up on fee transparency PEER-TO-PEER lending platforms have been urged to adopt a more transparent approach to the way they charge fees, or else face the prospect of being compelled to do so by the regulators. Neil Faulkner, cofounder of independent P2P ratings agency 4thWay, said that while P2P lending has broken boundaries in terms of its transparency in many areas, costs are not one of them. “Most P2P investors are told that their investing is ‘fee free’ or even that investing is ‘free’,” he said.
“Any slice of that which gets diverted to the platform reduces the investors' returns and is therefore a cost. Virtually the entire industry fails to disclose the full cost or indeed the bulk of the cost in P2P lending. “Platforms usually state the average interest rates that lenders are getting, but not the average borrower rate. Any headline borrowing rate that they advertise - the ‘typical’ borrower APR - is usually supposed to incorporate all arrangement fees. “But the typical APR advertised is usually the
“The truth is that investing is never free.” One of the most common ways platforms are accused of concealing their fees is in the ‘spread’ between the interest rates charged to borrowers and those then passed onto investors. “It is the investor who lent the money to the borrower, so the investor earns the interest,” said Faulkner.
lowest rate offered to their borrowers, rather than the average. It is therefore not informative to lenders.” While the spread is one of the more opaque ways in which platforms make money from investors, there may be other more explicit fees in place. Many platforms offer investors the opportunity to sell on an individual
investment to other users via a secondary market, though this will often incur a fee. This is an area which has seen a fair bit of change of late. For example, LandlordInvest has cut secondary market fees from 0.5 per cent to 0.25 per cent, after trialling removing the fees entirely, while RateSetter has streamlined the two fees secondary market sellers had faced into a single ‘transfer fee’. A spokesperson for RateSetter said that the firm had seen the opportunity to “simplify an important feature of our service for lenders”, and added: “We know that lenders value the ability to access their funds early – we always make clear this is subject to there being sufficient liquidity in the market – and to date, £240m has been accessed early via our secondary market.” Holding investments within an Innovative Finance ISA wrapper may also bring additional fees, depending on the platform. With Folk2Folk for example, if an investor placed their entire £20,000 ISA allowance for that tax year in an investment with the platform, they would incur a £240 tax wrapper fee. Another cost of investing – albeit not a fee exactly – is cash drag. This is when investors have money in their account with the platform which is not yet
being lent out. In other words, it is money that is not actually doing anything, failing to deliver the investor any form of return. Cash drag becomes an issue when a platform sees interest from investors outweigh that from borrowers, leaving investors unable to place their money in loans. A high-profile example here was Zopa, which elected to stop accepting new money from retail investors at the end of 2016. While no platform is able to outline cash drag costs explicitly, investors can get an idea of whether they are likely to struggle to place their cash with particular platforms by monitoring P2P investor forums and social media. Faulkner argued that platforms are entitled to charge fees for the work they do, and that on the whole the fees charged by platforms are reasonable, which raises the question of just why they aren’t more transparent. “Considering traditional, old-school investments are still plagued by precisely the same problems after many decades, the only solution appears to be for the regulator to force full cost transparency on the platforms,” Faulkner concluded. “They could not then complain about commercial issues, because it would be a level playing field.”
A cut above
Uma Rajah, co-founder and chief executive of online property finance marketplace CapitalRise, explains the importance of quality when considering real estate investments
T MIGHT sound cliché, but the number one thing you have to look at with property is location, location, location,” affirms Uma Rajah, cofounder and chief executive of online property finance marketplace CapitalRise. With members having access to investment opportunities in prestigious London addresses such as Eaton Square, Grosvenor Square and Yeoman’s Row, this is clearly a rule that CapitalRise lives by. “Our members benefit from the select and impressive calibre of properties we offer,” says Rajah. “We only consider prime and super-prime locations and our expert team conducts stringent due diligence on every project.” As well as feeling assured of the quality of the properties, investors
can feel confident in the experience of the team. Two of the co-founders – Alex Michelin and Andrew Dunn – are veteran property professionals who also founded the successful luxury property firm Finchatton in 2001 and have a billion dollars’ worth of projects under their belt. Rajah, who has a strong background in fintech and engineering, was brought in by Michelin and Dunn in December 2015 to launch the CapitalRise platform, as “they had an incredibly deep property knowledge but wanted a fintech expert to help bring their ideas to fruition,” she explains. With the team in place, CapitalRise has set about connecting institutional and individual investors with what it describes as institutional-grade property. To date CapitalRise has funded projects with a total gross development value of £160m, and this is expected to continue to rise rapidly over the next twelve months. Loan-to-value ratios on developments have so far fallen in the conservative range of 61 per cent to 67 per cent. The proposition for
investors is incredibly appealing, particularly in an era of historically low interest rates. They do not have to pay any fees and investors are currently earning returns between 10 and 11.5 per cent per year, with loan terms typically one-and-a-half years long. “Demand on the investor side has been really amazing with very little marketing – it’s mostly been through referrals and word of mouth,” says Rajah. “We believe this is due to the unique calibre of our investments, coupled with the attractive risk adjusted returns. We have a priority list of individuals and organisations who have preregistered with us so they can be first to hear about our next opportunity.” Furthermore, investors can benefit from tax-free earnings as CapitalRise launched its Innovative Finance ISA (IFISA) in March. “If you’re offering the sort of returns we are, as well as being able to offer them tax free, that makes them incredibly attractive,” Rajah explains. “An added benefit of our IFISA is that our investments are asset
backed. Having worked in the unsecured consumer and small business lending space, I think what makes property investment platforms particularly appealing is that the investment is secured against a physical asset.” Unsurprisingly, CapitalRise’s IFISA has seen strong uptake so far. 65 per cent of its investors were using the taxfree wrapper on the platform’s last project, with a third of those using CapitalRise’s transfer-in facility that takes the hassle of administration away from investors. “The IFISA has been incredibly popular, bearing in mind that public awareness of the product is still relatively low,” comments Rajah. “We’ve had so many people transferring in cash ISAs or stocks and shares ISAs where they were getting mid-singledigit returns at most, who are now getting 10 per cent returns or more tax-free.” With enviably high returns on enviably prestigious properties, investor interest in CapitalRise looks set to continue. “There’s a huge opportunity here for alternative lenders and a great appeal for investors looking for yield,” adds Rajah. “It’s an enticing proposition for many people.”
