The P2P Investing Report

The peer-to-peer investing report Published in association with the P2P Investing Summit 2021

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C A P I TA L

INTRODUCTION TO P2P

F

ew people realise that peer-topeer lending began in the UK. Zopa was the world’s first P2P lending platform when it launched in March 2005.

Since then, scores of P2P platforms have been created, acquired, rebranded and floated in the UK, building a multibillion pound industry which has managed to survive a global financial crisis, a series of regulatory hurdles, and – now – a global pandemic.

But what is P2P? At its core, P2P lending brings together borrowers and investors on one dedicated platform.

For borrowers, it provides an alternative to prescriptive bank funding, while investors can get a fixed return over the lifetime of the loan. These investor returns will beat the sub-inflation rates offered by high street bank savings accounts, without the volatility of stock market investments.

Since 2005, the sector has matured and diversified considerably. The introduction of the Innovative Finance ISA (IFISA) in 2016 allows retail investors to keep up to £20,000 of their P2P capital in a tax-free wrapper each year. P2P investments are also eligible for inclusion in a self-invested personal pension (SIPP).

There are also more protections in place these days for P2P investments. While P2P investments are not covered by the financial services compensation scheme (FSCS), some platforms use provision funds or shields to protect at least some of their investors’ capital. And it should be noted that client money which has not yet been deployed is often held in a bank account, which will be covered by FSCS. P2P lending is a regulated, riskassessed, technology-led form of investing and borrowing. Over the past 16 years, the average rate of defaults across the UK P2P sector has remained at approximately two per cent, while investor returns tend to sit within the three to 12 per cent range.

At the Peer2Peer Finance News and AngelNews P2P Investing Summit, we wanted to showcase the huge achievements of this industry. We have assembled an array of expert speakers from the worlds of investment and P2P lending, and we have created an agenda which will provide an insight into the variety of attractive opportunities presented by the sector.

We hope you enjoy the event and this special report.

Kathryn Gaw Report editor

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• Short-term flexibility • Provision fund cover • Tax free IF ISA available

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Issued loans are unsecured. Past performance does not guarantee future return.

Your actual return may be higher or lower. As with any investment capital is at risk.

No FSCS cover. Provision fund cover subject to availability of funds.

UNPICKING THE MYTHS

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Myth versus Reality: Common misconceptions about P2P Peer-to-peer lending is often misrepresented as a high-risk investment product which has been tainted by a couple of high-profile platform collapses. But this is just one of many misconceptions about the P2P sector…

MYTH: All P2P lending is high risk REALITY: P2P covers a broad risk spectrum. Investors can choose from a wide array of platforms and loan options, depending on their risk profile and investment goals. For instance, secured loans can be less risky than unsecured loans, if proper due diligence is done on the collateral and borrower.

Risk can be reduced by diversifying your investment across multiple loans, or multiple platforms, and choosing a mix of property, business, consumer and asset-backed P2P loans.

MYTH: The cost of investing in P2P is too high REALITY: Each P2P lending platform has a minimum investment threshold, but this is often as low as £1, £10 or £100. Most platforms will allow all investors – regardless of the value of their portfolio – to access their marketplace, and to top up their funds as and when they are able, in order to attract and retain retail investors.

MYTH: P2P investments are not regulated REALITY: All P2P lending platforms are regulated by the Financial Conduct Authority (FCA) and must therefore be fully compliant with all FCA rules. Platforms are either regulated directly by the FCA itself, or they act as appointed representatives for principal firms which are themselves directly regulated by the FCA. In recent years, the regulator has increased its focus on the P2P sector, and extra compliance measures have been

introduced to manage the growth of the P2P lending market.

MYTH: There are no tax efficient benefits to P2P REALITY: Since 2016, P2P investments have been able to benefit from the ISA tax wrapper. The Innovative Finance ISA (IFISA) was introduced specifically to encourage investment in the P2P market, and most platforms now offer IFISA accounts to all tax-paying investors.

Some P2P platforms have also received authorisation to offer self-invested personal pensions (SIPPs), allowing pension savers to get the maximum value from their portfolios.

MYTH: It’s impossible to diversify your investments in P2P REALITY: P2P is one of the few areas of investing that is not closely tied to stock market performance or Bank of England policy. For the most part, P2P loans offer a fixed rate over a fixed term, regardless of macroeconomic issues or market movements.

This fact alone makes P2P lending a significant diversification tool in any investment portfolio.

Within the world of P2P itself, investors can diversify their money by investing across several different platforms, and by choosing autoinvest options which automatically spread investor capital across a wide range of loans. This means that if one or two loans fail, the losses are offset by the performance of the other loans, significantly reducing the risk to the investor’s capital investment.

MYTH: P2P is unethical REALITY: Moneylenders get a bad name in the press, but P2P lending was founded on principles of fairness and affordability.

This is a regulated, researchdriven sector which was created as an alternative to banks. P2P platforms pride themselves on their transparency, and many offer environmentally and socially conscious lending projects to investors.

