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The end of the peer show?

Peer-to-peer lending promised to cut out the middle man, provide borrowers with funds at a competitive rate and investors with a return greater than that on offer from bank deposits but there may be limits to growth

The world’s first peer-to-peer (P2P) lender was launched in February 2005 in the UK. It was ZOPA. The name is an

acronym, standing for Zone of Possible Agreement. Over the course of the last decade and a half, P2P lending operations have been established in many countries and in almost every continent around the world. However, while some argue that this shows the power of the P2P business model, others suggest that we have begun to see the limits to growth and that as P2P players mature, their business needs to evolve – as with much of business and finance, the Covid-19 pandemic is having a ‘hothousing’ effect on this requirement.

ZOPA, which began as a retail lender, dealing with individual borrowers and lenders, is still a leading player in P2P lending, indeed it is one of the ‘big three’ P2P platforms in the UK, claiming to have lent out over £5 billion to almost half a million borrowers and generated more than £250 million in interest for its investors. But it is notable that it applied for and recently received a banking licence. A restricted provisional licence was granted by the UK authorities in December 2018 and, following a successful funding round of £140 million late in 2019, ZOPA announced in June 2020 that it had received a full banking licence.

Laid by an Egg

Touting itself as ‘the Feel Good Money Company’ ZOPA already offers a credit card and fixed term savings. It is effectively evolving into a digital bank, returning perhaps to its origins, having been established by a team from Egg, which was originally owned and launched as  the banking arm of Prudential in 1998 but is now a brand held by Yorkshire Building Society.

What of the others in the UK’s ‘big three’, RateSetter and Funding Circle? On 3 August 2020, Metro Bank (itself a relative newcomer in UK financial services, having been established in 2010 as was RateSetter) announced that it was acquiring RateSetter for an initial £2.5 million up front with a further £0.5 million 12 months later and up to £9 million more on the third anniversary of completion – subject to performance. The deal does not include RateSetter’s Australian operation.

The takeover will effectively see RateSetter step away from the P2P business model. RateSetter claimed to be the UK’s most popular P2P lender with some 750,000 people having invested or borrowed through the platform. However, in the year to end-March 2019, the company made a loss of £8 million on revenue of £33 million.

The attraction for Metro Bank? Well, the bank had already staked out plans to build its unsecured lending book and, in a statement, Metro Bank said: “RateSetter’s originating and underwriting capability will enable the bank to rapidly accelerate this ambition via an existing, scalable platform. The acquisition presents an attractive opportunity for Metro Bank to improve its lending yield, with RateSetter having achieved an average total gross yield of 8% for the financial year ending 31 March 2020, and is expected to be net interest margin enhancing in the first full financial year of ownership.”

The bank will operate RateSetter as an independent platform and originate loans under both the RateSetter and Metro Bank brands. However, following completion, Metro Bank will use its deposit base to fund all future unsecured personal loans, effectively beginning the process of winding down the existing P2P loan portfolio which RateSetter will continue to manage discretely.

And then there was one

That accounts for two of our big three, the retail lending specialists, and then there was one… The ‘one’ in question is Funding Circle, the UK’s leading P2P lender to SMEs. Funding Circle is international in scope, having acquired businesses in the US and in Europe,providing access to markets in Germany, Spain and the Netherlands.

These acquisitions were followed by an initial public offering on the London Stock Exchange in 2018. It was not an unqualified success. The company’s share price fell by almost a quarter on the first day of trading.

On 15 August 2020, The Daily Telegraph reported: “Funding Circle is not currently accepting new sign-up from everyday investors and has paused its peer-to-peer service. The only loans it offers use the Government’s Coronavirus Business Interruption Loan Scheme and are funded by pension funds and investment banks. The firm has no timeline for reopening to consumers.”

So, of the top three P2P lenders in the world’s oldest P2P marketplace, the UK, one is slowly metamorphosing into a bank and the other two are de jure and de facto apparently out of the P2P business! Among smaller P2P platforms, many are struggling, to say nothing about those that have already fallen by the wayside – the likes of Lendy, FundingSecure (it obviously was not) and Collateral.

More regulation…

Since April 2016, P2P investments have had tax advantages for UK investors if held through Innovative Finance Individual Savings Accounts (IFISA) and successive governments have favoured the sector. However, it was partly the failure of Lendy in May 2019 that drove the UK watchdog, the Financial Conduct Authority (FCA), to revisit its regulation of the UK P2P sector last year. In June 2019,

the FCA unveiled new rules designed to prevent harm to investors, without, it said, stifling innovation in the sector. In a statement, Christopher Woolard, Executive Director of Strategy and Competition at the FCA said: “These changes are about enhancing protection for investors while allowing them to take up innovative investment opportunities. For P2P to continue to evolve sustainably, it is vital that investors receive the right level of protection.”

The FCA placed a limit on investments in P2P agreements for retail customers new to the sector of 10% of investable assets unless they had received regulated financial advice. In addition to this restriction, new rules were announced to be implemented by 9 December 2019, including:

  • More explicit requirements to clarify what governance arrangements, systems and controls platforms need to have in place to support the outcomes they advertise, with a particular focus on credit risk assessment, risk management and fair valuation
  • Strengthening rules on plans for the wind-down of P2P platforms if they
  • Introducing a requirement that platforms assess investors’ knowledge and experience of P2P investments where no advice has been given to
  • Setting out the minimum information that P2P platforms need to provide to
  • Applying the Mortgage and Home Finance Conduct of Business (MCOB) sourcebook and other Handbook requirements to P2P platforms that offer home finance products, where at least one of the investors is not an authorised home finance

In its review of the P2P sector, the UK Campaign for Fair Finance™ CIC, a not-for-profit Community Interest Company (CIC), said: “The FCA is beginning to recognise that, in practice, the way some crowdfunders and P2P lenders operate amounts to the running of a

marketplace such as a multilateral trading facility or regulated market. At the most basic regulatory level it is very difficult to disagree with this assessment. Under European financial services regulation, the bringing together of buyers and sellers, is the core of what it is to operate an MTF or regulated market.”

And more cautious investment

Even P2P evangelists are starting to sound notes of caution. A survey recently carried out by the Croatia-based European P2P lending platform Robo.cash shows 66% of investors saying that they have learned that the reliability and transparency of P2P lending platforms are vital. By reliability, investors mean the platform’s history, the quality of its communication with investors and the public and, perhaps surprisingly, interest rates. Some investors mention that high interest rates may raise suspicion if there is no decent explanation on how the platform can afford to pay them. Some 19% of investors say the Covid-19 pandemic has taught them to diversify more, but only by means of trusted platforms.

Robo.cash, which was established in 2017, said: “By and large, we can say that P2P investors have not dramatically changed their mind about the segment. 95% of respondents say they will continue investing in P2P lending, and 68% of them are going to expand their investments. In terms of supply, the pandemic has undoubtedly set new quality standards for the segment. What is more, popular European P2P lending platforms have been showing different performance during the crisis, which has affected investors’ experience as well. These factors may lead to a considerable change in the market’s shares in the future, provided that the social and economic situation in Europe keeps stabilising.”

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