P2P Guide

13 12 THE P2P LANDSCAPE THE P2P LANDSCAPE Key Developments Pros and Cons Summary 1.3 1.4 There have been a number of developments that should give advisers confidence that the P2P sector is here to stay. DEVELOPMENT IMPORTANCE Innovative Finance ISA Launched in April 2016, apart from allowing P2P investors to earn tax-free returns, the IFISA shows that the UK government is committed to the sector. Regulation The P2P sector has been overseen by the FCA since April 2014 when rules such as ring-fencing client money and putting runoff plans in place were introduced. The regulatory framework is still being developed, but investors can have confidence that the sector has regulatory oversight. Publication of the FCA’s changes further to its review of crowdfunding rules, which include P2P as ‘loan-based crowdfunding’, is due in 2018. Market Data AltFi Data provides a meaningful comparison between platforms by analysing loan level data to a consistent methodology. In:review provides key sector-wide metrics such as lending volumes, returns and individual platform due diligence reviews. Institutional Involvement Institutional investors have invested in both the P2P platforms themselves, and the loans that they originate. These investors include mutual funds, pension funds, asset managers, family offices, broker- dealers and banks. This is a significant indication of the credibility of the P2P sector, and also brings the added benefits of institutional levels of scrutiny, expertise, due diligence and increased liquidity. But, platforms should not allow institutions to cherry pick the best deals. PROS CONS Attractive rates for investors and borrowers. Loans are not covered by the FSCS Bank Deposit Guarantee Scheme and FSCS Investment Protection Scheme and lenders’ capital is at risk. Uncorrelated to equity markets and less volatile. 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 runoff of their loan book. Choice of a range of risk adjusted returns to choose from. Lack of long term record, demonstrating performance through full economic cycle. Invested funds can often be deployed and redeployed very quickly. Potential for online fraud undermining the security of internet-based loan transactions. Many platforms use technology and undergo independent professional security testing to combat this issue. P2P platforms must be FCA authorised and advising on P2P agreements is an FCA regulated activity. Potential for offline fraud – platform malptractice as a result of breakdowns in corporate governance or outright fraud. Some platforms offer asset backing to provide security for loan repayment defaults. Interest rate rises could lead to a spike in borrower defaults. Some platforms offer provision funds that will pay out when loans default, but only up to their anticipated % bad debt rate. Potential for insufficient access to loan originations, leading to the acceptance of more risky loans and higher default rates. Predictable, fixed returns. Possibility of institutional investors cherry-picking the best P2P investments using their expertise and resources. A degree of liquidity – most major platforms offer redemptions and resale of loan parts via a secondary market. Some banks are also partnering with P2P platforms, and increasing liquidity. Liquidity disadvantage in comparison to banks. Some P2P loans do not allow exit until the end of the term, secondary market volumes are thin and these markets have not been tested in sector-wide sell off. Government support – IFISA eligible and the Bank Referral Scheme requires banks to refer borrowers they reject to P2P platforms. IFISA eligibility gives access to tax free earnings. Transparency: opportunity for investors to choose their underlying loan to give them control over what their funds are invested into (unlike bank deposits). P2P lending is becoming more popular with people looking for alternative ways to invest their pension savings before and after retirement. In fact, investments in peer-to-peer are now as frequent as investing in shares and bonds in the UK, showing that this form of investment is becoming more mainstream when compared with more traditional products. DAILY TELEGRAPH, RADIO TIMES MONEY, JULY 2017