MYTH: P2P is the lender of last resort REALITY: There are a number of reasons that borrowers will go to P2P. P2P lending platforms are faster and more nimble than banks as they are not weighed down by legacy technology systems. As a result, they can offer a faster approval process, which can be essential for certain borrowers, such as property developers working on a fast-moving deal.

Banks tend to be very prescriptive in their lending, which can also rule out many good-quality borrowers.

For example, a business with operations overseas might be harder for a high street lender to assess so they could be rejected for finance, whereas a specialist P2P lender may be prepared to do the due diligence and underwrite the loan.

We are in a digital age and many types of borrowers – ranging from individuals, to small businesses, to property professionals – prefer the ease and speed of technology-focused P2P platforms, combined with robust credit checking processes.

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IFISA

IFISAs unwrapped

The Innovative Finance ISA (IFISA) has proved hugely popular with investors, yet there is still a long way to go before the IFISA achieves the name recognition of its more mainstream cousins – the Stocks and Shares ISA and the Cash ISA. Read on for a few facts and stats about the IFISA… What is the IFISA? Launched in April 2016, the Innovative Finance ISA (IFISA) exists as a way for UK taxpayers to protect their nest egg from unnecessary taxation. The IFISA was created specifically for peer-to-peer lending platforms, with the aim of encouraging innovation and growth in the sector while allowing investors to benefit from tax-free returns.

Up to £20,000 can be invested within an ISA every tax year, and the IFISA is no different. There are no restrictions on where that money should be placed – investors can put the entire £20,000 into one loan on one platform, or they can spread it across thousands of different loans on a variety of platforms. However, only one IFISA can be opened per person, per year.

Like other ISA products, IFISA funds can be carried over to the next tax year, meaning that investors can benefit from compound interest over time.

P2P platforms must receive regulatory permission from the Financial Conduct Authority (FCA) before launching an IFISA, as well as HMRC approval. At the time of writing, there were approximately 100 authorised IFISA managers in the UK. What returns are on offer?

Target returns are unique to every platform and based on the value of the loan, the risk involved and the expected rate of default. In general, P2P returns range from approximately three per cent to 20 per cent or more.

How many IFISAs can you have?

Investors can only open and pay into one IFISA each tax year. However, as long as the annual £20,000 ISA allowance is not exceeded, money can be transferred from a Cash ISA, Stocks and Shares ISA, or another IFISA, into a new IFISA account at any time.

IFISA transfers usually take around 30 days to complete.

Is IFISA money locked away?

It depends on the P2P platform that is being used, with some offering a variety of products with different levels of access to funds.

In addition, many platforms offer a flexible IFISA, meaning that money can be taken out and reinvested within the same tax year, with no impact on your tax-free allowance.

How do you choose the right IFISA? There are dozens of IFISA options

available to investors in the UK, offering a range of different benefits.

Most P2P lending platforms offer the IFISA wrapper on all of their standard accounts, so any loan portfolio can be upgraded to IFISA status with no change to the risk profile or portfolio makeup.

How big is the IFISA market?

The IFISA market is only five years old, but it is believed to be worth far in excess of £1bn. Unfortunately, the 2019/20 IFISA statistics have not yet been made available by HMRC due to the pandemic, but data from The Investing and Saving Alliance (TISA) found that the total amount invested in the IFISA tax wrapper had reached £1.14bn by February 2020.

In the 2018/19 tax year, £711m was held in IFISA accounts, with an average of £14,503 invested in each wrapper.

PROMOTED CONTENT

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Do your due diligence and get two-for-one ISAs in 2021 Sourced Capital explains why investors should make the most of this year’s taxfree ISA allowance, despite the uncertain climate…

T

HE OFFICE FOR National Statistics is yet to release data on the number of ISA subscriptions in the 2019/2020 tax year, but looking at the previous two tax years, subscribers were up 1.4 million.

With the uncertainty that Covid-19 has brought, there are many reasons to believe that the number of ISA subscribers may have dropped in 2020/2021, but there is still time for investors to take advantage of this tax year.

High inflation rates and low interest rates on saving accounts make it tough for UK consumers, so investment alternatives such as the Innovative Finance ISA (IFISA) are becoming more popular. As

with any ISA, IFISAs are tax-free products. Although they are a riskier investment than a deposit account, investors are typically rewarded with a higher rate of return.

Sourced Capital provides something quite unique in the IFISA and peer-to-peer lending market.

Not only does the platform offer competitive returns of up to 12 per cent, but it also has a different business model to its competitors.

The Sourced group has a network of over 130 property specialists that it thoroughly trains and supports.

The network fuels the Sourced Capital platform with hand-picked investment opportunities, helping investors to get better returns.

As the network is a part of the same

Sourced Capital’s funding process for its network is a stringent, 20-step operation, from project submission to repayment to investors, which progresses as follows: 1. Borrower submits project to support team.

