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Peer to Peer Lending Report

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Peer to Peer Lending Report PEER TO PEER LENDING REPORT Accredited for CPD by CISI, CII, PFS OPENING STATEMENT Welcome to this in-depth report on Peer to Peer Lending. (“P2P”). TISA has long been interested in the potential Individuals can earn competitive interest Editorial of Peer to Peer Lending (P2P) and lobbied from peer to peer lending, albeit with risk, Daniel Kiernan successfully for P2P to be included within ISAs. and borrowers can be matched directly with Lisa Best willing lenders, either directly or through a Peer to peer lending enables lenders to be pool of lenders. This can be more flexible than Ryan Zeng matched directly with borrowers, whether borrowing through traditional banks, both individuals or businesses through online in speed of offer and lower fees, and interest services. Peer to peer lending companies rate. Borrowers do not have to pay for the Creative operate entirely online, so they can operate traditional infrastructure of banks, including with lower overheads and provide the service Mar Alvarez lots of High Street premises. more cheaply than traditional financial institutions like banks. Competition ecourages traditional banks to improve their offerings to savers (lenders) Sub-editing As a result, lenders can often earn higher and borrowers. In the meantime, savers can returns than from banks, while borrowers can Daniel Kiernan get better rates, and the opportunity to get borrow money at lower interest rates, even involved in backing businesses, though many Lisa Best after the P2P lending company has taken a savers choose not to. Borrowers get access to Ryan Zeng fee for providing the service and carrying out cheaper and more flexible finance. appropriate credit checks on borrowers. Peer to peer lending, then, is a new and Many peer to peer loans are simply unsecured interesting type of asset class, in the same way Research personal loans, though increasingly, that corporate bonds were in the in the 1990s. Lisa Best businesses, such as property companies, are Then, corporate bonds were new for retail using peer to peer as a convenient way to Ryan Zeng investors. Now, in corporate bond funds, they borrow. Interest rates can be set by lenders are an important and essential part of any Alan Sheehan who compete for the lowest rate or fixed by investor’s portfolio, offering diversification of Adrian Scales the intermediary company on the basis of an risk, low volatility (compared to stocks and Katie McCarthy analysis of the borrower’s credit. shares) and better yield than available from bank deposits. On some services, lenders manage the risks of bad debts by choosing which borrowers to Currently, most P2P lending is direct from Marketing lend to, and manage total risk by diversifying the individual to the P2P platform. But as their investments among different borrowers. Michelle Powell the market develops, we expect that many Other models involve the P2P lending advisers will see P2P as an important asset company maintaining a separate, ringfenced class to be considered for inclusion in client fund, which pays lenders back in the event Print portfolios. We believe that this will give more the borrower defaults. Peer to peer lending savers access to P2P, as advisers will increase DISCLAIMER PUBLICATION Palina Limited companies that become insolvent can the professionalization of the market. also place lenders’ money at risk. And, P2P This report is provided for general The information has been compiled investors are not covered by the Financial Therefore this guide has been produced as information purposes and for use from credible sources believed Services Compensation Scheme (FSCS). part of a series of educational papers that will only by investment professionals to be reliable, however it has not be published to improve the understanding of and not by retail investors. been verified and its accuracy and So, why do we like P2P? this important and growing market. completeness are not guaranteed. Reliance should not be placed on the The primary reason is that P2P introduces information, forecasts and opinions set The opinions expressed are those of choice and competition, for savers (lenders) out herein for any investment purposes Intelligent Partnership at the date of and borrowers. and Intelligent Partnership will not accept publication and are subject to change any liability arising from such use. without notice. JEFFREY MUSHENS Intelligent Partnership is not authorised No part of this publication may Technical Policy Director and regulated by the Financial Conduct be reproduced in whole or in part Tax