The Peer-to-Peer Finance Association has signed up another member. Crowdstacker brings the group’s numbers back up to eight, after a number of member platforms came and went in 2017.
Crowdstacker is a secured business lending platform and an Innovative Finance ISA first-mover. It was authorised some way ahead of most peer-to-peer lenders due to the timing of its launch, thus giving it a head start in the IFISA market.
But at first glance Crowdstacker seems a strange addition for the P2PFA. Not because it isn’t a good platform, but because of the types of businesses it’s been lending to – namely, lending businesses.
In March 2017, the regulator moved to effectively ban the process of wholesale lending (lending to other lenders) in peer-to-peer, because it was deemed to constitute a form of deposit-taking. RateSetter, one of the biggest peer-to-peer platforms in the UK, had been active in the wholesale lending market. Monitoring mistakes with one of its wholesale partners and a failure to disclose key information to investors immediately later caused RateSetter to withdraw from the P2PFA.
While all this was happening, Crowdstacker co-founder Mark Bristow told AltFi, in March 2017, that his platform was “not affected” by the regulatory crackdown because of the way that it structures its loans.
“Crowdstacker structures the loans on its platform as secured loans, where the borrower in turn lends to others, so that the borrower is not ‘accepting deposits’,” he explained at the time.
“In the case of Amicus, for example (which is a business that has raised money on our platform and which is itself a specialist lender), Amicus gives security over assets for all monies lent to it, and is therefore regulatory compliant.”
Karteek Patel, CEO of Crowdstacker, explained to AltFi that the rules around what constituted deposit-taking were unclear at the time, but that Crowdstacker had been given a legal opinion supporting its view that loans that are secured against an asset would fall outside of accepting deposits. Nevertheless, the platform has since made changes to its model to fall into line with FCA guidance.
Asked about Crowdstacker’s habit of lending to other lenders, P2PFA director Robert Pettigrew said: “The P2PFA was assured that Crowdstacker has ceased lending to lenders, and has arranged an orderly run-down of this activity in the interests of investors. The primary focus of their business model was reported as direct lending to larger-scale SMEs (involving loans of between £5 million and £10 million).”
The featured investment on the Crowdstacker platform at this moment is a £3m loan for a company called Rivers Leasing, which finances the purchase of commercial equipment. In other words, a lending company. Karteek Patel, CEO at Crowdstacker, explained why.
“The whole situation surrounding accepting deposits has some exemptions, and those exemptions include bonds and loan notes, because they are classed as securities,” he said. The Rivers Leasing opportunity has been categorised under “loan notes”. Crowdstacker has agreed not to make any more P2P loans to lending businesses – but it will continue to fund such businesses via bonds and loan notes.
“There are some differences in terms of investor classification,” said Patel. “As soon as it’s a bond or a loan note, we have to follow classification that is more akin to what you’ll see on Crowdcube,Seedrs, etc.” What this means is that users will have to pass a test to prove themselves sophisticated investors before allocating funds to the bonds and loan notes.
“We were doing an appropriateness test just to make sure people understood the risks anyway – since the start,” explained Patel. He described the sophistication test as an “enhancement”.
Irrespective of how the deals are structured, the indisputable fact is that Crowdstacker will continue making loans to lending businesses while a member of the P2PFA. But Patel doesn’t see anything wrong with these types of loans if they are structured correctly.
“From a principle basis, because of our model, we didn’t see an issue with lending to lenders,” he said, in reference to his firm’s dealings with the regulator in the Spring of last year.
In an announcement welcoming Crowdstacker to the group, the P2PFA noted that the platform “creates loan products that are ethical, fair and transparent, producing a forty-page information brochure for each loan product which outlines the lending proposition and company background as well as the specific macro-economic risks and the loan contract.”