2. Project is assessed by support team.

3. Comments made by support team.

4. If required, additional information added by borrower.

5. Funding call with network director.

6. Application call with Sourced Capital team members.

7. Application form submitted by borrower.

8. Borrower review (experience, AML, credit etc.).

9. Project review (financials, planning, exits, stress test etc.).

10. Offer in principle provided by Sourced Capital.

11. Surveyor instructed by Sourced Capital.

12. Build quotation and schedule submitted by borrower.

13. Monitoring surveyor instructed to assess build costs.

14. Approval in principle provided by Sourced Capital.

15. Solicitors are instructed.

16. Project exchange.

17. Sourced Capital raise funds on platform.

18. Project completion / drawdown.

19. Project construction.

20. Property project completed, exited and investors are repaid capital and interest.

group, the borrowers are put through even more steps than they would at your average P2P lender, as Sourced has its own dedicated support team.

The support team assesses projects rigorously before they are passed to Sourced Capital for funding.

“Having transparency on our process to our investors has always been important, and as a fast-growing P2P platform we’re continually improving that process to ensure that we protect our investors’ capital,” says Stephen Moss, founder and managing director of Sourced Capital.

“There has been a lot of uncertainty these past 12 months, which is likely to continue, but it’s no surprise that alternative methods of investing have come to the forefront and the likes of the IFISA has grown in popularity with investors. Having the ability to pick and choose where your money is invested, along with higher returns, is highly attractive to investors. Furthermore, the team at Sourced Capital has a rich amount of experience in property, alongside the network arm of the business, which is an extra tick in a box for investors when they are doing their due diligence.”

If you’re an investor that has been holding off on contributing to your ISA allowance this past year because of uncertainty, you may lose this year’s ISA allowance forever.

However, don’t forget the difference between contributing to an ISA and making an investment. Putting cash into an ISA doesn’t mean you need to invest it right away. While an IFISA isn’t designed to hold cash for the long term, you can certainly hold off investing until the right project comes along for you and you feel more confident about investing.

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PENSIONS

P2P and pensions Peer-to-peer loans can be a valuable addition to a pension portfolio, boosting returns and adding diversity. Here’s how to make P2P work as part of a pension plan…

P

ENSION FUNDS HAVE taken a battering over the past year, as the stock market reacted to the effects of the pandemic and the Bank of England’s base rate edged ever closer to negative territory.

Pension savers – already bruised from the global financial crisis just a decade earlier – have understandably begun to look beyond the traditional savings options, as evidenced in the rise of the Self Invested Personal Pension, or SIPP. There are believed to be more than one million SIPPs in the UK today – up from approximately 700,000 in 2016.

Since 2016, peer-to-peer lending platforms have been eligible for

inclusion in SIPPs and in Small Self-Administered Schemes (SSAS), which allow retail investors to protect their returns and profits from taxation while diversifying their money across a range of investment and savings options.

Over the past five years, there has been an increase in the number of SIPP providers adding P2P to their list of available investments, and a number of P2P platforms have developed their own SIPPs. So how can taxpayers use P2P lending to supercharge their pension pot?

The benefits of adding P2P to a pension portfolio are obvious. P2P offers a real alternative to the traditional pension options of

cash savings and a stocks and shares portfolio.

The very nature of P2P lending means that the sector is dissociated from stock market performance. A March 2020-style stock market crash has little-to-no effect on the viability of a P2P loan portfolio, where the loans are tied to an individual or business’s ability to meet pre-agreed payments. This in itself makes P2P a valuable tool when it comes to diversifying pension fund exposure.

However, like stock market investments, there is a wide risk spectrum when it comes to investing in P2P loans. Risk-averse investors can choose P2P loans which are secured with a first legal charge

PENSIONS

against a property or asset. This means that if the loan goes into default, the investors may still be able to recoup some of their capital through the sale of the underlying asset. Meanwhile, risk-aware investors can chase higher returns of 20 per cent per annum or more, by investing in higher-risk P2P options such as litigation funding.

Within the world of P2P itself, there is huge scope for diversification, with investors able to choose from consumer loans, business loans, property loans and more. Even if P2P lending represents just 10 per cent of a pension portfolio, it has the potential to be the most diverse portfolio segment of all, traversing the property sector, business space and the vast consumer credit market.

Furthermore, P2P loans can be surprisingly liquid. Many platforms run their own secondary markets, where loans and loan parts can be traded and sold off if an investor wishes to exit a deal early. This offers some reassurance for investors who may wish to withdraw some of their pension money for a life event or an emergency expense. However, it should be noted that this liquidity is dependent on demand in the secondary market.

And then there are the returns on offer. Despite the Covid-19 crisis, the P2P sector’s target returns have barely changed. This is a testament

to the rigorous due diligence which is performed on each prospective borrower, as well as the strength of the P2P lending model itself. Every P2P platform now has a track record of delivering inflation-beating returns to their investors, with a relatively stable default rate of around two per cent. Most platforms offer rates within the three to 12 per cent range.

The challenges of using P2P in a pension fund While P2P has made some progress into the SIPP market, there is still a way to go.

P2P is currently classified as a nonstandard asset, which is considered to be higher risk than standard assets such as funds and equities.

As a result, some advisers and SIPP providers are reluctant to allow their clients to include it in their SIPPs. Another concern among SIPP providers is the industry’s relative nascence, with some stating that they want to see the P2P sector survive an economic downturn before adding P2P investments to their books.

