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P2P lending offers an attractive entry point into property investment

For investors the current turbulent economic environment has made the trade-off between risk and return somewhat more challenging that it has been for a few years. Volatility in the equity markets at the end of last year saw stocks ricochet from record highs to post their biggest fall since 2008 – with the FTSE-100 ending down 12.5% at the end of December 2018. And while stocks bounced back in the first quarter, many are understandably wary.

In such a climate, it’s not surprising that investors are turning to asset classes that might be considered somewhat more stable such as property or bonds. Yet buying property remains expensive and buy-to-let investment is a far less attractive option than it once was.

This is where P2P lending platforms may offer a solution. Less costly than buy-to-let investment, I believe P2P property platforms provide the perfect entry into bricks and mortar investment while offering highly attractive returns.

Buy-to-let investors under pressure

Traditional routes into property investment are being squeezed as never before. The stamp duty surcharge on additional properties introduced in 2016 has made investing in a buy-to-let portfolio more expensive.

Meanwhile, some landlords now face an uphill battle getting mortgages at all, thanks to tighter lending restrictions ushered in by the Prudential Regulation Authority (PRA) at the start of 2017. And this month sees another tranche of mortgage interest tax relief disappear driving up costs once more for buy-to-let investors.

All of this has led to an 80% fall in new lending on buy-to-let properties in two years from £25bn to just £5bn. As a result, many investors spooked by the volatility in the equity markets and put off by the cost and increasing administration associated with buy-to-let investing have begun to look to alternatives such as P2P lending.

In their simplest form, P2P platforms connect those with money to invest with those looking to borrow, enabling investors to target solid returns without the rollercoaster volatility of the stock market, while benefiting from reduced transaction costs.

Additionally, P2P performance has proven to be robust with many of the largest P2P lenders delivering yields of around 4-5%. In 2015, P2P was approved to be included within the ISA wrapper, so interest earned through eligible P2P platforms can now be tax-free.

The rise of P2P, together with a decade of low interest rates has inspired many would-be savers to seek alternatives to traditional banks saving accounts to boost their income.

Lending is robust too. Last year, P2P lending volumes stood at £3bn, according to figures compiled the UK P2P Finance Association (P2PFA), while P2P lending to date now stands at £15bn and within this property-based P2P lending, in particular, is experiencing healthy demand.

Two main routes into P2P property investment

Property-backed P2P lending has become increasingly popular with investors because the loans are secured against bricks and mortar, reducing risk of capital loss, yet maintaining the healthy returns on offer.

There are two main ways to invest in property through a P2P lender.

The first, property crowdfunding is possibly the most familiar. It allows investors a fractional share of a property along with others over a lengthy period of time. Investors stand to make a profit as a property’s value rises over time, along with a share of potential profits from rent (which could be thought of as similar to a stock’s dividend). Of course, ownership also carries the risk of losses if property values drop, if there are void periods and owning a fraction of a property if things go wrong can create headaches in terms of determining the order in which multiple investors should be compensated.

Considered a simpler method, P2P property lenders advance money to property developers to either build small developments or refurbish old buildings into residential accommodation. The loans are for far shorter periods, so investors lose the potential for a windfall return on the longer-term investment in a buy-to-let property that is gaining in value each year. But the returns are generally more predictable and in some cases the investor, or some P2P platforms such as Blend Network, have the first charge on the loan should anything go wrong meaning the risk of significant losses is relatively small.

Investing outside of London offers greater rewards

We believe the biggest growth has recently been in this second area of lending to the broader residential space, which includes bridge funding, small family builders and developers of flats for sale to buy-to-let landlords.

Of course, all P2P property lending is not without risk. Investors should be aware that many platforms offer loans in higher risk assets and cities, which, as at least one recent high-profile case has shown, run a greater risk of default.

Property developers concentrating on prime, city-centre locations – sectors which generally have peaked in recent years, should in our opinion largely be avoided, while loans on high-value properties we believe should be assessed with caution. Moreover, in our experience, small builders who tend to operate in niche, higher-margin markets are less exposed to market volatility than London’s buy-to-let landlords.

We have developed a different model, which focuses on affordable housing, outside London, in less overbought regions where there is still the potential to secure robust returns. We have so far lent out some £6m, with an average return of close to 12% and had no defaults.

Essentially, P2P property investment can offer robust fixed yields, backed by physical property assets. With due diligence undertaken by the P2P platform and available to potential investors, loans are likely to be advanced to borrowers that have credible plans for their properties and pose little risk to investors while at the same time offering investors greater liquidity and more attractive returns than may be found in traditional property investments. That said, we always advise investors to do their own due diligence.