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IFISA SPECIAL REPORT
The golden ticket
The Innovative Finance ISA may have got off to a slow start, but its potential for the peer-to-peer lending industry is immense. Marc Shoffman delves into the past, present and future of the tax wrapper
HE INNOVATIVE FINANCE ISA (IFISA) has been heralded as the peer-to-peer lending sector’s passport into the mainstream. Savers and investors may not get the various levels of Financial Services Compensation Scheme protection afforded to traditional products, but the tax wrapper provides an air of respectability to a sector often painted as niche and risky.
But the IFISA got off to a slow start due to the lengthy authorisation process of many major platforms, so what does the future look like for the product and its providers? The IFISA was first mentioned by George Osborne in his July 2015 Budget. Much fanfare followed, with the sector’s biggest platforms such as Zopa even going as far as detailing the tax-free rates
they would offer ahead of the wrapper’s eventual launch in April 2016. However, regulation of P2P was at the same time being transferred from the Office of Fair Trading to the Financial Conduct Authority (FCA) and noone could have predicted the arduous authorisation process that followed. This left established players such as Zopa and Funding Circle waiting in the wings as the regulator
assessed their hefty business models, meaning that only a handful of platforms were able to launch their IFISAs in April 2016. Bigger P2P players were therefore absent in the IFISA’s first year and the product garnered just £17m subscriptions and 2,000 accounts in the 2016-17 tax year, a tiny intake compared with 8m cash ISAs and 2.5m stocks and shares ISAs opened
IFISA SPECIAL REPORT
When fellow platforms open up new IFISAs, “ this will create additional awareness for the product which in turn will drive increased take-up” in the same year, valued at £39bn and £22bn respectively. Since then, bigger names like Zopa and Funding Circle have finally received authorisation, potentially attracting more attention – and volumes – to the IFISA market. However, the early providers are feeling confident despite the increasing competition. One of the first platforms to come to market with an IFISA was Crowdstacker. The secured business loans platform launched in June 2015 so was not on interim permissions – the approvals given to platforms that existed before the FCA took over regulation in April 2014 – so got full authorisation in time to launch its product in April 2016. The platform attracted £15.6m across 1,548 IFISA accounts in the last tax year, of which £6.5m was transfers. “Uptake of the Crowdstacker ISA has remained steady since we launched it at the start of the 2016-17 tax year,”
says Karteek Patel, chief executive of Crowdstacker. “It has proven very popular with those opening new ISA accounts, but also those transferring money in from other types of ISAs they have opened in previous years.” Crowdstacker claims to have been the biggest beneficiary of IFISA season, but strangely so does ethical P2P platform Abundance with £10.5m, of which £2.8m was transfers. As our front page news story indicates, HMRC insists its figures are accurate and says they are based on figures that ISA managers provide when they submit returns to the taxman in June. Whoever was the biggest player last year, Abundance is pretty confident about its future. “About 50 per cent of the money invested with Abundance is through an IFISA account,” Bruce Davis, co-founder of Abundance, explains. “We expect to raise £40m to 50m in the 201718 tax year, up by 100 per cent on the previous year,
so hope for continued strong investment flows from ISA customers to support that.” The disparity over the reported numbers isn’t the only issue that P2P firms would like HMRC to address. There have also been calls for the taxman to handle how IFISA repairs – where investors go over their allowance – is handled, as well as questions regarding defaults and what happens following the death of an investor. Goji, which provides administration for several P2P platforms’ IFISA offerings, has been involved in the debates. Jake Wombwell-Povey, chief executive of Goji, says there hasn’t been any feedback from HMRC yet. But while the taxman ponders this, WombwellPovey says P2P lenders will have other challenges to face, such as providing liquidity for any IFISA transfers as well as preparing for competition from bigger players. “Undoubtedly competition will increase,
but P2P is still very much a new, growth market and attracting new investors will be where the battle lies,” he explains. “Equally, different lending platforms appeal to different types of investors so not all platforms are competing like for like, especially for existing investors. “There are hundreds of billions of pounds sat in cash ISAs earning close to nothing. Goji has seen with its own ISA administration platform that around 80 per cent of transfers have come from cash ISAs. “I think many platforms will be judging success by their own standards and will be looking to secure substantial assets under management relative to their own loan book and obviously that is important in balancing the supply and demand of a platform.” In February, Lending Works became the first larger platform to launch an IFISA. It closed its product temporarily after just 24 hours due to “unbelievable demand” from investors, which saw