Thus far, the coronavirus pandemic has proven the resilience of P2P and its ability to weather great uncertainty without losing the trust of its investors. Many P2P lending platforms believe that this will represent a turning point for the sector, placing it on a par with more established alternative investment

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options such as hedge funds, private equity, and commodities.

What to consider before adding P2P to your pension portfolio First and foremost, before making any investment in P2P it is important to be aware of the risks.

These risks are explained clearly on each individual platform, and inexperienced investors are discouraged from the sector by way of an appropriateness test which every platform now has to offer.

The biggest risk to P2P investors is the possibility that they will lose their capital investment. This particular risk can be partially mitigated by investing across several different platforms, and by ensuring that said platforms are fully authorised by the regulator.

It is also important to consider the vehicle in which your P2P pension investments will be held. It is very possible to use the Innovative Finance ISA (IFISA) to build up a P2P portfolio for your pension, but there are some limitations here.

Namely, that only one IFISA can be opened per tax year, making it harder to diversify from the outset. IFISAs are also limited to £20,000 per year, whereas up to £40,000 per year can be placed within a SIPP. SIPPs and SSAS allow for much more flexibility, as investors can spread their allowance across multiple platforms from day one, and these P2P investments can sit alongside a raft of other SIPP and SSAS options such as stocks and shares, bonds, and property assets.

But perhaps the most important thing to consider is how P2P can benefit a pension portfolio, by filling a unique space where risks can be managed and minimised, while fixed returns can help to stabilise a portfolio which may otherwise demonstrate stock market and economy-linked volatility.

Once this is understood on a wider scale, the P2P pension market will truly take off.

Fund Ourselves Ltd Factsheet - January 2021

Strictly Private and Confidential

Dedicated IFA Portal for Client Portfolios

Guaranteed Minimum 10% p.a.

Return

Short-Term Flexibility & Monthly liquidity

Performance Year 2020 2019 2018

Jan 1.34% 0.82% 0.07%

Feb 1.35% 0.86% 0.25%

Mar 0.72% 0.96% 0.41%

Apr 1.45% 1.20% 0.59%

May 0.42% 1.59% 2.03%

Jun 0.11% 1.02% 0.95%

Jul 2.16% 0.48% 0.72%

Aug 1.06% 1.24% 0.42%

Sep 0.43% 1.42% 0.57%

Oct 0.86% 0.88% 0.81%

Nov 0.99% 1.49% 0.89%

Dec 0.62% 1.00% 0.74%

Total 12.12% 13.75% 8.77%

The presented return is the net return delivered to investors.

Commentary by founder & CEO

Key features

We are delighted to deliver our Factsheet for January 2021.

The objective of Fund Ourselves is to generate attractive return on investment achieved through unique UK based short-term financing.

Fund Ourselves achieved excellent consistent results over the past three years. We are very proud and extremely pleased with the results and looking forward to continue delivering great return on investment for our investors whilst helping hard working families with their short-term credit needs.

• Short-term flexibility with monthly liquidity

Yours sincerely, Nadeem Siam

• Tax free returns available through IF ISA

• Attractive yield with guaranteed minimum 10% p.a.

• Forecast 10% - 15% annual return per annum (p.a.)

• Segregated ring-fenced client accounts • Fully regulated structure domiciled in the UK

Key facts Fund Ourselves is providing consistent returns that have outperformed benchmarks compared to traditional asset classes whilst maintaining short-term flexibility with monthly liquidity and enabling risk mitigation for investors whilst helping hard working families.

The first three years of asset allocation have seen Fund Ourselves enter mainly into a hugely diversified portfolio of UK based consumer shortterm micro credit investments.

Fund Ourselves is focused on applying short-term financing solutions to selected consumers through debt instruments taking an active approach to investing, seeking situations where significant value can be unlocked.

Targeted Returns Base Currency

Selected by the Department of International Trade to join the 2020 & 2021 Fintech Trade Mission to Austria & Zurich representing the UK Fintechs

Nadeem Siam Founder & CEO

8% - 12% GBP

Authorised & regulated by the UK Financial Conduct Authority.

• Dedicate portal for IFA to manage their clients • Luxemburg based alternative investment fund (AIF) • Highly diversified portfolio across thousands of transactions • Proprietary technology enables the efficient automated sourcing, credit checking and matching of short-term credit.

Total return over 1-, 3- & 5-year period 1 Year 10.0% 12.5% 3 Years 33.1% 42.4% 5 Years 61.1% 80.2%

15.0% 52.1% 101.1%

Risk warning: Past performance does not guarantee future returns. As with any investment, capital is at risk as the value can go up as well as down. No FSCS cover. The tax treatment of your investment will depend on your individual circumstances and may change in the future.

Best Month Worst Month

Backed by Fasanara Capital, a leading European specialised credit hedge fund

2.16% 0.07%

Luxemburg AIF authorised & regulated by the Commission de Surveillance du Secteur Financier

Great opertunity to invest in Great Britin in GBP with high yeild flexible double digit return

Email: nadeem@fundourselves.com Tel.: +44 (0) 758 544 3862

Fund Ourselves is a trademark and the trading name for Fund Ourselves Ltd (company no. 09550128) with registered office addre ss at Fund Ourselves Ltd, 10 York Road, London, SE1 7ND, United Kingdom. Fund Ourselves Ltd is authorised and regulated by the Financial Conduct Authority (Ref 729238).

