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Peer-to-peer lenders told to clean up poor practices or face crackdown

The financial regulator has sent a seven-page letter to peer-to-peer lending firms warning them the industry must clean up poor practices or face a “strong and rapid” crackdown.

Peer-to-peer firms match individual borrowers or companies with lenders willing to put money aside for longer, hunting for a good return. As the banking middleman is cut out, borrowers often get slightly lower rates, while lenders can sometimes earn 6%+, though the regulator has repeatedly said it’s concerned that many don’t understand the risks involved.

Now The Times has revealed that in a letter sent to 65 firms, the Financial Conduct Authority (FCA) has highlighted an array of problems with some lenders, including weaknesses in disclosure of information to clients, complicated charging structures and poor record-keeping.

The letter itself hasn’t been published, and when we contacted it today the FCA wouldn’t officially comment. But we understand that the contents of the letter quoted in The Times is correct.

For more on how this works, including a full breakdown of the risks, see our Peer-to-Peer Lending guide.

What is peer-to-peer lending?

Peer-to-peer lending websites are industrial-scale online financial matchmakers. They can allow borrowers to get slightly lower rates, while investors who offer loans get far improved headline rates, with the sites themselves profiting via a fee.

But investing your money this way is NOT like traditional saving, as there’s no savings safety guarantee and you could lose your money. It may also be hard to get your money out early and your cash may not be lent straightaway, so you may get no interest for a while. See our Peer-to-Peer Lending guide for a full list of risks.

What does the letter sent by the FCA say?

MoneySavingExpert.com hasn’t seen the text of the letter sent by the FCA, so we don’t know full details.

However, according to The Times, the FCA says in the letter that certain platforms have made “significant changes to their business models without notifying us”. It also adds that this is being driven by pressure on many in the industry to return profits, resulting in them taking “additional, opportunistic risks” in certain areas, and warns of “severe” consequences to the stability of platforms.

The letter reportedly says the FCA is “reviewing the adequacy of a number of firms’ financial resources” and says the industry must “act now” to clean up poor practices or face a “strong and rapid” crackdown.

For full details, see The Times’ story Peer-to-peer lenders given final warning by Financial Conduct Authority (you’ll need to register to read the whole article).

What else is the FCA doing on this?

In June 2019, the regulator published new rules designed to better protect investors, which all peer-to-peer firms will need to follow by 9 December 2019. These rules include a limit on how much new investors can put into peer-to-peer lending, new checks to ensure you have the knowledge and experience to invest and stronger rules on plans if a lender goes bust. See New FCA rules on peer-to-peer lending for more info.

By Callum Mason

Source: Money Saving Expert

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Peer closely – but carefully – at peer-to-peer property investments

The interest rates on peer-to-peer property investments may look appealing, but investors should tread carefully.

Whether you’re selling your house or buying wine, cutting out the middleman can help you secure a better deal. Peer-to-peer (P2P) lending works on this principle too. By bringing together investors and borrowers, a P2P platform can offer each party terms they wouldn’t have been able to access readily through a more traditional financial institution. For the investor, who lends the money, it’s the prospect of a higher return; for the borrower, it’s the potential for a cheaper rate, a faster application process (hours rather than days in the case of P2P business lending) and a higher probability of getting a loan.

A selective market for borrowers
For those seeking to invest directly in property, borrowing from a P2P is an option, but it’s a selective market. It doesn’t generally cater to people buying houses to live in, nor for investors who want a long-term mortgage (although some platforms, including Landbay and LendInvest offer buy-to-let mortgages with terms of up to 30 years). On the more standard buy-to-let products the rates aren’t especially low. Landbay offers a two-year fixed product at 3.09% for up to 75% loan-to-value (LTV), but it’s possible to secure rates of 1.59% and 1.73% from Post Office Money and Virgin Money respectively.

But go more niche and the P2P lenders come into their own. For instance, LendInvest’s five-year fixed rate of 3.19% at 65% (LTV) for buy-to-letters who are limited companies is very competitive in that market. It is possible to go lower with Keystone’s 2.99% rate, but this comes with a 2% fee, double the fee charged by LendInvest.

However, the primary focus for the P2P platforms is short-term lending, especially for bridging and development finance. For example, on its residential bridging products, LendInvest offers rates from 0.55% a month for up to 18 months on properties with an LTV of 50% or less. It is possible to edge below these rates – specialist lender Precise Mortgages offers bridging from 0.49% – but with other factors such as fees and terms also important, the P2P platforms look appealing.

Choose your risk level when lending
These platforms rely on investors to fund their lending, so this is another way to gain access to the property market. The returns of the property-backed loans you are financing will be linked to the fortunes of the housing market.

It’s possible to select the level of risk you can tolerate. Some platforms will allocate your money to a selection of loans while others allow you to select those you want based on factors such as the interest rate and LTV. Minimum investments of £1,000 are standard, although it is possible to start with just £100 with Landbay. Given the breadth of risk, rates vary. LendInvest quotes a target annual return of 4%-7%, while Landbay flags up an annualised projected return of up to 3.54%.