Source: Mortgage Introducer

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City watchdog issues warning on investing in peer-to-peer loans

The UK financial watchdog has warned customers about investing in peer-to-peer lending through innovative finance ISAs (IFISAS).

The Financial Conduct Authority (FCA) said it had seen “high-risk” IFISAS, which invest money into products such as mini-bonds or peer-to-peer investments, being advertised alongside cash ISAs.

However, these types of investments may not be covered by the Financial Services Compensation Scheme, therefore customers may lose money and be unable to reclaim losses.

In a statement the FCA said: “Investments held in IFISAs are high-risk with the money ultimately being invested in products like mini-bonds or peer-to-peer investments.

“These types of investments may not be protected by the Financial Services Compensation Scheme so customers may lose money invested or find it hard to get back.

“Anyone considering investing in an IFISA should carefully consider where their money is being invested before purchasing an IFISA.”

The FCA’s warning follows the collapse of mini-bond firm London Capital & Finance, which put the investments of thousands of bondholders at risk.

The watchdog has called for an independent investigation into the regulation of LCF following its failure.

By Jessica Clark

Source: City AM

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Alternative property financing route proving increasingly popular

An Altrincham firm is proving that alternative funding lines are just as effective in the property market as traditional sources.

The House Crowd is a peer-to-peer lending platform that specialises in helping people invest in secured bridging and property development loans.

Based in Hale, The House Crowd is currently funding the development of more than 200 properties across the North West, all of which are crowdfunded.

The majority of the properties are developed by the company’s own development arm, House Crowd Developments, which means it has full control over its developments and can ensure full transparency into the progress of projects for its investors.

Frazer Fearnhead, founder and chief executive at The House Crowd, said: “It’s no longer the case that, in order to invest in property you need to have a high net worth or the spare time to become a landlord.

“Investing in crowdfunded development projects is a great alternative route into property investment. And it helps buyers, too – many of the properties we build are eligible for the Government’s Help to Buy scheme.

“So, in a way, those investing in property developments are helping, albeit in a small way, to solve Britain’s housing crisis.”

The House Crowd also has its own Innovative Finance ISA (IFISA) which automatically diversifies investor capital across its portfolio of peer-to-peer development loans, all of which are secured against the borrower’s property asset.

Investment starts from £1,000 up to the maximum tax-free allowance of £20,000 in any one tax year.

And, the interest rates offered are considerably higher than traditional cash ISAs, although, it must be said that they do not offer the protection of the Financial Services Compensation Scheme.

The House Crowd’s IFISA for 2019 offers a target return of 7% per annum.

Fearnhead said: “There’s definitely a lack of awareness around IFISAs, but they’re growing, with £270m invested in its second full tax year of existence (2017/18).

“Alternative investment options democratise property investment and allow normal people who are looking to make a good return on their money to invest in property and, more importantly, make a decent return.”

One of The House Crowd’s major property developments is in The Downs, Altrincham.

With a gross development value of £15m, The House Crowd is raising the money for the development through investments made in its peer-to-peer lending and IFISA products.

To date, House Crowd Developments has completed phase 1 of the fundraise – £2.25m for the land purchase – as well as phase 2, £1.5m for initial construction costs.

The project is scheduled to finish in the third quarter of 2020, and it will result in a total of 40 buildings, comprising 31 apartments, eight town houses and one commercial unit. Prices will range from £225,000 to £695,000.

“London has traditionally been the focal point for property investment in the UK, but there’s so much opportunity in the North, particularly the North West,” said Fearnhead.

“We know first-hand that there’s demand for property in the region – in fact, 40% of the houses in one of our developments in Cheshire sold on opening day.

“The Government’s ‘Northern Powerhouse’ campaign has certainly helped, but the promise of new, affordable housing and nearby jobs is a big draw.”

He added: “We are confident in the land values in the North West, but would exercise greater caution for development loans in other areas which are being more heavily affected by Brexit uncertainty and sluggish house price growth.

“We are avoiding prime central London for the time being, but will look at everything else on a case-by-case basis. Thankfully, the North West, where most of our development loans are based, continues to grow steadily in value.”

By Neil Hodgson

Source:The Business Desk

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Breaking down the lending barriers

Peer-to-peer lending may not be a familiar part of an adviser’s arsenal, but interest in the area is on the rise and the industry’s overall growth rates add weight to its suggestion that it is moving into the mainstream.

However, a recent paper by the FCA that has suggested consumers are at risk of harm shows there is work to be done to convince more advisers of its merits.

