Adviser guide - IFISA

13 WHAT CAN AN IFISA HOLD? Peer-to-peer (P2P) lending is the practice of lending directly to small business and consumers via an online platform. Since they operate entirely online, P2P lenders can provide the service more cheaply than traditional financial institutions such as banks. As a result, they can offer better rates to borrowers and competitive interest to investors. Returns on a portfolio of loans can vary but are typically higher than cash held on deposit, at around 5-6%, with less volatility than equities. Peer-to-peer loans P2P PROPERTY LENDING P2P CONSUMER LENDING P2P BUSINESS LENDING 0% 10% 20% 30% 40% 50% • The UK is one of the few countries in the world to have bespoke financial services regulation of P2P lending. FCA 36H regulation acts as a barrier to participation to less serious providers, preventing the types of issues other countrys’ less mature P2P markets have experienced • Government support - IFISA eligible and the Bank Referral Scheme requires banks to refer borrowers they reject to P2P platforms • Many banks don’t see P2P as a rival and some are partnering with P2P platforms, and increasing liquidity • It is not simply a matter of applying to the platform for a loan - credit checking and underwriting are undertaken by platforms and more than half of all applications are rejected • Attractive rates for investors & borrowers • Uncorrelated to equity markets • Invested funds can often be deployed and re- deployed very quickly • A degree of liquidity – most major platforms offer redemptions and resale of loan parts via a secondary market • Some platforms offer provision funds that will pay out when loans default, but only up to their anticipated % bad debt rate • Loans are not covered by the FSCS Bank Deposit Protection Scheme or FSCS Investment Protection Scheme and lenders’ capital is at risk. • Potential for platform collapse (e.g. resulting from lack of deal originations/bad underwriting generating significant defaults) though FCA regulated platforms must have a living will/plan for an orderly run off of their loan book • Lack of long term record, demonstrating performance through full economic cycle • Liquidity disadvantage in comparison to banks • Less transparency and control than DBS P2P % OF P2P LOAN APPLICATIONS APPROVED (2016) FEATURES SOURCE: CCAF Established investment managers such as Downing, Octopus and Triple Point now have offerings in the P2P and DBS markets with dedicated adviser portals to help advisers manage their client portfolios and adviser education programmes available. The market is maturing and advisers can make meaningful comparisons between providers using tools, such as in:review, to determine which offer is most suitable for their clients. It’s also worth noting that platforms offering these investments via ISAs must be fully authorised by the FCA. Additionally, platforms must hold client deposits and repayments via an authorised custodian, and if that entity fails, the FSCS Deposit Protection Scheme applies up to £85,000. Summing up The advantage of P2P loans for lenders is that they can generate higher interest rates than those that could be earned from banks and other financial institutions. HMRC P2P Lending process Loan application on a P2P website, specifying the amount to borrow and the loan term Credit Check The platform conducts a credit check and adds successful requests to the online marketplace Investors bid to lend money and declare how much they will lend and the interest rate they will charge. OR... Investors auto- lend platform picks a portfolio of loans that aims to meet lenders’ appetite for risk and returns criteria Investors can resell the loan on a secondary market at a premium, or wait for the repayment plus interest Loan is arranged The business pays the fee to the platform and receives the money From 2015 to 2016, P2P Property Lending volume grew by 88%, P2P Consumer lending by 47% and P2P Business lending by 36%. (CCAF) 12 WHAT CAN AN IFISA HOLD? (Marketplace lending)