This document (“Summary”) has been prepared for information purposes relating to potential investments in or through Fund Our selves Ltd (the “Company) only and is confidential to and for the exclusive use of the recipient. The issue of this Summary and its contents, or any part or parts thereof, shall not constitute an offer to subscribe for an investment in the Company. Neither this Summary nor anything contained in it shall form the basis of any contract or commitment whatsoever. This Summary does not purport to be all-inclusive or to contain all the information that a prospective investor may desire in deciding whether or not to make an investment in the Company and is subject to updating, revision and amendment. This Summary has been prepared by the Company based on information available to and opinions of the directors of the Company and the information contained herein has not been the subject of independent verification or financial audit. No undertaking or other assurance is given or made by or on behalf of the Company as to its accuracy, fairness or its completeness.

The investment to which this Summary relates is only available to investment professionals. If you are in any doubt about the investment to which this Summary relates you should consult a person authorised by the Financial Services Authority who specialises in advising on investments of the kind to which this Summary relates.

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INDUSTRY STATISTICS

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P2P in numbers Over the past 16 years, the peer-to-peer lending sector has reached plenty of milestones. Here are just a few of the numbers that tell the story of its success…

£1.14M invested into IFISAs

(as at February 2020) In February 2020, IFISA inflows broke the £1bn barrier. Due to Covid disruption, this is the most recent data available for the tax wrapper.

10%

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P2P lenders accredited to CBILS Funding Circle was the first P2P firm to be accredited for the government-backed coronavirus business interruption loan scheme, followed by Assetz Capital, then Folk2Folk and LendingCrowd.

portfolio cap

The FCA has mandated restricted retail investors to cap their P2P investments at 10 per cent of their total investment portfolio.

$4.1bn (£3bn) invested in fintech sector last year

The UK’s fintech market attracted £3bn in venture capital and private investment in 2020, second only to the US globally.

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REGULATION

Understanding the P2P investor marketing restrictions The City regulator recently introduced new rules that change the way peer-topeer lending products are marketed to investors. We explain how the changes might affect you…

I

F YOU HAVEN’T HEARD about the latest opportunities in peer-to-peer lending, there may be a good reason for this.

The Financial Conduct Authority (FCA) introduced tougher investor marketing restrictions in December 2019, designed to protect consumers from unnecessary risk.

As a result, P2P lending platforms have been restricted to marketing only to sophisticated and high-networth investors, people receiving regulated investment advice, or those who pledge that they will not invest more than 10 per cent of their portfolio in P2P loans (known as restricted investors).

In order to comply with these rules, all prospective P2P investors will be asked to complete an appropriateness test to determine whether or not they understand the investment risks which are specific to P2P. Each platform has its own unique appropriateness test, making it harder for would-be investors to game the system by memorising the answers from a previous test. However, the aim of the tests is always the same – to learn the extent to which the prospective investor understands P2P lending, and to discourage uninformed investors from making impulsive investment decisions.

Who can invest in P2P? As a general rule, there are five kinds of P2P investors: high-net-worth individuals (HNWIs), certified sophisticated investors, self-certified sophisticated investors, restricted investors, and investors who are receiving regulated advice.

High-net-worth individuals The FCA defines HNWIs as people who have an annual income of at

least £100,000, or wealth amounting to £250,000 or more. HNWIs may invest any amount of money in P2P, with no restrictions. They can do this either via a regulated financial adviser, or by investing directly into P2P lending platforms.

Certified sophisticated investors Investors can become certified as ‘sophisticated’ if they can prove that they are “sufficiently knowledgeable to understand the risks associated with engaging in investment activity in non-mainstream pooled investments”, the FCA says.

P2P lending platforms can certify sophisticated investors on completion of their appropriateness tests, and this certification lasts for a year.

Self-certified sophisticated investors The FCA allows investors to describe themselves as ‘sophisticated’ if they have been a member of a network or syndicate of business angels for at least six months, or if they have made at least two investments in unlisted companies over the previous two years.

Anyone who has been employed in the financial services sector for the previous two years, or who has spent

at least two years as the director of a company with an annual turnover of at least £1m, may also self-certify as a sophisticated investor.

Restricted investors Restricted investors are those who have never invested in P2P loans before, and have little knowledge of the sector. The FCA requires these investors to sign a declaration stating that they will not put more than 10 per cent of their investment portfolio into P2P loans.

Restricted investors can re-classify as either self-certified or certified sophisticated investors after they have made two or more P2P investments, and can demonstrate an improved understanding of the sector.

Investors who are receiving regulated advice Financial advisers are trusted by their clients to make appropriate financial decisions on their behalf, and this vital role has been recognised by both the FCA and P2P lending platforms. As a result, any investors who are receiving regulated advice from a professional financial adviser or wealth manager can bypass the certification processes completely and invest in P2P without any of the above-mentioned restrictions.

