By Ryan Weeks on Thursday 1 June 2017
Two of the UK’s “big three” peer-to-peer lenders have now been fully authorised, ending an agonisingly long period of regulatory limbo in which both firms announced tweaks to their business models.
Both Zopa and Funding Circle were authorised in the past few weeks. RateSetter continues to operate under interim permissions. MarketInvoice, the fourth largest UK-based marketplace lender by lending volume, may only be invested in by high net worth individuals and institutions, and so doesn’t require these permissions.
For the past year and a half, peer-to-peer and marketplace lenders have had to endure both the trials of the authorisation process, and the looming uncertainty of the ongoing FCA review of crowdfunding rules. While the review is yet to conclude, the industry has already been warned that new rules may well be introduced this year.
Under these various pressures, the business models of a whole host of peer-to-peer operators have had to be adjusted. It’s anyone’s guess as to exactly what the regulator wants, but a key tenet seems to be that the exact dynamics of a platform’s underlying loans should be passed through to investors.
So how have these changes shone through in the data?
Funding Circle said at the time that the decision was not based on performance. But what does the data tell us?
AltFi Data’s analytics engine shows that only one quarterly cohort of Funding Circle’s property-backed lending resulted in any bad debt. This came in the third quarter of 2015. Bad debts for this cohort have reached 4.67 per cent – but it’s important to note that recoveries may still be made, and that this is just one of 17 quarterly cohorts. The size of this cohort is about £34m.
AltFi Data told us at the time of Funding Circle’s announcement that property loans had historically accounted for just 2.2 per cent of all defaulted Funding Circle loans in the UK (£1.6m of £73.2m), while the cumulative net loss rate for its property loans stood at 0.5 per cent.
These metrics appear to uphold Funding Circle’s assertion that the decision to drop property loans was not performance-linked.
The FCA sent around its now-infamous “Dear CEO” letter in late February, in strong terms advising peer-to-peer lenders to wind up any wholesale lending activities, which involve lending to another lending business. The regulator’s director of supervision Jonathan Davidson wrote that this kind of activity might constitute deposit taking, and could amount to a criminal offence.
Neither Zopa nor Funding Circle had been involved in this market, but RateSetter had been lending to other lenders since 2013. The multi-faceted lending firm began winding up its wholesale activities in December of last year, shortly before being asked to do so by the regulator.
We now know the identity of a few of RateSetter’s former wholesale lending partners. Indeed, RateSetter acquired two of them – Vehicle Stocking Limited and Vehicle Credit Limited – out of administration earlier this month. It also acquired an equity stake in George Banco, and will lend directly to its customers henceforth. George Banco is a guarantor lender with a representative APR of 49.7 per cent.
The firm has now lent a little over £1.9bn in loans, of which 15.4 per cent are wholesale. As can be seen in the chart below, the overall trend is down.
For investors, the move is supposed to open up larger deployment opportunities. And sure enough, the firm clinched a £45m per year funding deal with Banco BNI Europa a few weeks ago, claiming that the new product was driving institutional interest.
But is the deployment opportunity at MarketInvoice truly expanding?
Well, since unveiling the new product in February, MarketInvoice has posted back-to-back monthly origination records (versus all previous months in its existence), with £42m in March and £35m in April.
But this isn’t yet feeding through in terms of outstanding principal per month, which is hovering at around £25m per month, versus an all-time high of £35m. This is a reflection of the fact that money is churned on the MarketInvoice platform very quickly, due to its short average terms.
The key to increasing capacity for larger investors will be driving up both origination volumes (which seems to be happening) and average terms. Since the launch of its open funding lines, MarketInvoice’s average term has climbed from 1.5 months in February to 1.9 months in April.
The combination of these factors would suggest that its investment capacity is indeed on the rise.
There have been a number of changes at Zopa in recent months. The platform has had to introduce a waiting list for new investors, due to excess demand. And investor demand now looks set to shift up another gear, with the firm on the brink of launching its Innovative Finance ISA offering.
The firm will soon be consolidating its investment accounts into just two products: Zopa Core and Zopa Plus. The former will offer a targeted net return of 3.9 per cent, while the latter will target 6.1 per cent. These targeted returns are based on the risk-return profile of the loans that each account will offer exposure to. Neither will be covered by the Safeguard fund, which is being phased out altogether.
The end of the Safeguard means that Zopa’s investor experience will more closely mirror the exact dynamics of its underlying loans going forwards. AltFi Data’s analytics engine indicates that the characteristics of those loans are changing.
The net returns delivered to Zopa investors has been fairly consistent at between 4.5 and 5.0 per cent for the past two and a half years. But the rate being paid by its borrowers is climbing.
Zopa’s average gross interest rate has steadily increased from 5.3 per cent at the outset of 2015 to 8.4 per cent in April 2017. The reason for this is simply that a higher proportion of Zopa’s loans are now being made to “riskier” borrowers. But the returns being offered by the platform haven’t yet adjusted to reflect this.