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IFISA SPECIAL REPORT
Different lending platforms “appeal to different types of investors so not all platforms are competing like for like
around £1.5m transferred into the product. “We didn’t want to take in £10m and leave the money waiting to be matched, or lower rates or credit criteria to lend the money out,” Matthew Powell, director at Lending Works, told Peer2Peer Finance News at the time. The platform ended up attracting £9m in the last tax year. Meanwhile, fellow Peer-to-Peer Finance Association member Landbay – which launched its IFISA later in February – saw £1.5m come in between February
and April alone. Rather than worrying about competition, Landbay’s Julian Cork insists it will be positive for the sector once more big platforms launch their own products. “As and when fellow platforms open up new IFISAs, this will create additional awareness for the product which in turn will drive increased takeup,” Cork says. “We are still at the innovator stage of the adoption curve, so there is huge potential for us in the ISA market, and plenty of space for multiple players to address the appropriate risk/return
profile of our investors.” This was sentiment shared by others including Crowdstacker. “There are hundreds of ISA opportunities, not just the IFISA, already marketed by very large providers, some very small providers, and those in between,” Patel says. “Each offers their own advantages. There’s no doubt an ISA is a great way for people to save and invest in a tax-efficient way, so the breadth of choice can only be a good thing for investors seeking to diversify the ways in which they grow their money.” Abundance’s Davis also highlights the various
offerings in the P2P space, from business, property and personal loan platforms, compared with a traditional ISA. “It is a very diverse sector with each platform offering different products and benefits,” he adds. “Unlike the high street banks, we don’t all sell the same vanilla choices. Investors need to shop around for the products which suit their needs.” Big three platforms Zopa and Funding Circle have taken a different approach to other platforms before launching, as they anticipate strong demand from investors.
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IFISA SPECIAL REPORT
opa has only opened its IFISA to existing customers, while Funding Circle has said it will wait to launch once the balance of supply and demand is right on the platform. But, while there may be appetite from investors, can the demand be met on the borrower side in the P2P market? Landbay again is not concerned. “We operate in a £35bn to £40bn market,” Cork says. “Within the buy-tolet sector, we operate at the specialist end which, following regulatory changes, will be less well served by incumbents. “Landbay has strong origination volumes via our intermediary partners and our fully scalable platform is ready to meet increased demand. It’s also worth bearing in mind that buy-to-let loans are typically much longer tenure than some other asset classes within UK P2P, so we don’t need to originate nearly as often as some of our peers.” Crowdstacker’s Patel puts it more simply. “Businesses will always need to borrow, and investors will always want to invest,” he asserts. “Platforms just have to continue to bring together both parties in a mutually beneficial manner. “Whether they use P2P loans, bonds, or loan notes, all can be held in an
The benefit of those allowances and “ tax wrappers all depends on the investor’s personal tax position” IFISA. The key is to offer the right structure to suit the borrowing business, whilst also offering the best investment options for investors.” The IFISA of course isn’t the only route that P2P investors can use to gain tax-free income. There is already the personal savings allowance of £1,000 – or £500 for higher-rate taxpayers - and the option to put P2P loans in a selfinvested personal pension. Wombwell-Povey says all these choices form part
of the decision-making process for investors. “The benefit of those allowances and tax wrappers all depends on the investor’s personal tax position,” he explains. “For example, they may already have insufficient personal savings allowance, such as if they are an additional or higher-rate tax payer with rainy day savings, have large cash ISAs earning little interest or have maxed out their lifetime allowance on a pension - all of those scenarios
make an IFISA potentially attractive. “It comes down to financial planning 101 in a way - what are the investor’s wealth objectives, what is their risk profile, what are the tax wrappers available to them...then we can start to think about asset allocation.” The IFISA may have got off to a slow start but it looks like the investor will only benefit from the extra choice, through whatever means they invest, as momentum gathers pace.
