“We remain concerned that standards of disclosure do not meet our expectations.”
“We found inadequate disclosures about risk and loan performance.”
However, further analysis of the FCA’s commentary, together with an understanding of the evolution of best practice amongst the big platforms, results in a much more prosaic conclusion. The truth is, measured by origination volume, the majority of platforms in the market place are already satisfying the FCA’s requirements. And they are doing so because the FCA’s interests, and their own interests, are completely aligned on this issue.
The FCA’s concerns, as expressed in the recent review, are that:
“it is difficult for investors to compare platforms with each other or to compare…with other asset classes due to complex and often unclear product offerings”
“It is difficult for investors to assess the risks and returns of investing via a platform”
Some of the prevailing solutions to the challenge of disclosure do indeed fail to satisfy these problems. If platforms disclose lending statistics themselves, or use static loan book disclosure as a means of inviting investor scrutiny, they will fail to assuage these concerns. Either solution delivers data that is not comparable, is hard to consume, impossible to compare like for like, and lacking in the credibility that can be achieved using independent third party verification. Persisting with this approach will likely continue to result in concerns from the regulator.
The market leading platforms all understand this. They realise that investor adoption can only be achieved if investor scrutiny is encouraged by disclosures that facilitate efficient due diligence. As a result, they are already delivering disclosure that allows like for like comparison, both between platforms, and versus other asset classes. They also understand that if this asset class is to deliver on its potential for growth, it needs to gain adoption amongst mainstream investors. On the retail side that means expanding beyond early adopters to the vast majority of the savings and pensions market, most of which is controlled by IFA’s and wealth managers. On the institutional side that means expanding beyond the small number of ‘specialist’ portfolios presently deploying in the space into the huge realms of vanilla credit and fixed income managers. This will only be achieved by delivering disclosure using independent verification to a common standard.
AltFi Data uses loan by loan cash flow data to deliver net return analysis, and all related metrics, to a common standard. Our data set allows for completely granular analysis i.e. by risk band, borrower type, security type, etc., and delivers an output that is consistent, allowing for like for like analysis of lending track record. This allows like for like appraisal of both risk and return and speaks to mainstream investor cohorts in a language that they understand. This analysis supports the biggest 4 platforms in the UK by monthly origination:
Zopa
Funding Circle
Ratesetter
Market Invoice
Together these platforms amount to around 70 per cent of loan-based crowdfunding origination in the UK. I would argue that these platforms are already well on the way to complying with any further requirements that the FCA might introduce in 2017. The challenge for the FCA is that, when measured by number of platforms, the amount that are delivering this kind of verified and granular disclosure remains low. Whilst the platforms listed above represent the bulk of loans originated, they are only 4 out of the 24 tracked by the AltFi volume indices (i.e. all UK platforms that disclose volume data and have originated more that £5m of cumulative origination) and an even smaller proportion of those that the FCA is seeking to supervise.
Picture 1 - Monthly origination of UK loan based crowdfunding platforms
A detailed look at the FCA’s choice of wording supports the notion that compliance is inconsistent and the challenge may in fact lie in raising the standards of the least compliant:
“We remain concerned that standards of disclosure do not meet our expectations. To aid firms, and raise standards, we plan to consult on additional provisions to provide a consistent minimum basis for investor disclosures.”
AltFi Data want to help more platforms to deliver this kind of disclosure. We are also working hard to disseminate this loan level disclosure more widely. To some extent this is a chicken and egg exercise. As investors discover that consistent and verified disclosure exists, their interest in the sector increases. Methods of dissemination are developing to allow efficient due diligence. This includes collaboration with established financial consultants to provide a due diligence product that to satisfies the requirements of a range of investor cohorts. It also includes working with aggregator platforms to ensure that their customers can make an informed choice between different platforms and products. This process of evolution is the reality of a developing asset class. We hope that we can significantly improve the reach of our analysis in the coming months. But what is important is that the type of approach that should satisfy the regulator’s concerns on disclosure already exists.
The largest originators in the sector are already working hard to encourage the kind of investor scrutiny that creates confidence in the track record of the asset class and drives widespread investor adoption. In so doing they are well on the way to satisfying the concerns of the FCA. I hope that the FCA’s latest clarification of its intentions will prompt other platforms to recognise that satisfying these regulatory concerns also satisfies their own interests. Because to attract capital for investment platforms must welcome scrutiny. This means facilitating the due diligence process by allowing investors to identify risk and return in a credible and comparable format.
As such AltFi Data hope to demonstrate to all originators that, when it comes to delivering effective disclosure, their interests are in fact completely aligned with the regulator. Because credible and comparable disclosure, that encourages scrutiny, both satisfies the regulators need, as well as prospective investor’s needs, to understand risk and return.
Picture 2 - Trailing 12 month % NET return, to LARI methodology, of 4 UK loan based crowdfunding platforms