At its heart, P2P is a way of for consumers to lend money to companies and individuals – via platforms, which either set interest rates themselves (the most common method, as Table 1 shows) or allow consumers to do so.

The attraction is that these rates are typically substantially higher than can be found elsewhere. But as always, the greater yields come at the expense of higher risk of default, and P2P is not covered by the Financial Services Compensation Scheme.

For intermediaries, such lending might provide a useful option when catering for clients with short-term time horizons, such as one to three years, in cases where equities pose too much of a risk to capital and cash is unable to match inflation.

The sector’s relative infancy has meant the number of advisers dipping their toes in remains fairly small. But providers say they are starting to see a notable uptick in intermediaries using P2P for client recommendations.

“A few years ago very few financial advisers were using [P2P]. But we’ve now got 1,100 advisers registered on the platform, and adding more and more every day,” says Sam Handfield-Jones, chief product officer at Octopus, who adds his company’s loan book has grown to in excess of £250m.

“They range from advisers having 10, 20, 40, 50 clients on [the platform], through to advisers using it to solve really specific problems or one or two clients, so it’s still massively varied as to how it’s used.”

Nathan Mead-Wellings, director at London-based advice firm Finura Partners, says more clients are starting to broach the subject. “There is an interest among the higher net worth to get into the lending space where they have reasonable knowledge of asset-backed lending in particular,” he says.

“Familiarity with larger platforms such as Ratesetter is also filtering down. These clients are often prepared to view these as high-risk investments and are aware that they lack FSCS protection.”

Growth and responsibility

Growth in the sector has certainly been eye-catching. Data compiled by the UK Peer2Peer Finance Association shows cumulative lending had risen to nearly £9bn in the first quarter of 2018, a jump of more than 50 per cent from the second quarter of 2017. Almost two-thirds of this lending was shared between two providers – Funding Circle and Zopa, the longest running P2P platform.

Greater regulation is inevitable in any new sector that starts to gain popularity with consumers. Back in 2016, FCA chief executive Andrew Bailey remarked of P2P: “It’s a fast-moving, evolving industry. Some of the directions in which it’s going are posing some quite big challenges in terms of transparency and fairness.

“Those are the things that we’ll be considering when it comes to the point of proposing and making rules. We always try to balance innovation and competition against having a fair and transparent environment.”

Two years later, in July 2018, the watchdog subsequently unveiled a 156-page consultation paper in a bid to address potential problems in the space.

The regulator identified poor business practices, particularly on some P2P platforms. These related to “disclosure of information to clients, charging structures, wind-down arrangements and record keeping”, it said.

The report also highlighted a number of potential and ongoing harms that may impact investors, such as poor quality or unsuitable products, poor treatment of customers, and high prices.

Gonçalo de Vasconcelos, chief executive at crowdfunding platform SyndicateRoom, says the real surprise was a proposed clampdown on promotional activity by P2P providers.

Investors in the space could now face the same kind of marketing restrictions that already apply to the investment-based crowdfunding sector. These require providers to ensure they only target their promotions at advisers or sophisticated/wealthy investors, or else those who certify they will not invest more than 10 per cent of their assets in “readily realisable” securities.

Mr de Vasconcelos says: “The changes to the P2P sector were mostly unnecessary and slightly over the top. The unintended consequence, or perhaps intended, is that everyday investors see P2P as this spooky, dangerous thing that it isn’t – just look at the track record of the main P2P platforms for more than 10 years now.”

But some say this track record is rightly treated with scepticism.

Mr Mead-Wellings says: “It can be hard to run due diligence on the different platforms and understand the default rates/profitability and so on, but mostly [the issue] is that few have been tested in a downturn. It would be interesting to see what the average credit profile of their borrowers and lenders is.”

Mr Handfield-Jones adds: “Advisers are where they should be, cautious about adopting new things. They have an obligation to protect their clients’ money and the sector is 11 to 12 years old – so it’s still new.”

Mr Vasconcelos concedes the example of an adviser who took an interest in one of his company’s products, but ultimately would not show it to clients because it lacked a three-year track record.

He says: “It’s not worth them running the risk due to regulatory reasons. The two main barriers for advisers to get involved are lack of knowledge and being risk-adverse. The most sophisticated advisers are on it, but it’s still a very small percentage of the market.”

The task for providers is to assess how the industry can evolve in an adviser-friendly way.

Medical attraction

Another obstacle to more advisers and consumers embracing the asset class is accessibility. Mr Handfield-Jones says encouraging more self-invested personal pension providers to permit P2P investments is one of Octopus’s key aims.