Importantly, however, these rates are far from guaranteed. Any defaults will erode the return and investors’ capital is at risk. Sarah Coles of fund platform Hargreaves Lansdown points out that just because your investment is secured against the properties backing the loans, it doesn’t mean you would get all your money back in the event of a forced sale.

How will P2P fare in a downturn?
Note too that P2P platforms have yet to experience a severe downturn, while they’re also not covered by the Financial Services Compensation Scheme (FSCS).

There are already signs that the market is getting tougher. Demand for loans has fallen. At the end of May, property platform Lendy went into administration. This left more than 20,000 of Lendy’s individual investors exploring legal action to recover the £165m plus they had invested. A catalogue of errors may lie behind Lendy’s spiral into administration, but the Financial Conduct Authority (FCA), the City regulator, is keen to ensure that investors don’t fall victim to the overambitious marketing claims of P2P lenders.

It is also introducing a cap on the amount they can allocate to P2P arrangements. To avoid overexposure to risk, this is set at 10% of investable assets where the investor hasn’t taken financial advice. Platforms will also have to “assess investors’ knowledge and experience”, says the FCA.

Expect a shake-out
The upshot, according to Matt Hopkins of accountancy group BDO, is not that the P2P market is a bubble about to burst, but that there is likely to be a shake-out over the next few years as tougher conditions lead to consolidation in the number of platforms. We may end up with a handful of larger platforms alongside a few niche ones. In the meantime, given the recent turbulence in the sector and the uncertain macroeconomic outlook, investors should tread extremely carefully.

By: Sam Barrett

Source: Money Week

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The peer-to-peer industry isn’t doing enough to protect investors

The abundance of peer-to-peer lenders offering high yielding loans has been getting the attention of regulators.

Many peer-to-peer lenders target unsophisticated retail investors, who can invest as little as £100. And yet, there is a relatively high cost to on-board small investors, because platforms have to handle customer calls, and anti-money laundering requirements.

There have been dozens of failures, but the closure of Lendy has shocked the industry. The high-profile peer-to-peer lender accrued more than £160m on its loan book, and by the time the administrators were called, £90m was believed to be in default.

Many firms are being supported by equity injections (crowdfunded by retail investors), but given their high cash burn, it is simply a matter of time before they too fail.

Some providers offer woefully inadequate provision funds, which give a false sense of security. When Collateral collapsed last year, it emerged that they did not have the correct regulatory permissions.

Profitability aside, there is a fundamental issue with most peer-to-peer firms.

They are just a data intermediary between borrowers and lenders, rather than a financial intermediary. They earn fees based on volume of transactions, regardless of the underlying loan performance, whereas financial intermediaries, such as banks, have obligations to repay depositors when loan investments go bad.

Without this alignment of interest, the level of due diligence performed during the underwriting process is limited, and the onus is on the investor to understand the risks and read the terms and conditions.

But many investors do not bother reading the small print, which is usually signed electronically at the click of a button. Investors are often unaware of the risks.

Clearly, more needs to be done to protect investors. Recent regulatory changes to protect investors include a cap on investor wealth in such investments.

However, minimum standards of underwriting criteria should be introduced by the Financial Conduct Authority, such as valuation methodology and borrower’s solicitor requirements, so that risks are managed.

In Germany, for example, a banking licence is required by all lending firms. Obtaining this is a more thorough process to check that the lender’s systems and staff are appropriate.

Default rates are currently artificially low, because at the end of a loan term, borrowers easily jump ship to another peer-to-peer lender eager to lend money.

Meanwhile, the shortage of good quality loan opportunities means that small peer-to-peer players, who don’t have established broker relationships, will end up lending on risky assets and borrowers.

Both borrowers and brokers are wary of the ability of peer-to-peer lenders to raise a sufficient quantum of funds within the timescales required. The weak underwriting process of some peer-to-peer firms means that they are mispricing the loans, so ultimately the investors are insufficiently compensated.

Having emerged only in the past decade, peer-to-peer firms were largely not in existence during the 2007 crisis, so like a game of musical chairs, when the credit cycle turns, no one wants to be holding the loans when the music stops.

By Vivek Jeswani

Source: City AM

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FCA confirms new rules for P2P platforms

On 4th June 2019 the Financial Conduct Authority (the “FCA”) published final rules for peer-to-peer (or P2P) lending platforms. The new rules are the result of the FCA’s consultation that launched in July 2018, with the FCA stating that the new rules are designed to help better protect investors and allow firms and fundraisers to operate in a long-term, sustainable manner.  The new rules and guidance will come into force on 9th December 2019, with the exception of certain rules relating to mortgages that are funded through P2P loans (explained in further detail below) which entered into force on the same day that the policy statement was published by the FCA.

Why have these new rules been introduced?