A rewarding opportunity Nigel Hackett, director at property-backed peer-to-peer lender FundingSecure, details the recent changes in the P2P market following the introduction of the Innovative Finance ISA
undingSecure was the first peerto-peer platform to offer loans secured against property and one of the first to offer tax-free investments through an Innovative Finance ISA (IFISA). When FundingSecure first started, we were the only peer-to-peer platform offering fully secured loans. Initially our focus was on assets such as jewellery, luxury vehicles, artwork and collectibles. This rapidly expanded and we became the first P2P platform to include short-term bridging loans secured against property, in order to meet the needs of borrowers and to satisfy our growing investor base. In April 2016, the UK government launched the IFISA. Although targeted primarily at the P2P market, there were very few products on the market at the time of launch. This was mainly due to the prerequisite of full Financial Conduct Authority (FCA) authorisation, rather than interim permission, which most platforms had. The FCA had initially focussed on authorisation of the personal loan space, particularly payday lenders, as it felt this area was in urgent need of revision. Only when the focus turned to the P2P sector did firms start to become fully authorised, with FundingSecure being one of the first. In April this year, within three weeks of becoming FCA authorised, we launched our IFISA. While we expected an increase in the level of
investments from existing members, we were pleasantly surprised at the number of new investors who joined us over the following months, primarily through word of mouth from existing members. In the past there was an element of the unknown for many potential P2P investors, with many waiting to see how the industry developed before taking the plunge. However, with increasing public exposure, particularly following the launch of IFISA products, individuals are increasingly looking towards the sector. In some ways the advent of the IFISA has legitimised P2P platforms, spurred on by the continuing low interest rates
completed loans to date, the actual interest rate (net to investors) has equalled 13.2 per cent per year. In order to diversify their portfolios quickly, we have also seen a massive increase in purchases through the secondary market – deals equate to over £8m per month, more than twothirds of which relates to IFISAs. This allows new investors to start earning interest straight away and ensures existing investors are able to diversify their current holdings. As word spreads of the potential taxfree earnings that people can enjoy, we are seeing the above trends continuing – with no reduction in the number of new
available elsewhere. The returns offered by the platforms, such as ours which range from 12 to 13 per cent, are even more appealing when compared to the two to three per cent offered by cash ISAs. Although investing in IFISAs is not risk-free, newer investors are evidently willing to accept that risk, while spreading their investments across multiple loans to diversify their holdings. The average holding of our investors is £22,800, which is typically spread across more than 135 investments. With £110m returned from more than 1,200
investors and the transfer of both cash and stocks and shares ISAs into the IFISA. Whilst the amount invested through P2P platforms still remains a small proportion of the total amount invested in the UK, it is by far the fastest growing market and the addition of IFISAs looks set to further accelerate this growth. To investigate this investment opportunity further, please register on our web site (fundingsecure.com), which is free and without obligation. Once registered you will be able to see the current offerings available, as well as the full history, broken down by each individual investment.
“ The advent of the IFISA has legitimised P2P platforms”
Grand ambition Funding Circle’s chief executive and co-founder Samir Desai would be forgiven for taking his foot off the pedal after leading the company's stratospheric growth over the past seven years. But he is just getting started, as he explains to Andrew Saunders
S CHIEF EXECUTIVE and co-founder of Funding Circle, in seven years Samir Desai has gone from snapping at the heels of the banks to boss of the third-biggest small business lender in the UK. But he’s still every inch the restless entrepreneur, as frustrated by the failings of big banks and as determined to be a better lender to small businesses - as he was when Funding Circle first opened its doors back in 2010. “We’re still very focussed on providing a simple product to businesses that need faster, cheaper better loans on the one hand, and on the other providing investors with access to good returns,” he says. “We have a long track record of doing both now. “It’s very empowering when I talk to borrowers, because they are just like
us - they talk about their businesses and they care, they are passionate. That’s why they like to deal with us.” They certainly seem to - Funding Circle has made loans totalling £2.7bn to date, matching around 7,500 investors with nearly 28,000 small business borrowers. As anyone who saw him on the platform at the LendIt Europe conference in October would attest, he’s a feisty character who lost few opportunities to hold his fellow panellists - representing RBS’s Esme platform and Lloyd’s – to account, over everything from the cost of capital to the app-ification of small business finance and reaping the spoils of AI. Understanding and implementing the latest AI techniques is going to be a critical driver of future competitiveness, he reckons. “How much of an advantage will that be? My
guess is that it’s going to be huge, because wherever we have used them in parts of our business they have radically transformed what we’re doing,” he says. Peer-to-peer lending platforms like Funding Circle are much better placed to do this than banks, he says - and not only for the usual smallversus-big-business reasons of agility and innovation. It’s also a consequence of the regulatory environment for banks, especially given the huge taxpayer bailouts many have required since the crash of 2008. “The ability of banks to use deep learning, or even traditional machine learning techniques,
is pretty limited,” he asserts. “Because if you’re a regulator you need to understand every bit of the way a bank’s capital model is calculated, and that will massively limit their ability to use the latest techniques. “It’s the same in any market where the taxpayer stands behind it; it’s right that banks shouldn’t be able to use these tools in the way that asset managers and platforms can.” By contrast, he says, P2P platforms have no taxpayer-guaranteed safety net, and no capital models to be picked over and approved. Given their relatively small size and the lack of leverage, they
thus offer a potential ‘safe space’ in which novel techniques can be trialled and understood, both by the platforms themselves and the regulators. And that’s just one aspect of the tech transformation that is about to overtake small business finance. Like so much else in modern life, he says, it’s going to become app-ified. “I don’t know how you manage your finances, but on my phone I have Funding Circle [for investors currently, but an app for borrowers is on the way] I have other funding apps like Vanguard IG and I have TransferWise to send money,” Desai comments. “One of my apps is my current account too, but I don’t do much there apart from check my balance and pay people. “When you can switch between them with a few clicks, there’s no point in having a onestop shop. We don’t need to get our mortgages from the same place that we get insurance or a current account. In a pre-internet, pre-mobile world it probably made sense to have a one-stop shop, but if banks didn’t exist today you wouldn’t invent them.”