Just two providers are currently on board, and regulators’ growing suspicion of unregulated investments held within Sipps may mean others are reluctant to take the plunge. But Mr Handfield-Jones notes those in the decumulation phase often seek to access parts of their money on a number of different time horizons, a preference he says can chime with P2P.

He explains: “An adviser will rarely recommend equity exposure on a sub three-year time horizon, yet if you’re buying multi-asset funds and selling them down to fund income in decumulation, you’re effectively buying equities and selling them down on a sub-three year. But because it’s wrapped up in the multi-asset fund it’s not so obvious.

“When you’re talking about portfolio construction, decumulation and income drawdown, maintaining that capital within your Sipp wrapper is an important part of that and will be the big switch to [push P2P lending into the] mainstream.”

Providers also claim advisers may end up using P2P to support client objectives in relation to their businesses.

Mr Handfield-Jones says he has seen a sharp rise in medical workers, such as doctors and dentists, who fund private work through a limited company, investing the business’s capital into P2P.

“They don’t want to take out the dividends and pay dividend tax, but if you’ve got a company bank account with a high street bank you’re going to be earning negative interest. So the idea of putting your balance sheet to work a bit harder is quite appealing,” he says.

As ever, ensuring that all clients’ eggs are not in one basket will be paramount in such situations.

Losing interest

One initiative that was previously predicted as a game changer for P2P was the Innovative Finance Isa. Introduced in April 2016, the IFISA enabled peer-to-peer lending to be accessed in a tax-efficient wrapper for the first time. Rates on offer from such propositions extended all the way up to 13 per cent, suggesting the risks involved in P2P may be greater than some claim.

Take-up rates began at very low levels, but £290m was invested during the 2017-18 tax year, a sharp uptick on the £36m invested in the Isa’s first 12 months of existence.

Mr Handfield-Jones says: “The first year was a little bit underwhelming. The year just gone has been much stronger, and we expect this year to be double or triple what we did last year.”

He adds the first-year results could largely be attributed to the lack of providers in the market. Low savings rates remain the most obvious way in which providers can attract investors, especially as cash Isas can be transferred without the need for new funds to be committed. But consumer’s love affair with cash, regardless of its suitability, is proving difficult to change.

“You’re seeing solid adoption, but in the context of seeing £40bn into cash Isas it’s still a drop in the ocean. And that’s where the opportunity is – you’re talking about hundreds of millions of pounds of lost interest in the UK,” Mr Handfield-Jones adds.

That is a problem faced by the investment industry more generally. But with lending platforms having yet to experience real hardship, the question of whether P2P is a suitable replacement may not be answered until the next economic downturn.

Source: FT Adviser

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Alternative finance platforms report stellar growth

The UK alternative finance market grew by 35% to £6.2 billion in 2017, with P2P and crowdfunding accounting for 30% of all deals, according to a report by Cambridge Centre for Alternative Finance.

Peer-to-peer business lending retained the top spot, with £2 billion in transaction volume in 2017 and 65% year-on-year growth, estimated to be equivalent of 29.2% of all new bank loans to small businesses in 2017. That’s nearly double the 15.3% figure in 2016.

Consumer lending in the P2P space commanded £1.4 billion, with property lending standing at £1.2 billion and invoice trading at £787 million.

Equity-based and real-estate crowdfunding platforms also had a stellar year, with the former growing by 22% year-on-year to £333 million, and the latter hitting 200% y-o-y growth at £200 million.

But debt-based securities stagnated at £79 million, while rewards-based models decreased by £4 million to £44 million in 2017.

Institutional financing helped propel the figures, accounting for 40% of funding for P2P business lending. This trend of institutionalisation was also seen in equity-based crowdfunding, where 49% of the funding was provided by venture capital funds and professional investors “co-investing” with retail investors.

The CCAF also asked UK online alternative finance platforms to provide an indicative breakdown of their operating costs and budget allocation, finding that on average and across models, they spend about 15% on IT, 14% on research and development, 14% on sales and marketing, and eight per cent on reporting and compliance.

Bryan Zhang, the executive director of the Cambridge Centre for Alternative Finance says: “This report reflects an industry that is playing an increasingly important role in helping consumers and businesses access finance, whilst growing to become more diversified, sophisticated and institutionalised.”

Bruce Davis, director of the UK Crowdfunding Association adds: “As we move into uncertain times with Brexit discussions ongoing, the UK will need to ensure its home-grown providers of investment capital can keep providing vital investments to grow businesses and improve the UK’s productivity and international competitiveness. We hope that policy makers and regulators alike will think about ways that they can further support the growth of the industry as it matures and diversifies further.”

