By Roger Baird on Thursday 5 September 2019
The trade body head talks about Brexit, regulators and the recession
The hothouse of Brexit has choked the life out of the country’s wider national agenda, leaving Britain at a standstill for the last three years, runs the received wisdom of those in public life. But Paul Smee, chair of the Peer-to-Peer Finance Association (P2PFA), doesn’t see it that way.
Since he took up his post 18 months ago the UK’s financial regulator has clamped down on the £10.5bn industry Smee represents, a notable firm has collapsed with more than £160m of outstanding loans, and like the rest of the economy, his industry is busy preparing for a post-Brexit downturn.
“We are still managing to talk to people despite Brexit,” says a wily Smee perched in a green wing-backed armchair in the main bar of the City Livery Club, which looks onto the Thames.
He adds: “We have a good dialogue with the Treasury. They are very interested in the kind of investment we can provide small businesses. Granted, MPs are pressed for time. But we can still find important officials to talk to.”
Smee joined the P2PFA last March replacing Christine Farnish who stepped down as head of the trade body after five years.
He came from banking trade body UK Finance, where he was head of mortgages.
But he has over 20 years experience leading British trade association, starting in 1999 where he led the Association of Independent Financial Advisers, followed by the Association of Payment Clearing Services, and then the Council of Mortgage Lenders. Before that he spent a decade in the old Department of Trade and Industry from the mid-1980s after leaving university.
He leads an alternative finance industry which bypasses banks to match lenders with borrowers, that grew in the aftermath of the 2008 financial crisis. Consumers were dissatisfied with the poor customer service high-street banks offered, while small firms found their credit lines cut, as traditional lenders feared defaults.
In June, the Financial Conduct Authority (FCA) imposed stricter requirements on governance and other controls the industry operates under, following the collapse of Lendy a month earlier.
The watchdog’s most notable restriction is that peer-to-peer groups should make retail investors fill out questionnaires to determine if they are ‘sophisticated’ or ‘high net worth investors’. And even if they are, no individual investor should commit more than 10 per cent of their investable assets to peer-to-peer agreements in a single year.
At the time, Ratesetter chief executive Rhydian Lewis, a pioneer of the industry, called the investor cap, an “unnecessary” move that “just patronises normal people”.
And now Smee says: “I didn’t think that 10 per cent rule was badly needed. But we can live with it. The industry talks to its lenders, and we think they understand they are making loans, which can go bad.
“But when I read the FCA document for the first time, I didn’t get a sinking feeling. We don’t have a problem with the broad strokes of the FCA’s thinking.”
The collapse of Portsmouth-based property peer-to-peer firm Lendy, with outstanding loans of more than £160m, and some £90m in default, prompted the new rules from the FCA. The watchdog is also carrying out an in-depth report into the firm’s failure, which affected with some 21,500 investors. Critics argue that Lendy under competitive pressure wrote poor quality loans to swell its balance sheet, which then turned bad.
However, the Lendy crash, taken together with the poor float of the sector’s biggest firm Funding Circle last October, which languishes 75 per cent below its 440p float price at around 112p this week, has tarnished the sector.
Smee says: “Lendy always looked like an outlier to me. It’s origins, the way it had grown, was different from the rest of the sector. Drawing general lessons from that company to the rest of the industry is difficult. As for the regulators, you have to ask why that firm was authorised?”
Investors ask themselves the same question. In July, FCA chief executive Andrew Bailey was jeered by around 350 small investors at its annual meeting over the watchdog’s oversight of Lendy, failed investment firm London Capital & Finance in January and the suspension of star asset manager Neil Woodford’s £3.5bn flagship fund in June.
Small is beautiful
The P2PFA's membership is made up of eight platforms and eight associates, which it says accounts for two-thirds of the industry by volume. The body, founded in 2011, has a 10-person board, led by Smee, which meets five times a year.
Previously, Smee has led a financial advisor's trade body with thousands of members, who collectively managed some £900bn.
But Smee believes small is beautiful. He says: “When we meet it means that everyone can get around the table. And that is a good thing for a trade body. It also means you get a chance to understand the different flavours of peer-to-peer finance across the industry. Business models vary across the sector.”
MarketInvoice found the association was no longer to its taste and decided not to renew its membership last December. The invoice finance and business loans platform said its funding was moving towards more institutional backing and bank partnerships.
Talks about talks
Smee agreed: “That firm is going down a different route. They are looking much more at institutions or high net worth individuals, rather than basing their model on retail investors.”
However, one firm that might rejoin the association is Ratesetter, who left the body two years in the wake of a bad loans scandal.
Ratesetter resigned its membership after it breached the trade body’s principles when it stepped in to bail out bad loans at two firms it had lent cash to.
But in June reports surfaced that Smee and Ratesetter’s Lewis were in talks about the firm rejoining the fold. Ratesetter is regarded as one of the industry’s big three firms, along with Funding Circle and Zopa.
Smee says: “Ratesetter is the sort of body we need to keep in touch with in any circumstance. We are always talking to them. Perhaps one day they will rejoin. I am not ruling that out.”
Businesses across the UK economy fear the prospect of a recession. In the three months to June, the economy shrank by 0.2 per cent, according to the Office for National Statistics, the first contraction since 2012. Business conditions were weakened by heightening Brexit uncertainty and global tensions, centred around the US-China trade war.
‘Strong underwriting standards’
Critics of the peer-to-peer industry say loose underwriting standards to attract business will flush out the sector in the event of an extended downturn.
“Whenever a recession does come, one hopes that losses in the peer-to-peer sector are not disproportionate,” says Smee. “But strong underwriting standards will be the key. That will be the test for everybody in the loans sector.”
If tough times do hit peer-to-peer firms, they will at least have a man at the helm who has taken financial sectors through rough waters before.
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