“ We won’t become a bank as long as I am around”
ut what about growth? The view that P2P players will have to become more bank-like and embrace balance sheet funding to achieve scale and reduce cost of capital is increasingly prevalent, not least in the US where Funding Circle has expanded its business. Closer to home of course, Zopa, viewed by many as the ‘other’ poster child for P2P, in consumer rather than SME lending, has gone for the ‘if you can’t beat them, join them’ approach and is launching
a bank. You won’t find any banking licence application forms lurking on Desai’s desk. “We won’t become a bank as long as I am around,” he says unhesitatingly. “I don’t get the cost of capital argument. How long do people believe in a model where a bank is worth the equity on its balance sheet? At some point the banks will have to increase their return on equity. Cost of capital is not a big advantage to banks, or if it is it won’t be for long.”
By contrast the platform model is simple, scalable and keeps Funding Circle’s interests aligned with those of their investors. “We are committed to the platform model and we care about our track record and performance, because it’s the only way we can raise more investment to do more loans,” Desai adds. “That’s very powerful.” The only exception to the ‘no balance sheet rule’ will be when they first set up shop in new countries. “In new geographies there
We were never able to find an individual “ investor who could outperform our models”
is a period where we may lend our own money out, because we have learned that it is the best way to test them,” he explains. “But once you have done that research and development, the platform model is more efficient and better.” Especially when it comes to achieving scale something that is close to his heart. “There are only a few platforms of scale, but there are huge benefits,” he says. “Investors want scale, and liquidity concentrates to the largest players.” Scale is expensive, but the fact that the Funding Circle group was still loss-making in its most recent annual results has not deterred its backers, which include Index Ventures and Carphone Warehouse founder Charles Dunstone. They
have bankrolled the business to the tune of over £300m, including an £82m fundraising in January 2017 led by Accel Partners. Rather than complicated debates about financing models, Funding Circle’s secret sauce is focus, he says: having a simple proposition that is repeatable in new markets, that meets borrowers' needs and that investors can understand. “We’re in four markets [UK, Germany, the US and the Netherlands] and we’d like to enter more,” Desai explains. “Everyone else has taken the approach of doing lots of different products in one market; we do the same product but in lots of different countries. Ours is a better model because you get huge synergies on the investor side - if they
trust you in one market, they are willing to invest in others.” It’s that strategy, he says, which has led to two of Funding Circle’s more controversial recent decisions - to wind down its property lending business and to remove the manual lending option for its investors. “Property was a good part of the business, but we only did it in the UK,” he explains. “We felt we should focus and simplify. As Steve Jobs said, focus is about what you say “no” to.” So the move wasn’t down to concerns that Funding Circle’s property loans were going into default, because property is such a boom and bust sector? “It is cyclical but we were comfortable with that and so were our investors,” Desai replies.
n the decision purely to offer auto-bid investments, he recognises that some veteran DIY investors may not be happy that the selfmanaged approach they have been using for years has been taken away from them. But the advantages are worth a few grumbles. “We looked at what people do rather than what they say – 80 per cent of new investors were signing up to autobid,” he states. “And it is much faster - loans now get funded in five minutes, and the time to sell is much quicker too investors can typically get access to their money in 20 minutes.” Besides, those DIY investors who thought they could beat the system were deluding themselves, he adds. “We were never able to find
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an individual investor on either the retail or institutional side who could outperform our models,” he asserts. “The reason is that on the platform we are allowed to disclose 30 factors, whereas our models use 2,000 factors. Things like consumer credit data and bank statements, information we are not allowed to disclose for obvious reasons.” With economic growth prospects darkening under the shadow of Brexit - UK GDP grew at only 0.3 per cent in the
third quarter and inflation is up to 2.9 per cent some P2P sceptics are claiming that a slowdown is coming and that, as Warren Buffet might say, the tide is about to go out and reveal those who have been swimming naked. But the fact that P2P as an industry has yet to endure the downside of a credit cycle is overplayed, Desai argues. “It’s a bigger issue in the press than it is for investors,” he says. “We have done deals with incredibly sophisticated investors, they have done their maths and they can
see that in Funding Circle the loss rates are about two per cent and the net yield is seven per cent in the UK.” Hard times could even be the making of the business, because good loans will outperform other asset classes. “You can see on the website that we expect losses to double in a similar downturn [to the one in 2008],” he adds. “And even if they treble, you’ll still be getting a decent return.” So as Funding Circle heads towards its eighth year of lending, what is the next big milestone
in his sights? “We want to get to £100bn a year of new lending, which would create three million new jobs a year,” he says. You can hardly accuse him of lacking ambition. How long that might take is another question of course. “Who knows? We’re 70 times bigger than we were seven years ago," he says. Our growth will probably be a bit slower than that, but then we only need to get 40 times bigger.” However long it takes, it's certain that Desai will go the distance.