Source: Fin Extra

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Returns from peer-to-peer lending look attractive, but is it a sensible sector to invest for retirement?

Peer-to-peer lending (P2P) has long been deemed by many professionals in the conventional investment industry as too risky for retail investors.

And yet, this technology driven form of lending has surged in popularity over the past decade, which is largely a result of the sector offering a decent return where other asset classes have struggled.

According to research from AltFi published last month, the UK P2P lending market has outperformed more than 90 per cent of UK funds investing in bond and direct property over the past three years.

But while potential returns from P2P lending look attractive, is it a good place to invest for your pension?

Game-changer

Before the pension freedoms were introduced in 2015, savers had to buy an annuity, which pays a fixed sum of money throughout retirement.

“Historically, planning for retirement was relatively simple,” says Michael Lynn, chief executive at P2P lender Relendex. Now people have more choice, they are turning away from the traditional annuity, which Lynn says is because savers have been bitten by traditional pension schemes, and are being badly let down by off-the-shelf products.

Throw into the mix the concerns about an end to the equity bull market, and it’s not really surprising that people are looking to alternative sectors like P2P and crowdfunding to provide extra income in retirement and see their savings grow above inflation. In fact, Crowd for Angels says more than 20 per cent of its investors use the platform to save for pension growth.

And indeed, Relendex’s Lynn says that looking outside the box has become a “necessity” for retirement savings to flourish. He even argues that P2P investments need not be risky, provided the loans are secured against assets and the lender platform is regulated by the Financial Conduct Authority.

Structurally sound

The government’s launch of the Innovative Finance Isa in 2016 has also given people more faith in the sector, offering savers a tax-free wrapper for alternative investments.

Of course, if you’re investing through the Innovative Finance Isa, this should act as a supplement to your retirement income, rather than a replacement for a pension.

Whether you’re saving for retirement or not, it’s never a good idea to invest in one asset class. But there’s certainly something to be said for allocating a small portion of your pension savings to authorised P2P lending firms.

As Folk2Folk chief executive Giles Cross puts it: “Returns from the right P2P platform can be a great way of bolstering retirement income, and should be considered as part of a balanced portfolio of investments.”

As well as the Isa, you can also invest in P2P loans through a DIY-style pension wrapper, such as a self-invested personal pension scheme (Sipp).

One of the benefits of the pension wrapper over the Isa is that you can invest through several different P2P lending sites, rather than just one, which in turn spreads some of the risk.

However, also bear in mind that most Sipp operators will only have a limited number of P2P providers to choose from – if any at all.

The chief executive of Goji, Jake Wombwell-Povey, warns that investing in debt products through Sipps is difficult. One problem is that some platforms don’t have the processes in place to make sure that money invested through a Sipp is not lent to a connected party.

“HMRC levies a tax charge against the Sipp trustee for breaking the rules; this means that Sipp administrators are understandably risk-averse to ensure that they don’t incur those charges – and this manifests in restricted investment lists.”

Wombwell-Povey also points out that Sipp managers need more regulatory capital if they allow investors to hold P2P loans and crowd bonds, which ultimately means higher costs for investors.

“All of these well-intentioned challenges have essentially relegated these investments into the ‘too difficult’ bucket for many of the less innovative Sipp managers, or into the ‘too expensive’ bucket for other investors, despite soaring popularity among retail investors.”

So if you’re looking to tap this market through a Sipp, look at the range of P2P providers available, and weigh up whether you think the extra costs are worth it.

Risk and reward

The proposition of each P2P lender varies so drastically and there are huge differences in the level of risk. This means there is no simple answer to whether the sector is suitable for your pension.

Just like any investment, it’s important to do your research when choosing where to allocate your money: make sure you understand the proposition, and are comfortable with the risks. Also find out the default rate, and whether the firm has a provision fund to compensate investors for poorly performing loans.

Richard Gill from Crowd for Angels says it’s important to know when you’ll receive income. “Some products, such as those offered by P2P providers, make consistent payments into your account as the loans are paid back. Others, like crowd bonds, may make monthly, quarterly, or semi-annual interest payments.”

Ultimately there’s a strong argument for allocating some of your pension savings into the P2P market, but make sure you understand what you’re signing up for.

Source: City A.M.

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P2P Lending Investment Returns Outstrip Many Market Competitors

Peer to Peer (P2P) lending may be one of the newest kids on the investment block but according to new research from AltFi, it is paying out handsome returns.