As we reported in our briefing at the time of the launch of the FCA’s consultation (which can be found here), the FCA’s objective in bringing in the new rules is to prevent harm to investors, without stifling innovation in the P2P sector and is in line with its commitment to keep regulation of the sector under review.  Christopher Woolard, Executive Director of Strategy and Competition at the FCA commented on 4th June 2019 that [the new rules] ‘are about enhancing protection for investors while allowing them to take up innovative investment opportunities. For P2P to continue to evolve sustainably, it is vital that investors receive the right level of protection.‘   The FCA had also identified a specific gap in consumer protection for customers who enter into a mortgage or take out home financing products through loan-based crowdfunding and proposed to extend the rules that apply to home finance providers to those who operate P2P lending platforms where at least one of the investors is not an authorised home finance provider.  These are the rules that entered into force on the same day that the policy statement was published by the FCA.

What do the new rules do?

The new rules implement the FCA’s proposals largely as set out in the consultation paper, although the FCA has added more guidance and clarification to deal with concerns raised by firms during the consultation process.  The FCA has stated that the proposals that generated the most feedback were those relating to the application of marketing restrictions to the P2P sector.  The changes introduced by the new rules extend the application of the marketing restrictions that currently apply to investment-based crowdfunding platforms (in relation to non-readily realisable securities) to the P2P sector. This includes bringing in a requirement for P2P platforms that communicate “direct offer” financial promotions to ensure that they only communicate such promotions to retail clients that:

  • are certified or self-certified as ‘sophisticated investors’ or are certified as ‘high net worth investors’;
  • confirm before a promotion is made that, in relation to the investment promoted, they will receive regulated investment advice or investment management services from an authorised person, or
  • are certified as a ‘restricted investor’; that is, they will not invest more than 10% of their net investible assets in P2P loans in the 12 months following certification.

Among other things, this new requirement means that retail customers who are classified as “restricted investors” are limited to investing a maximum of 10 per cent of their investible assets in P2P loans.  The FCA’s Policy Statement expressly states, however, that investors that initially fall within the restricted investor category can be reclassified as certified sophisticated investors (removing the 10% investment limit) if they have made two or more P2P investments in the past two years.

Where no advice is given to a retail client, the final rules also require P2P platforms to carry out an appropriateness assessment.  This requirement also currently applies to the investment-based crowdfunding platforms.  However, the final rules contain guidance on the topics that P2P platforms should consider including in the appropriateness assessment, including:

  • the nature of the client’s contractual relationship with the borrower, and with the platform;
  • the client’s exposure to the credit risk of the borrower;
  • that all capital is at risk
  • the fact that investments on the platform are not covered by the Financial Services Compensation Scheme;
  • that returns may vary over time;
  • that entering into P2P agreements or investing in a P2P portfolio is not comparable to depositing money in a savings account;
  • information on the platform’s risk mitigation measures, including in the event of its insolvency; and
  • the role of the platform and the scope of its services.

Overall, the FCA believes that the new rules strike an appropriate balance as they should allow the P2P sector to continue to market to new investors and to differentiate themselves, while also protecting investors. For crowdfunding firms who provide mortgage and home finance products to retail customers, the final rules extend the application of existing rules for the home finance sector to P2P platforms that offer such home finance products, where at least one of the investors is not an authorised home finance provider. The policy statement includes various other changes to the FCA rules which will impact the P2P lending sector.  In summary, the final rules include:

  • more explicit requirements to clarify what governance arrangements and systems and controls platforms need to have in place to support the outcomes they advertise relating to the P2P loans on their platforms, with a particular focus on credit risk assessment, risk management and fair valuation practices;
  • strengthening rules on plans firms need to have in place for the wind-down of P2P platforms if they fail; and
  • setting out the minimum information that P2P platforms need to provide to investors.

The policy statement also refers to the FCA considering further whether operators of P2P lending platforms should hold additional regulatory capital.  While most of the respondents to the FCA’s consultation paper refer to any additional regulatory capital requirement being overly burdensome, the FCA has stated “We will consider if further action is appropriate”.

Investment based crowdfunding platforms

While the focus on this policy statement is the P2P lending industry, the FCA has also commented on the financial promotion requirements that currently apply to investment-based crowdfunding platforms.  Once the new rules enter into force on 9th December 2019, these requirements will also apply to P2P lending platforms. In summary, the FCA’s earlier consultation paper referred to the requirements that must be satisfied to classify an investor when marketing a “non-readily realisable security” (NRRS) or a “non-mainstream pooled investment” (NMPI).  The FCA has stated that respondents said that the relevant FCA rules set different expectations under the NMPI and NRRS regimes as to the checks or evidence-gathering that firms must undertake to satisfy themselves of a client’s classification.  It was noted that the NMPI rules explicitly require firms to take ‘reasonable steps’ to establish that a person falls within a particular category, whereas the NRRS rules do not explicitly set out such a requirement to take ‘reasonable steps’.  In addition to noting this difference, firms that responded to the FCA’s consultation paper requested more clarity on what constituted ‘reasonable steps’ for this purpose. Taking these comments into account, the FCA stated that “we are considering these comments in a broader context. This will include, where appropriate, consideration of the approach to be expected of P2P platforms which may update further the revised rules set out in this PS.  We expect to be able to comment further in due course. If we conclude that additional rules and guidance are needed, we will consult on our proposals”.

Source: Lexology

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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.