Stuart Lunn, co-founder and chief executive of peer-to-peer business lender LendingCrowd, explains why there is a place for both active and passive investing in P2P
HE ACTIVE versus passive debate was thrown into the spotlight recently when Funding Circle withdrew its manual lending option, meaning that the big three peer-to-peer providers now purely offer passive investment products. Critics argue that P2P has moved away from its roots, while others say passive investment products are essential to bring the sector into the mainstream. Stuart Lunn, co-founder and chief executive of Edinburgh-based P2P business lender LendingCrowd, sees the benefits of both. “For P2P investing to become truly mainstream, it’s essential to simplify the products on offer and enable greater comparability between opportunities,” he asserts. “Passive products force greater diversification and I think that will benefit the sector as a whole. “Furthermore, these types of investments are more likely to be adopted by intermediaries such as independent financial advisers and wealth managers, which will also
boost mass market adoption.” With all these advantages, is there still a place for manual lending? Lunn thinks so. “If you consider the stock market, many investors enjoy stock picking but also have money in passive funds,” he explains. “Similarly, many of our investors like using both active and passive products. “Active investors may become a minority, but they’re still an important group of customers.” LendingCrowd offers both active and passive investment opportunities on its platform. Investors who choose the manual option can select transactions based on their individual risk tolerance, sector and geographic bias, as well as setting their own interest rates through an auction process. This gives individuals control over their portfolios, but it can also be time-consuming. Furthermore, if capital and interest are repaid monthly, uninvested cash can build up quickly, creating a cash drag on returns. With the automated
option, investor funds are lent out automatically without having to choose individual investments. This is a quicker, more convenient method and gives an automatically diversified portfolio as the platform spreads the money across a wide
“Around three quarters of our new investors from the past three months have chosen the passive product and with the ISA it’s even more heavily skewed than that,” says Lunn. “A lot of ISA investors are new to the sector so go straight to the passive option.
of our investors like using both “ Many active and passive products” range of loans. Repayments may also be automatically reinvested, eliminating the risk of having uninvested cash in your account. In February, LendingCrowd launched its Innovative Finance ISA with a passive account and in May it launched its Self Select ISA, meaning that investors can now choose either type of investment within the tax wrapper. The passive Growth ISA offers target returns of six per cent, while active investors can set their own rates with the Self Select ISA.
“The ISA is a massmarket product. If the P2P industry is going to get a meaningful slice of that market they need to offer passive investments.” Passive investment may be the natural evolution of P2P, but for some experienced investors, manual lending will always be the preferred option. “Either way, it’s individuals owning their own portfolio and driving the economy through lending to businesses,” says Lunn. “Our passive product is as much P2P as our manual one.”
For even more peer-to-peer finance news, go to our website at www.p2pfinancenews.co.uk. Providing real-time news and exclusive insights, www.p2pfinancenews.co.uk is your indispensable portal into the peer-to-peer finance world.
Go online to sign up to our e-newsletters, which come out every week day at 7am, to get a comprehensive digest of the latest peer-to-peer finance news sent
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Reaching new heights David Bradley-Ward, chief executive of asset-backed peer-to-peer lender Ablrate, delves into the attractions of the Innovative Finance ISA
BLRATE may have the most exotic origins of any peer-topeer lender in the UK, as it was borne out of a deal to fund an aircraft going from the Pacific Islands into Latin America. Chief executive David BradleyWard and his business partner, who both worked in the financing sector, were working on the transaction when the mezzanine investor pulled out at the eleventh hour. “We persuaded the bank to take a slightly larger investment and the deal got done, but afterwards we realised we could have offered the direct investor 12 or 13 per cent returns and still made more money than the deal we did with the bank,” Bradley-Ward says. “So we went to some of the P2P lending platforms at the time and asked if they would be
interested in these types of deals. But nobody was interested in financing an aircraft. “So we thought, if noone’s doing it, we may as well do it ourselves. That’s when we came up with the original concept for Ablrate and we launched in July 2014.” While the platform begun life focusing on aircraft deals, it was a “hop, skip and a jump” into other types of assetbacked lending, according to Bradley-Ward. A pivotal moment for Ablrate was when it became fully regulated by the Financial Conduct Authority in March 2017, with ISA manager approval from HMRC following shortly after. Ablrate launched its Innovative Finance ISA (IFISA) in August 2017, with IFISA administrator Goji providing the technology. The platform’s taxfree wrapper is flexible, meaning that investors can withdraw and return money within the same tax year. It offers returns ranging between 10 and 15 per cent, which are all the more attractive when compared to the painfully low rates
offered by cash ISAs. The appeal was not lost on investors and almost 100 IFISAs were set up in just 48 hours, despite no marketing efforts by the company. “The flexibility of our IFISA has attracted quite a lot of people and the product has taken in almost £2.5m in funds since our 4 August launch,” Bradley-Ward says.
We offer good “returns, flexibility and no charges” “It’s purely been word of mouth so far. We offer good returns, flexibility and no charges, which has attracted existing customers and new investors to the IFISA.” The liquidity of Ablrate’s platform is another attraction, as its secondary market trades £30,000 to £40,000-worth of loan parts per day. Bradley-Ward “fundamentally believes” all P2P platforms should have a self-select product, which Ablrate currently offers, but he also acknowledges the mainstream attractions
of auto-bid investing. As such, the company is developing its own autobid product – that will be IFISA eligible – which is set to go live by the first quarter of 2018. “You can’t throw away a very large market of people who want an autodiversified, auto-matched investment product,” he affirms. “That’s why we’re working on a product like that, using the technology of our secondary market to service that segment of investors who don’t necessarily want to self-select.” Going forward, it’s a case of developing new products, growing the team and boosting loan origination. “We’ve been surprised at the size of the ISA transfers – they’ve totalled hundreds of thousands of pounds,” says Bradley-Ward. “Some of the ISAs that have been opened are probably waiting to see a little more deal flow from us, which we’re gearing up to in the coming months. “It’s a very exciting time for Ablrate and for the wider P2P industry.”