P2P GUIDE

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Take your pick

There has never been more choice for peer-to-peer investors. From propertybacked loans, to litigation loans and funding solar-powered projects, there is an option for everyone‌

P

EER-TO-PEER LENDING began with a simple concept.

Ordinary, creditworthy people in need of a loan could be matched up with ordinary people who wanted to earn inflation-beating returns. One peer lends money to another; one peer borrows from another.

Today, we would call this P2P consumer lending, and it is one of a number of ways in which investors can access the P2P lending market.

The core principle of P2P lending has been modified over the years to lower the risk of financial loss and expand the opportunities available to borrowers and lenders alike.

Secondary markets have improved

liquidity for investors, creditchecking processes have been refined and auto-investing has allowed individual investors to diversify their P2P portfolio by automatically spreading their money across multiple loans.

But the most significant change has been the emergence of different types of P2P investing. No longer limited to consumer lending, the P2P sector now offers funding solutions for small- and medium-sized enterprises (SMEs), property developers, litigation and more.

Read on for a quick guide to some of the different types of P2P lending available today‌

P2P property lending P2P property lending has grown into one of the most crowded areas of the market, with dozens of platforms providing finance for property developments, buy-to-let mortgages and more.

These loans allow retail investors to access the huge profits and returns available in the UK property market, without actually having to buy a property themselves. For ÂŁ1,000, a retail investor could claim a stake in a number of projects, earning monthly interest via the rental income while their capital investment is protected by the value of the property itself.

However, it is essential to

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P2P GUIDE

understand which type of property loan you are investing in, and what your risk position may be.

Property development loans These are loans which are used to fund or refinance property developments. Rather than being offered on a loan-to-value (LTV) basis, they are funded according to the loan-to-gross-developmentvalue (LTGDV), which estimates the final sale value of the property development.

While property development loans often offer the highest returns to investors, the returns reflect the risk that the development process could run into difficulties, and – in the worst case scenario – may not ever be completed. In order to mitigate this risk, P2P lenders will keep the LTGDV relatively low, and their credit checking process will extend to the contractors and other relevant parties.

Buy-to-let loans Landlords can use P2P to finance or refinance buy-to-let mortgages, with the property value and the value of the rental income used as the underlying security.

Bridging loans A bridging loan is a short-term loan secured against a property, where the borrower needs to ‘bridge’ the gap between a property purchase and a property sale. In P2P, bridging loans are often used to secure a property while a mortgage is arranged, or to restore or update a property for sale at a later date. By nature, these loans carry a slightly higher risk because the bridging lender is reliant on another funding line being made available by a particular date.

Business lending P2P platforms have helped to transform the business lending landscape, supporting small- and medium-sized firms by offering fast and simple access to finance. Each business is judged on its own merits, and all loan applicants are subject to

a rigorous credit-checking process to determine their ability to make repayments.

There are both unsecured and secured business loans in the P2P market.

The role of P2P in the business lending space has become even more pronounced over the past year, as platforms have stepped in to offer much-needed funding to Covid-hit businesses across the UK. Several P2P lenders have been approved to offer the governmentbacked loan schemes, although retail investors are not able to invest in these loans at present.

Consumer loans Sometimes referred to as ‘pure’ P2P, these are personal loans funded by retail investors. While it is possible to invest directly in a small number of personal loans, some consumer lending platforms will bundle together groups of loans which share a similar risk profile. This adds diversification for investors and offers a choice between higher-risk loans with a higher return or very creditworthy loans which come with a lower risk and a lower return.

Ethical lending Environmentally-friendly and

socially-conscious investments have grown in popularity over the past decade, and these types of loans are a perfect fit for the P2P lending market.

Over the years, P2P platforms have helped to fund social housing, wind farms, solar panel installations and international relief projects by asking retail investors to fund their loans and bonds.

The UK government recently announced plans to launch its first sovereign green bond, in an effort to meet the country’s net zero target by 2050. This is likely to push environmentally-focused loans into the mainstream, and create wider demand for ethical lending projects.

Specialist loans The P2P model has been applied in a number of specialist areas, including litigation finance, music rights and film projects.

Like all P2P lending, each loan application is judged on the creditworthiness of the applicant and the value of the collateral, if it is a secured loan.

Some of these specialist areas, such as litigation funding, can offer extremely high returns, but it should be noted that this is often balanced against high risk.

PROMOTED CONTENT

15

Diversification and cash allocation – The key to optimising returns Paul Sonabend is a typical lender on the Relendex platform. He is a Chartered Accountant who was semi-retired after a successful entrepreneurial career and was looking for asset-backed investments with a consistent rate of return.

Sonabend became a lender in 2017 and was asked to represent the lenders. His involvement grew to the point where he became executive chairman in 2019.

A

VERY INTERESTING exercise is the preparation of the annual Outcomes Statement as required by the Financial Conduct Authority (FCA).