P2P lending arrived in the UK back in 2010 with the launch of Funding Circle. The idea was simple. In the wake of the financial crisis, banks were – and still are – paying abysmally low rates of interest to savers. P2P platforms allowed savers to collectively lend money to businesses and individuals, usually over relatively short periods of time. By cutting out the middleman (or to be more precise, banks and other traditional lenders), P2P lenders were able to offer competitive rates to borrowers and superior returns to investors.

The market has evolved over the years. AltFi – which provides specialist news for the alternative investment industry along with a range of analytics services – says the market is growing rapidly. For instance, in 2015, P2P lending platforms brokered around £1.1bn in loans. In the first half of 2018 alone, the figure was £3bn. Separate figures from the Peer to Peer Finance Association reveal that its members have, to date, originated loans to a value of £9bn.

As P2P lending platforms have proliferated, there has been a considerable amount of specialisation. Many are open to a broad spectrum of investors, ranging from private individuals on relatively modest incomes,  seeking a way to make their money work a bit harder to institutions, such as pension funds. Some platforms focus on wealthier investors or specialise in certain sectors, such as the property market.

Beating the Market

According to AltFi  Data’s  Lending Returns Index,  P2P platforms delivered a return of 18.92% to investors between June 2015 and June 2018. Based on an analysis of data from Funding CircleMarket InvoiceRate Setter and Zopa, that figure has been calculated after factoring in losses and fees. The average return not only compares more than favourably to the average returns from bank savings accounts that typically offer 1.5% per annum or less (even after the Bank of England’s hike in rates) but also with the more rarified forms of investment favoured by professional investors.

AltFi cites the example of the M&G Optimal Income fund, which returned a premium of 12.6% to investors over the same period. Overall, the report says that P2P returns outperform many large investment funds and bond investment opportunities.

The target interest rates advertised by some of the leading  P2P platforms confirm that the returns from P2P offer attractive returns. For interest Funding Circle currently targets a return of 7-8% per year for its investors. Zopa targets 4.5% per annum for low-risk loans and 5.2% for those who are happy to live with a slightly riskier proposition.

A Lot of Variation

However, the returns enjoyed by investors do depend on the performance of the loans and as Uma Rajah, CEO of prime property focused platform lender CapitalRise observes,  returns vary from 2% to 12% per year, depending on the platform.

“The rate of return depends on a lot of factors – the level of risk, the creditworthiness of the borrower and the purpose of the loan. That’s why annual returns can vary so much from platform to platform.”  

A Safe Investment

But given that high returns are available, should the ordinary saver (aka ‘retail investor’  in the parlance of the financial services industry) be rushing to take money out of his or her easy-access savings account and put it instead into a P2P platform?

Investing via a P2P platform is a relatively simple process. The platforms in question are essentially online marketplaces that bring together prospective borrowers with investors who have cash they are prepared to lend in concert with others. For its part, the platform vets those who are applying for finance – assessing their creditworthiness –  and then presents a range of loan propositions to prospective lenders. Every platform works a little differently but in most cases, the loan opportunities will be rated in terms of the associated risks and an interest rate is set accordingly. Generally,  investors, have the ability to choose a particular loan opportunity but some platforms ask for funds to be pre-committed and the platform itself makes investment choices and funnels that cash to borrowers. In an ideal world, investors lending through a platform can choose a rate of return that aligns with their own appetite for risk.

More Regulation

Despite the success of P2P, there are still some question marks over its suitability for ordinary investors, as highlighted in July by the industry regulator, the Financial Conduct Authority (FCA). While the regulator has been broadly supportive of  ‘alternative finance’  it has expressed concerns that some platforms are not providing sufficiently accurate or transparent information about investment opportunities on offer. So under proposed new rules, all P2P platforms will have to be much more open when it comes to disclosing information on interest rates (real and expected),  default rates and the risks associated with each loan.

The FCA is also calling on platforms to tighten up their approach to marketing, saying that some lenders were being exposed to opportunities that fell outside their stated risk comfort zone. More controversially – at least within the industry – the regulator is also proposing that the marketing of some P2P products be restricted to ‘sophisticated investors’  – or to put it another way, individuals who tend to be wealthy and can demonstrate that they are financially literate.

It would be wrong to suggest that P2P investing is unacceptably risky – as the AltFi research indicates, the returns after losses remain high. But the reforms should provide an added safety net and have been broadly welcomed by the industry as a positive step. As David Bradley Ward, CEO of the P2P platform, Abirate put it:

“For the P2P lending industry to grow further, it needs to be effectively regulated. In short, this means there’s a fair playing field for lenders, borrowers and platforms. FCA regulation has cemented peer-to-peer lending as a mainstream financial service but to reach its full potential the industry must ensure best practice at a time when the FCA is seeking the adoption of good practice.”