FUTURE OF P2P
The skyâ€™s the limit First they disrupted the market, then they were regulated, and now they have the IFISA. Itâ€™s time for the peer-to-peer lending sector to embark on the next stage of its journey, writes Andrew Saunders
AY YOU be cursed to live in interesting times goes the old Chinese proverb, a timely warning that periods of rapid change may take us to exciting new places but also often involve a pretty bumpy ride along the way. And while not many in the peer-to-peer lending sector would regard themselves or their industry as cursed - rather the opposite in fact - there can be no doubt that the
times are interesting, and about to get a whole lot more so. Thanks to ever-smarter tech, new products like the Innovative Finance ISA (IFISA), new funding models, economic uncertainty and the blurring of the lines between traditional banking, P2P lending and the wider alternative finance community, there are a whole bunch of powerful and
unpredictable influences coming to bear on the P2P sector over the next year or two. Just how mainstream can P2P get, without losing sight of the reforming zeal that brought it to life in the first place? Perhaps the biggest current opportunity for a step change in the way that punters - and the market - regard P2P is the much-vaunted IFISA. The tax-free wrapper
has been heralded as the product that will see P2P break away from its DIY investing roots, attracting a whole new raft of customers whose most sophisticated financial purchase until now has been a savings account. As our IFISA special report on page 14 shows, the potential impact of this product on the P2P industry is immense and yet to be fully realised. However, a big question
FUTURE OF P2P
companies scale, the marketplace “ Asmodel becomes challenging ”
hanging over the future, not only of P2P but the entire financial services industry, is the prospect of a serious economic slowdown for the first time in almost a decade. As P2P sceptics everywhere never lose a chance to point out, the sector as a whole has never been tested by a serious recession. Consequently there are some platforms which are ill-prepared for stormy weather, says Stephen Findlay, founder and chief executive of BondMason. “P2P hasn’t been through a credit cycle yet, and some of them are struggling even in relatively benign conditions,” he comments. “If people are making loans where 25 per cent are in default already which some are - then all you can say is that they don’t know what they are doing. But if they have been diligent and cautious and have robust credit assessment and scoring, they will probably be OK.”
Even if some platforms do fail, anyone expecting a bank-collapse style spectacle will be disappointed, according to Neil Faulkner, managing director of independent P2P analysis firm 4th Way. “P2P failures will be much less dramatic than bank failures,” he argues. “P2P lenders are not allowed to use your money for anything else, it is not part of the assets of the platform. There is no leverage and no ridiculously complicated products. It’s way, way safer than banks.” So whatever the doom mongers might say, a P2P bloodbath is far from a foregone conclusion. In fact it’s perfectly possible that it will weather a recession rather better than some more traditional asset classes. “There is always lots of negative comment about the fact that P2P has never been through a recession,” says Peter Renton, founder of the LendIt conference series. “Once we have,
people will see that their P2P portfolio has only gone from six per cent to, say, two per cent returns that’s a big drop of course but still positive.” It might also inject a dose of realism into some of the Panglossian predictions that have dogged growth projections and company valuations in the past few years. “There are good markets and profitable business to be done, but probably not at the growth rates that were assumed initially,” says Andy Davis, author of a pair of influential reports on P2P for the Centre for the Study of Financial Innovation. “It’s a hard slog and it takes a long time to get to scale.” But consumer lenders may be more vulnerable than those in the SME space, he adds. “I suspect that consumer credit conditions will worsen. That market will become challenging for small players. The small business end of the
market is inherently more diverse and there are more funding structures.” Davis argues that in the future, larger P2P platforms will shift towards hybrid models, embarking on balance sheet lending like banks to increase their profitability, although this hypothesis is fiercely contested by some industry figures. “Banks enjoy extremely cheap funding, if you are trying to compete with a bank and your cost of funding is significantly higher then you are not in the game,” he adds. To P2P purists, balance sheet lending can look like heresy - the antithesis of what the sector is supposed to be about. But heresy or not, it is inevitable, says LendIt’s Renton - just look at the US market. “As companies scale, the marketplace model becomes challenging. No-one in the US now is totally committed to the pure marketplace model. I don’t quite understand
FUTURE OF P2P
P2P will “be integrated
into the wider community
the commitment to it [the platform model] in the UK. It’s almost religious. “But you have to be pragmatic - the bottom line is that borrowers are going to be loyal to the best rates, rather than to a particular platform. And a bank’s cost of capital means lower rates.” Not everyone agrees. Funding Circle (whose boss Samir Desai is profiled on p22) is one high-profile dissenter from the hybrid orthodoxy. RateSetter is another, as head of policy John Battersby explains. “We have a very clear position on this - from the start our focus has been on retail money,” he says. “So hybrids are not for us. We think there is a big appetite for self-directed
investment – one million people will be investing in SIPPS for example. We designed our model with the retail investor in mind right from the start.” So P2P is being stretched into a new shape by the pull to attract a new breed of mainstream customer, and a shift to more flexible funding models to better service the anticipated demand. That new shape will inevitably see it losing some of the distinct, DIY identity that made its name in the first place, says BondMason’s Findlay. “P2P will be integrated into the wider community, it won’t go mainstream in its current form,” he argues. “There will be lots of wrappers
P2P failures will be much less “dramatic than bank failures” to make it simpler for investors.” So with all that coming down the pipe, perhaps it’s not surprising that the industry’s equity investors are starting to ask that question they always do in the end - when will their P2P investments start to show a profit? In the US the mood music is changing, says LendIt’s Renton. Having bankrolled growth for some years now, many backers there are starting to press for returns. “In general, returns to shareholders have not
been great,” he explains. “Lending Club is still only at a quarter of its high, OnDeck is even lower. “What’s changed in the US is that the only ones getting funded in 2017 are those with a pathway to positive cashflow and not too long a one at that.” The same tune is likely to start playing shortly on this side of the pond. P2P may be about to enter the equivalent of its difficult teenage years, but the journey is worth it. Even in the most interesting of times.