This year, my team wanted to understand what factors really made a difference to the returns enjoyed by our lenders. The FCA focuses on the rate of losses. This is understandable as an institution that does not properly underwrite its business can suffer substantial losses. However, an expert team which knows its business should be correctly assessing risk and pricing loans accordingly. This is what our analysis shows. Clearly the losses anticipated on our junior and mezzanine loans are greater than those on our A and A+ rated senior loans, but after risk adjustment the returns are remarkably consistent across all loan types. In the end it comes down to individual preference, those lenders with a greater risk appetite will outperform risk averse ones most years as defaults are low but in bad years they will suffer more.

Given the fact that Relendex and other experienced platforms should be correctly pricing loans, what then are the factors determining investment returns?

The figures show that there are two major factors. The first is obvious.

Diversification. Clearly the investor in a single higher yield loan could outperform if all goes well, but dramatically underperform if it defaults, so diversification is the key to consistent returns.

The second factor is obvious, but nearly always overlooked by lenders. This is cash drag. In 2020, a staggering average 16 per cent of lenders’ funds on our platform were not allocated to loans. Put simply, this reduced average returns by approximately one per cent.

The reasons for this cash drag are manifold and include: lenders not checking their accounts often enough so interest and capital repayments are not immediately reinvested; lenders holding their cash for the right loan and then missing out (one, almost £6m loan made in 2020, was filled in under 22 minutes); and lenders holding cash for a rainy day.

Whatever the reason, it is hard for lenders to optimise their returns. This requires them being active managers

of their funds. Spending time on due diligence and reinvesting spare cash either into our new listings or by purchasing loan parts on our very active resale marketplace.

Relendex’s reputation is growing on the basis not only of the quality of our loanbook, but in the consistent returns we are providing in times where banks and governments are offering little, or even negative ones. However, we do recognise that optimising returns requires effort on the lender’s behalf and so we are now delighted to be able to offer a solution that will optimise returns and remove the timeconsuming effort from lenders.

Our associated company, Farringdon Portfolio, has now been authorised by the FCA to advise on Relendex loans and to define loan portfolios to meet individual lenders’ risk profiles. Farringdon Portfolio undertakes the due diligence work on the lender’s behalf and ensures that cash utilisation is maximised.

Farringdon Portfolio also provides a full reporting service. As Farringdon Portfolio’s fees are capped not only can lenders save valuable time, but the asset allocation efficiencies should lead to enhanced net returns.

Lenders on Relendex’s P2P platform finance loans secured on UK commercial property. Relendex’s directors and shareholders lend alongside retail and institutional lenders in every loan.

Relendex and Farringdon Portfolio are both licenced by the FCA.

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IFAS

Engaging with IFAs What more can be done to attract financial advisers to the peer-to-peer lending sector?

I

T’S COMMON KNOWLEDGE that independent financial advisers (IFAs) have always been reticent about the peer-to-peer lending sector. Over the past few years, many platforms have devoted endless time and money to winning over the IFA market, with limited success. So why does it feel like so

little progress has been made?

There are a variety of reasons why IFAs are still cautious about P2P: a lack of education or awareness about the products on offer; the fact the P2P lending sector does not have financial services compensation scheme protection; the relative nascence

of the industry; and the occasional piece of bad press following the high-profile collapses of platforms such as Lendy and Collateral. The professional indemnity insurance costs for IFAs is another reason, as insurers are wary of any alternative investment, not just P2P. Advisers tend to stick to plain

IFAS

vanilla asset classes because they are easier to understand and defend in the event of a complaint. And of course, investments in equities, bonds and property have a long track record which means that many investors will already have a pre-conceived idea of the risk involved. This makes it much easier for IFAs to ‘sell’ these traditional investment classes to even the most inexperienced investor.

By contrast, the P2P lending sector is still considered to be relatively new, and its shorter track record means that it has not yet completed a whole economic cycle and proven that it can survive in a downturn. Of course, the Covid-19 pandemic and inevitable

“ I think IFAs

should gain more comfort through the fact the sector is well regulated

”

recession will finally put that argument to bed. But for now, with just 15 years of history to draw from, advisers find it difficult to assess if P2P is low, medium or high-risk.

This poses a challenge for any IFAs looking to advise on P2P.

17

“It’s difficult for IFAs to engage with the sector,” says Anthony Carty, group financial planning and business development director at selfinvestment specialists Clifton Asset Management.

This is the unfortunate reality of the P2P/IFA relationship. Education is obviously needed, to show IFAs the risks and returns of the sector and where P2P can fit in their clients’ portfolios. More third-party risk assessments of P2P may also help to improve engagement with advisers.

But it’s not just down to the platforms. IFAs also have a responsibility to seek to upscale and engage with the sector in order to advise clients with a wider knowledge of investments in their toolkit. This may be more likely at a larger IFA firm, where there are more resources available, and more spare time to spend researching alternative investment opportunities.

IFAs lead busy lives and many have come to depend on using investment portals where they can easily apply for whatever investment they are interested in for their clients.

Some P2P platforms such as Octopus Choice – although it is not currently lending amid the pandemic – have developed their own portals for IFAs that are simple to use and favoured by this community.

“I don’t think many platforms are IFA friendly,” says Carl Roberts, chartered financial planner, and founder and managing director of RTS Financial Planning. “We’ve used Octopus Choice; one of the main reasons is they’ve built up a good, long-standing relationship with the IFA world.

