Funding Circle has become the latest marketplace lending platform to attempt to simplify its investment process. The business loans-focused platform is withdrawing its manual bidding option, and will instead funnel all users into one of two new Autobid accounts.
These accounts, Balanced and Conservative, somewhat mirror the simplified investment products that were rolled out by Zopa in May. Investors in Funding Circle’s Balanced account will receive automatic exposure to the firm’s A+ to E risk bands, with a projected return of 7.5 per cent per annum, net of fees and bad debt. The Conservative account will focus on lower risk businesses, with a targeted net return of 4.8 per cent per annum.
Funding Circle is likely to face some backlash on the back of these changes. 75 per cent of new investors on the platform use its Autobid tool, and yet there is no denying the fact that the platform retains a significant number of highly engaged, manual investors – many of whom have been investing since the formative days of peer-to-peer lending. 17 per cent of Funding Circle's customers are pure manual bidders from day one.
Part of the rationale behind the revamp is that these “enthusiast” investors have to a certain extent been able to game the system, to the detriment of passive investors. One method for doing this involves buying into and selling out of loans at choice moments in what Funding Circle calls “the returns cycle”.
But the withdrawal of manual bidding and other tweaks will put a stop to this. The option for investors to sell individual loan parts via the secondary market at a premium or discount has also been withdrawn. Investors must now delegate the process of withdrawal to the Funding Circle machine.
New loan parts will never be larger than £100. If an investor lends a larger amount to a single business, this amount will simply be sliced into £100 parts. As of tomorrow, Funding Circle has also withdrawn loan sale fees indefinitely; previously these were 0.25 per cent. No more than 0.5 per cent of a lender’s portfolio will be lent to a single business going forwards, subject to a minimum of £20 per business.
Funding Circle has indicated that “many” of the investors who manually choose loans on its platform at present are not fully diversified. The revamp aims to solve this, in line with the desires of the regulator. It has also been difficult in the past for Autobid investors to get access to D and E loans, which have proven particularly popular. The broad intention of Funding Circle’s tweaks is to level the playing field for all of its investors, and to give all investors exposure to as broad a range of businesses as possible. These changes also bring the individual and institutional investor experiences into line with one another. Institutions have not been able to hand-pick loans on the platform for some time.
The company has also advised that returns will now be more in-line with whichever lending option an investor selects, with less cash-drag. It will achieve this with a smarter Autobid engine which prioritises the allocation of funds for investors whose returns are underperforming expectations.
“By launching a significantly improved and upgraded lending experience, we’re making it even easier for investors to earn stable, attractive returns,” said co-founder and UK managing director James Meekings (pictured). “These changes will make lending at Funding Circle simpler, better, fairer. We want to create a level playing field for all investors and ensure everyone has the same opportunity to lend to UK businesses. With the choice of two lending options, investors will be able to choose a return that suits their risk appetite.”
Funding Circle has been working on this revamp for some time, but has stated that it was not mandated by the regulator. Funding Circle received full authorisation from the FCA in May, paving the way for the launch of its Innovative Finance ISA, which remains pending.
"AltFi Data have long seen marketplace lending as being best suited to a ‘passive’ investment model," said Rupert Taylor, CEO of AltFi Data. "It is extremely difficult to identify alpha at the individual loan level, and assuming it does exist, even harder to scale that as a strategy.
"AltFi Data believes that diversification provides the best opportunity to minimise risk, together with due diligence to identify the best origination partner. Extensive due diligence should be performed to identify platforms with the best ability to source loans, price risk, and manage that risk over the life time of the loan. Pricing and sourcing loans is the role of the platform. If the originator can demonstrate track record, and appropriate alignment of motivations, then a passive allocation can be made with confidence."