Uma Rajah points out that there three different categories of lending – consumer, business and property – and each have their own risks associated.

“Loans to SMEs and consumers are usually unsecured,” she says. “What this means, in a nutshell, is that should the borrower be unable to repay the loan, investor capital is lost. Property loans, on the other hand, are secured against the properties themselves with a legal charge. The easiest way to understand this is to imagine that should the borrower be unable to repay, the lender (or lenders) could seize the property and force its sale in order to recoup their capital.”

P2P Lending is now part of the mainstream. The Altfi report suggests that it is delivering consistently high returns. But the opportunities and risks vary according to the platform and the nature of the loan.

Source: CashLady

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FCA threatens clampdown on P2P lending

Regulators are considering making peer-to-peer lending and crowdfunding less accessible to investors who aren’t professional or very rich, says David Stevenson.

Can you be trusted to be a sensible investor? The Financial Conduct Authority (FCA) has been pondering whether investors looking to put some money to work in alternative finance are capable of making sensible and informed decisions about the range of products on offer. If they can’t, should their cash be channelled into more open, transparent, mass-market products, such as unit or investment trusts or exchange-traded funds?

I realise this all sounds a bit policy-wonkish, but when it comes to the world of alternative finance, especially peer-to-peer (P2P) lending, this regulatory attitude may be about to have a direct impact on your investments. A few weeks ago, the FCA produced a consultation paper entitled “Loan-based (‘peer-to-peer’) and investment-based crowdfunding platforms: feedback on our post-implementation review and proposed changes to the regulatory framework”.

These fussy new rules…

Most of the suggestions in the paper are good old-fashioned common sense, designed to make P2P lending more mainstream and less risky. But one key proposal stands out like a sore thumb. The regulators suggest that future P2P investment “promotions” should only be able to target the following groups: those certified or self-certified as sophisticated investors, those certified as high net worth investors, those under advisement from an authorised person, and those who certify they will not invest more than 10% of their net investable portfolio in P2P agreements.

So, to be clear, in the future, if you are a new customer at, say, Zopa, Ratesetter or Funding Circle looking to bolster your income, you’ll have to prove you are independently wealthy or a finance professional, or certify that you only have 10% of your portfolio in online lending.

The reaction of many experienced private investors has been negative, to put it mildly. The industry website www.altfi.com, of which I am an executive director, asked for views. M. Thomas said the FCA “has once again demonstrated its antipathy towards individual… investors and the original spirit of P2P (to cut out the middleman)… these FCA proposals demonstrate a nanny-state mentality – people must be protected against themselves”.

Another unnamed pensioner added that “as a former company director, I’m well able to decide for myself what investments I make, and have no plans to reduce my current level of P2P lending (30% of my total). The FCA may wish to reflect on the fact that had its predecessor been rather better at monitoring the activities of Equitable Life, many of us would now have less need to consider some higher-risk investments in our retirement.”

…wouldn’t work

Many investors I’ve talked to with an interest in alternative finance are deeply troubled. Most simply intend to ignore the changes, even if they come in. And that, of course, is the real problem with any form of regulatory overreach. The intended beneficiaries simply ignore the good intentions and just fib and say whatever the regulator wants to hear. Witness the world of stockbroking, where investors already have to self-certify if they want to deal in securitised options such as covered warrants. Most retail stockbrokers send out pointless forms asking all the right questions about attitudes to risk. Most of them know full well that investors who sign the forms aren’t entirely truthful but connive in the charade.

But even if these changes were easy to apply, I’m not convinced they are fair. Is P2P really that risky? In effect, the regulators are saying online lending is as risky as, say, crowdfunding. With all due respect to successful crowdfunding platforms such as Seedrs and Crowdcube, the risk from investing in start-ups is immeasurably higher than that from lending to consumers or even established small companies with clear credit track records. With the former, most experienced investors are used to the idea that a large proportion of their investee companies won’t make it. With online lending, most credit investors (institutions are active in this space) don’t expect losses to exceed 5%-10%, even in the worst years.

Even if policymakers are worried about risk, there is a better way of managing this downside – sharper, smarter regulation. Or as Rhydian Lewis of P2P lending platform Ratesetter puts it, rather than block access, why not “eliminate the high-risk elements of P2P lending and… keep it accessible”? Wouldn’t it be better to close down rubbish platforms, force through far greater transparency about risks and impose heavy penalties for rule-breakers? Why should the wealthy or financial professionals be the only ones to benefit from an alternative to the lacklustre yields on offer at high-street savings institutions – most of which haven’t even passed on the recent increase in the Bank of England base interest rate?