“They were in the Enterprise Investment Scheme space and built up a good reputation through that.”

Industry onlookers have suggested that more platforms should introduce IFA-friendly portals and products to encourage uptake among the adviser community – but these products have to be suitable for their clients, and they must be easy to understand and to market.

18

IFAS

Innovative Finance ISAs (IFISAs) have been touted as an attractive product for IFAs, due to the widespread recognition of the ISA brand among individual investors.

However, it is down to the platforms to communicate these benefits to IFAs in a way that is compliant with the Financial Conduct Authority (FCA) marketing restrictions.

“P2P needs to ensure the right products are marketed to the right people and to be careful that IFAs know exactly what the features of the products are,” says Mark Turner, managing director, regulatory consulting at Duff & Phelps.

“I think IFAs should gain more comfort through the fact the sector is well regulated.”

In December 2019, the FCA introduced a raft of new regulations into the P2P lending sector, including a provision which states that platforms can only communicate ‘direct-offer financial promotions’ to certain investors, including high-net-worth or sophisticated investors, restricted investors (the everyday investors who pledge to put no more than

10 per cent of their portfolio in P2P) and those receiving regulated financial advice. This only heightens the importance of winning over IFAs, as they could unlock a whole new segment of the market for P2P platforms.

While regulation is important, ultimately IFAs want to see evidence of consistent asset performance.

have stopped lending during this time, including Octopus Choice and Lending Works, and we are still only at the beginning of what could be a severe recession.

Yet, the sector is confident it will survive. Those platforms that can show that they have provided a diversified source of income and have managed risk well in this difficult time, will

A huge reason why many advisers have avoided P2P is the fact the sector hasn’t been through a whole economic cycle and thus does not have any proof of how it would perform during a downturn.

Covid-19 is providing this test and platforms must pass it.

To attract more IFAs the sector needs to prove itself during the crisis, avoid any platform failures and return to pre-Covid-19 liquidity.

The majority of platforms are faring well so far, although some

stand out for IFAs. Furthermore, the downturn may show that P2P is even more attractive than other assets, such as stocks and shares, as it is does not experience the same level of volatility during economic instability and tends to offer fixed, inflation-beating returns.

“Lots of P2P lending platforms are holding out so hopefully IFAs will be more comfortable referring clients to platforms that have proved they can manage through a difficult economic downturn,” says Daniel Rajkumar,

“ As long as the lack of choice, flexibility and access is there that will continue to provide a challenge”

IFAS

founder and managing director of Rebuildingsociety.

When Covid-19 is a distant memory, and the P2P survival stats are in, the advocacy work will need to begin. There is no shortage of analysts who can provide deep and frequent commentary on stocks and shares investments, for instance, as well as making predictions about future performance. These insights coalesce to give advisers a sense of the viability of a particular investment opportunity, making it easier for them to make informed decisions about their client portfolios.

However, in P2P there is very little independent data to draw from. This makes it much more difficult for an IFA to make a recommendation.

They effectively have to do their own homework on P2P. More third-party analysis and commentary is needed – from analysts, from commentators, and from trade bodies such as the recently-established 36H Group.

A few independent due diligence platforms already exist. In:Review collates third-party feedback on alternative investments such as P2P lending, in a way that is easy for IFAs and potential investors to digest.

for independent scrutiny should never be considered by IFAs,” says Mike Bristow, chief executive of CrowdProperty.

Carty adds: “As long as the lack of choice, flexibility and access is there that will continue to provide a challenge.”

“ You’ll get more advisers coming to P2P

as it becomes clear that it’s not susceptible to immediate mood swings from investors in the same way as equity Meanwhile market data portal Brismo compares the performance of different P2P lending platforms, although it does not contain data from every lender in the sector.

This is another reason why platforms need to target the larger IFA firms – they have the time and resources to compare platforms and produce their own due diligence portfolios.

“Platforms that don’t display data and offer their loanbooks up

”

IFA Carl Roberts does not believe the sector has done enough to target advisers and attributed this to high costs and the fact they may be used to working with, and marketing to, investors directly.

“But until platforms do, P2P won’t be on the radar of IFAs,” he adds.

The fact is that there are some IFA-friendly P2P products, and IFAs are engaging with P2P lenders to a certain extent. But more progress is needed.

19

Engagement with advisers may have been interrupted by Covid-19 but the pandemic also provides an opportunity for the sector.

It is vital that P2P survives this economic downturn and continues to offer respectable returns for investors, while managing the inevitable defaults that will come with any recession.

If the sector comes out well from Covid-19, it will show that the P2P lending model is operationally robust and should be on the radar of every IFA in the country.

“I think IFAs will come around and won’t be able to ignore P2P forever,” says Lisa Best, head of financial services content at alternative investments research firm Intelligent Partnership.

“It’s another alternative that can provide income for clients and I think you’ll get more advisers coming to P2P as it becomes clear that it’s not susceptible to immediate mood swings from investors in the same way as equity.”

This article first featured in Peer2Peer Finance News.

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