Peer to Business Lending
Alternative Finance Sector Report - October 2014 17
PEER TO BUSINESS LENDING
ALTERNATIVE FINANCE SECTOR REPORT
PUBLISHED
November 14
AUTHOR
Luke Jackson
Samantha Goins
What if bank lending
restrictions ease?
This shouldn’t dramatically affect
the attractiveness of P2B lending for
borrowers. There could initially be a
slowdown in the growth of the P2B
market, as borrowers remain with
traditional lenders rather than embracing
alternative finance. Longer-term, it
should result in a more efficient and
competitive finance market as borrowers
are given the choice to use P2B lending
or banks. This should improve the service
offered by banks and reduce the costs
of borrowing. There should still be
significant growth in the P2B market,
returns for investors may fall slightly but
should remain well above bank deposits.
The changes to bank regulation and in
particular capital adequacy are unlikely
to be relaxed in the medium to long-term
and in fact are more likely to continue to
become more onerous for banks. Capital
adequacy requirements for SME business
lending are likely to remain more
punitive for banks than many other forms
of lending through the process referred
to as ‘slotting’.
What if there is a platform
failure in the sector?
FCA regulation implemented in April
requires all UK based P2B lending
platforms to have processes in
place for the ongoing management
of loans should the platform cease
operating. Loans should be held by
an independent third party or trustee,
with an administrator appointed to
manage ongoing administration. This
should provide ongoing protection to
investors. The main consideration of a
platform failure is reputation: Why did
the platform fail? Had they not been
conducting appropriate due diligence,
or were they simply not making enough
money? A failure of a large platform
would adversely affect the reputation of
the entire P2B lending sector.
What happens in another
recession?
Another recession could potentially be
positive for the P2B lending market:
banks would cut back on lending and
small businesses would struggle to raise
finance through traditional methods.
Appetite for alternative finance at
higher interest rates actually increased
during the previous recession, as
investors looked for diversification from
mainstream investment products and
creditworthy borrowers could afford
to pay higher rates for critical finance
that would allow them to grow their
business during times of recession. On
the other hand, failure rates of SMEs
would likely rise and there would be
an increase in default rates on loans. It
would also become much harder to sell
underperforming loans on the secondary
market. Investors may cut back on
investing and save more money in cash
or use it for essential day-to-day living.
What is the debt recovery
process and success rate?
Platforms should make their debt
recovery process clear, and openly
provide bad debt predictions and
historic rates of default. Many platforms
have started to publish this type of data.
The majority of P2B lending platforms
take security through a first charge on
property, debenture over company
assets or a guarantee from the directors.
In the case of a default, assets will
be seized by the lender (or platform/
trustee) and sold to cover the amount
outstanding on the loan. Some platforms
will use an external debt management
company, others will do this in-house.
Providing the value of assets is higher
than the amount outstanding on the
loan, investors should receive all of their
capital back, but this is not guaranteed.
What happens if there
is a run on a protection/
provision fund?
A limited number of P2B platforms offer
a protection or provision fund for all or
certain categories of loans. The aim of
the protection fund is to compensate
investors should a borrower default and
in some cases may cover for missed
interest payments to lenders as well as
the risk of capital loss on a default. On
average, across P2P lending platforms
that offer protection funds, they only
contain enough money to cover about
2% of their outstanding loan book.
If more than 2% of loans failed there
wouldn’t be enough money to repay
all investors. Investors should decide
whether they want a platform that uses
a protection fund, or only loans that are
asset backed.
Are platforms covered
by the Financial Services
Compensation Scheme (FSCS)?
Platforms do not give investment advice
and are not covered by FSCS. UK based
P2B platforms must be regulated by
the FCA. Platforms are required to hold
minimum capital reserves and have
robust procedures in place to manage
client money and administer outstanding
loans should the platform fail.
07
08
09
10
11
12