You are earning your P2P interest tax-free aren’t you? It is almost a year since the Innovative Finance ISA was extended to include debt-based crowdfunding, yet the majority of investors are still paying tax on returns when they don’t need to, as Julia Groves, partner and head of crowd bond platform Downing Crowd explains…
ith the birth of the Lifetime ISA (LISA) for 18-39-yearolds on 6 April 2017, the Innovative Finance ISA (IFISA) is no longer the baby of the ISA family. But it is perhaps still the least well understood. The IFISA allows access to alternative finance returns in the form of both P2P loans or debtbased securities, for example crowd bonds. Because these types of investments involve more risk, they offer the potential for significantly higher returns - typically between three per cent to seven per cent per year over a short to medium term - than currently available through cash ISAs. Provided you are happy to take on the higher risk that comes with investing in P2P loans and crowd bonds, the IFISA could therefore prove an attractive option. And since they are generally illiquid and held for a fixed term they are not exposed to the short-term volatility that comes with investing through a stocks and shares ISA. Finding new and diversified investment opportunities to enhance the tax efficiency of your investment portfolio has become more of a challenge following the recent changes to pension legislation and further restrictions
on Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) qualifying investments. As a result, high earners should make sure they maximise the tax wrappers available to them. Is the typical 0.5 per cent return on savings the best use of your ISA wrapper? Or are you better paying tax on that and protecting a potential five per cent or six per cent annual return from your lending? Some of the terminology surrounding the IFISA and its associated investments can be confusing, but the first thing to be clear on is that an IFISA can only hold P2P loans and debt-based investments. Not any equity investments. Whilst P2P lending is typically more diversified, with the platforms mostly picking the loans for you, debt-based investments - more simply known as crowd bonds – tend to focus on a smaller number of larger investment opportunities. Although these carry single investment risk, they should allow the platform to take a more thorough approach to due diligence. The offer document for each opportunity outlines all the information an investor should need to understand the offer, the risks and fees involved and the
due diligence undertaken. It should be an open and transparent process that should suit investors who want transparency and control. The annual ISA allowance is now £20,000 and there is no limitation on transfers of your existing ISAs from previous years, so for those looking to broaden the diversification of ISA portfolios and invest in assets uncorrelated to the stock market, the IFISA is surely worth a look if investors understand the risks involved and are happy to take them. Since we launched our first bond in March 2016, we have raised more than £33m across 16 bonds to support smaller UK businesses across a variety of sectors. In doing so, we have offered members a 5.7 per cent per year weighted average interest rate, as at 16 October 2017. If you would like more information on Downing Crowd, our crowd bonds or the Downing IFISA, please visit our website at www.downingcrowd.co.uk. Crowd bond disclaimer - capital is at risk and returns are not guaranteed. Past performance is not an indicator of future performance. Any personal opinions expressed are subject to change and should not be interpreted as investment advice or a recommendation.
Earn 9% p.a. with ArchOver Invest direct to UK Companies and receive returns of up 9% p.a. against secured business loans. ArchOver is fully authorised and regulated by FCA. Total Lent:
Total Interest Paid to Lenders:
Total Losses & Defaults:
Pledge per project: £1-2k Projects invested in: 16 Time registered: 4 months Total lent: £24,000 Total interest payable
Pledge per project: £1-2k Projects invested in: 42 Time registered: 2 years Total lent: £81,000 Total interest payable:
Pledge per project: £10-20k Projects invested in: 25 Time registered: 11 months Total lent: £193,000 Total interest payable:
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Register Today & Earn up to 9% p.a. ArchOver is authorised and regulated by the Financial Conduct Authority under registration number 723755. ArchOver is not covered by the Financial Services Compensation Scheme. Your capital is at risk. Published by ArchOver Ltd, 5th Floor, 40 Gracechurch Street, London, EC3V 0BT. Figures are accurate as at 18th September 2017.
Published on Nov 3, 2017