By Ryan Weeks on 23rd February 2016
The past week was rather a seismic one in the peer-to-peer lending space, with shifts in product aplenty. A few weeks ago the industry came under fire from a feisty Lord Turner – who declared that the losses that would in time be felt by peer-to-peer investors would serve to make even the worst bankers look like “geniuses”. And of course we have the April 6th Innovative Finance ISA deadline on the horizon. All in all, it’s both an exciting and a turbulent time to be running a peer-to-peer lending platform.
In rather timely fashion, then, the bosses of the P2PFA’s eight member platforms converged today over breakfast to answer questions from the media on the state and evolution of the industry. As expected, the IFISA was first on the agenda.
The interplay between the authorisation process and the April 6th date formed a natural starting point for discussion. Technically speaking, the FCA has six months to respond to applications from the point that it stops asking questions – but by the sounds of things the questions continue to roll. However, Pete Behrens of RateSetter described himself as “cautiously optimistic” that the major platforms would have received the regulatory thumbs up by April 6th. Nick Harding of Lending Works was keen to remind the audience that the IFISA is not a “one day event”, but rather a year or ten year long transition.
On IFISA mechanics, it’s yet to be decided whether investors will be able to transfer existing P2P investments into an ISA wrapper. Based on today’s discussion, it sounds as though HMT has no philosophical objection to the idea of customers selling existing P2P assets and re-investing through an ISA wrapper. The issue of a multi-platform IFISA also cropped up. Under existing rules, investors will only be able to allocate their IFISA allowance to one P2P provider per tax year – meaning that multi-platform IFISAs will have to be built up over a number of years. A number of third party outfits – Goji springs to mind – are attempting to offer a solution to this issue, but there’s a potential stumbling block. Is Lending Works, for example, going to direct investors to a third party solution and risk losing those customers to another provider? Unlikely. In regard to the much-rumoured Hargreaves Landsdown peer-to-peer lending operation, it was posited that the investment supermarket could have provided a multi-platform IFISA product, had it not been distracted by constructing an offering of its own.
Moving away from IFISAs, I quizzed Zopa boss Giles Andrews on the platform’s soon-to-be-launched suite of new investment products – which will include a non-Safeguard lending option by the name of “Zopa Plus”. The Zopa Plus account will provide investors with access to the platform’s D and E loans, which were hitherto on hold for institutional investors. Giles stated that these D and E rated loans would carry interest rates in the teens, but that they should not be seen as “sub-prime”. He also revealed that, for the time being at least, Zopa loans to Uber drivers will continue to be cordoned off from retail investment. To clarify, Zopa has been using institutional funds to trial higher risk lending activities for the past 12-18 months – with a view to opening such opportunities up to retail investors down the line, once comfortable with the associated risks.
Some time was inevitably apportioned to RateSetter’s recent about-turn in regard to its provision fund. It recently transpired that RateSetter had been using a small portion of the balance of its provision fund to underwrite larger loans on the platform. RateSetter published an update on these activities last week – one which Peter Behrens admitted, with hindsight, to have been rather poorly communicated. A passionate backlash from the platform’s investors caused RateSetter to call an immediate halt to the investment of provision fund money through the platform, as well as to the unwinding of the 0.6% of the balance that was already being invested.
RateSetter initially set about investing a small portion of its provision fund via the platform to help to settle “wobbles” in the marketplace, which can be brought about by particularly large loans. These will generally be development loans – which made up 10% of the platform’s outstanding loan book in late November 2015. RateSetter had been using the provision fund money to close out these larger loans in a more efficient and expedient fashion. When asked why he hadn’t used institutional money as a means of underwriting such loans, Peter explained that RateSetter’s institutional partners are not currently choosing to commit funding to the platform’s real estate loans.
Adair Turner reared his head once more. The former FCA boss ruffled feathers a few weeks back by declaring the credit processes of peer-to-peer lending platforms to be woefully inadequate. When asked about those comments, Landbay’s John Goodall and Lending Works’ Nick Harding pointed to the fact that the vast majority of lead underwriters at P2P platforms have in fact been poached from the major banks. The very people, in fact, whose most disreputable of peers will be held up as geniuses in the context of future peer-to-peer losses, according to Adair!
The range of responses to the Lord Turner's comments was fascinating. As James Meekings of Funding Circle rightly pointed out, peer-to-peer lending is a highly diverse industry, and credit procedures vary enormously platform-to-platform. Lord Turner was primarily concerned by the level of automation involved in the underwriting processes of peer-to-peer platforms. MarketInvoice is highly dependent on technology – a position that the platform’s Credit Analytics Lead Hendrik Brackmann vehemently defended in a recent column for AltFi. The underwriting of LendInvest loans, on the other hand, requires a great deal of human involvement. As CEO Christian Faes put it: “We’re never going to get to the point where a computer spits out a mortgage.” In short, before critiquing credit processes in P2P, one first has to acknowledge the variety of credit processes in P2P.
Finally, some quick-fire takeaways…
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