Source: Money Week

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New rules for peer-to-peer lending announced by FCA

The popularity of peer-to-peer (P2P) lending has increased exponentially in recent years, with nearly £10 billion being transferred through such platforms in the past ten years. In an attempt to fix “increasingly complex business structures”, the FCA has announced new plans for new rules for peer-to-peer (P2P) lending.

The FCA has announced new plans which will see a crackdown on P2P lending and the loan-based crowdfunding industry in general following concerns that consumers are at risk of investing in things they do not understand.

P2P lending was last reviewed by the FCA in December 2016, announcing at the time, its plans to address the gap in protections for customers. Since then it has monitored the situation and noted the variety of loan-based crowdfunding business models, of which some are becoming increasingly complex. Whilst the FCA regulates loan-based crowdfunding (also known as P2P lending) and investment-based crowdfunding (which falls outside of the FCA’s present review), the FCA does not regulate donation-based or reward-based crowdfunding (hence, both of these fall outside of the FCA’s review).

As part of its ongoing monitoring, the FCA has also noted poor practice among some firms in the crowdfunding industry. The proposals detailed below aim to improve standards in the sector whilst still leaving scope for further innovation.

The consultation is aimed at establishing views on the following proposals:

  • Proposals to ensure investors receive clear and accurate information about a potential investment and understand the risks involved
  • Ensure investors are adequately remunerated for the risk they are taking
  • Transparent and robust systems for assessing the risk, value and price of loans, and fair/transparent charges to investors
  • Promote good governance and orderly business practices
  • Proposals to extend existing marketing restrictions for investment-based crowdfunding platforms to loan-based platforms

Executive director of strategy and competition for the FCA, Christopher Woolard has stated that: “The changes we’re proposing are about ensuring sustainable development of the market and appropriate consumer protections. We believe that loan-based crowdfunding can play a valuable role in providing finance to small businesses and individuals but it’s essential that regulation stays up to date as markets develop.”

Equally, the FCA was keen to ensure that not all P2P lenders were criticised, noting that some “P2P platforms already have more robust systems and controls in place”.

The new proposals will also see tighter provisions when alternative funding is used for home loans. The FCA will seek to enforce its Mortgage and Home Finance: Conduct of Business rules on P2P platforms if they begin to deal in the residential lending market.

The FCA is asking for responses to the consultation by 27 October 2018 before it publishes rules in a Policy Statement later this year.

Source: Lexology

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Tougher P2P lending rules proposed over poor practice concerns

The city watchdog has proposed a number of measures to tighten up control of the peer-to-peer lending sector following concerns about poor practice and potential risks to investors.

The Financial Conduct Authority (FCA) has opened a consultation on loan-based crowdfunding platforms (peer-to-peer) following its original review of the sector in 2016.

It said since then, it’s observed that the new and growing area has become increasingly complex and has found evidence of “poor business practices” that could cause actual or potential harm to investors.

For example, P2P platforms have a much more active role by taking decisions on behalf of investors, structuring the loans they’re exposed to, and splitting loans across a number of investors (lenders) in order to receive a target rate of return.

Given the focus on headline rates, investors may not be aware of the exact level of risk they’re being exposed to. Further, the FCA said investors may not be receiving full information on charging structures, wind-down arrangements and record keeping.

Customers may also be buying unsuitable products, may be receiving poor treatment, may not be remunerated fairly for the level of risk they’re taking, and could be paying excessive costs for a platform’s services.

As a result, it has today proposed the following measures to ensure investors are given clearer information about investments, charges and risk:

  • When a platform advertises a target rate of return, it should be achievable, and for investors to understand and be fairly remunerated for the risks they’re exposed to
  • Where P2P platforms price loans or choose loans on behalf of investors, they need to clarify what systems and controls are in place to support the outcomes advertised
  • Strengthening rules on plans for the wind-down of P2P platforms, such as for the IT infrastructure to continue for the benefit of investors.

Christopher Woolard, executive director of strategy and competition at the FCA, said: “When we introduced new rules for crowdfunding, we said we’d review the market as it developed. We believe that loan-based crowdfunding can play a valuable role in providing finance to small businesses and individuals but it’s essential that regulation stays up-to-date as markets develop.

“The changes we’re proposing are about ensuring sustainable development of the market and appropriate consumer protections.”

The consultation closes on 27 October and the FCA expects to publish the new rules later this year.