Incentivised Savings Association (TISA) Authority and does not give advice, without the written permission information or promote itself to of Intelligent Partnership. individual retail investors. Copyright © Intelligent Partnership 2017 3 CONTENTS INTRODUCTION INDUSTRY MILESTONES THE INVESTMENT CASE RISKS & CONTROLS WAYS TO INVEST & ADVISE FINAL CONCLUSIONS 39 RISKS & CONTROLS 39 FRAUD 40 DEFAULTS 41 ORIGINATION 43 PLATFORM MELTDOWN 10 INDUSTRY MILESTONES 52 FOCUS ON PLATFORMS 43 LIQUIDITY 13 INSTITUTIONAL MONEY 54 BUSINESS MODELS 44 INTEREST RATES 14 REGULATION 55 ACCESS TO DIRECT 45 LACK OF TRACK RECORD LENDING STRATEGIES 18 INNOVATIVE FINANCE ISA 30 INVESTMENT CASE 47 P2P IN A RECESION 59 AGGREGATORS 19 GOVERNMENT SUPPORT 30 YIELDS, RISK & RETURNS 72 FINAL CONCLUSIONS 03 OPENING STATEMENT 48 REGULATION 62 WAYS TO INVEST: 21 BANK TIE UPS 33 OTHER ASSET CLASSES CONCLUSIONS 73 SWOT 07 INTRODUCTION 49 OTHER MACROECONOMIC 22 MARKET DATA 34 AUTHENTIC AND POSITIVE RIKS 63 ADVISING ON P2P 74 APPENDIX I: REFERENCES 08 WHAT IS PEER TO PEER LENDING? 28 CONCLUSIONS 37 CONCLUSIONS 50 CONCLUSIONS 70 LENDINGWELL 78 CPD AND FEEDBACK * Please note: unless otherwise stated, all charts and graphs have been provided by Intelligent Partnership Published February 2017 Intelligent Partnership is committed to the very highest FSC is a non-profit international organisation established to promote the responsible management of the world’s professional standards as embodied by its accreditation forests. Products carrying the FSC label are independently certified to ensure consumers that they come from and membership to these industry associations. forests that are managed to meet the social, economic and ecological needs of present and future generations, and other controlled sources. 4 5 INTRODUCTION A GROWING NEW ASSET CLASS Peer to Peer (P2P) lending the information advisers need to when/if the firm becomes publicly traded or a third party deems it has grown rapidly since understand the asset class and make INTRODUCTION an informed decision about the merits suitable for acquisition, making the foundation of Zopa, the (or otherwise) of adding P2P to their the risk associated with this form world’s first online lender, in investment proposition. of crowdfunding much higher. Crowdfunding investors are not 2005. The global market has ACKNOWLEDGEMENTS & THANKS purchasing an income stream with a defined term, stated interest rate been calculated to have an We couldn’t do this without the help and and repayment of principle at the estimated worth of over $180 support of a number of third parties who end of that term (bullet loan), or have contributed to writing this report. billion, and the UK market periodic repayments of principal and Their contributions range from inputting interest (amortising loan) as they are transacted just over £3 billion into the scope, sharing data, giving us with a P2P loan. in 2016. their insights into the market, providing copy and peer reviewing drafts. REGULATORY DEFINITIONS Growth in the sector is far from over, So a big thanks to: Cormac Leech of with analysts predicting the UK market Confusingly and perhaps Victory Park Capital Advisers, Orca alone will continue to expand at a unhelpfully, the FCA has decided to Money and Liberum. Their input is CAGR of over 40%, with total lending use “Crowdfunding” as an umbrella invaluable, but needless to say any set to reach £30.3bn by 2022. term that encompasses both issuing errors or omissions are down to us. equity and P2P lending. They Of course, there are lots of reasons We also carried out our own extensive subdivide the sector into “Equity behind this extraordinary growth, but research, examining brochures, Based Crowdfunding” and “Loan the biggest driver is the returns on investment prospectuses, and trawling Based Crowdfunding”, but these offer. P2P lenders can earn annualised through websites to verify data and terms are rarely used within the net returns ranging between 5% and identify the latest trends. industry. Therefore, in line with the 7% and often higher. These returns are rest of the sector, we’ll use the terms comparable with the highest yielding The report is made possible by our P2P lending, marketplace lending or equities and bonds, and easily beat sponsors, LendingWell, who have online lending. the returns on high street deposits supported us by helping to meet estimated at an average of 0.62% production and printing costs. by the Bank of England1 November LEARNING OBJECTIVES Inflation Report. DEFINITION OF TERMS By the end of the report readers However, P2P is still a new asset class P2P lending has already developed will be able to: and many advisers are understandably its own specialist language, jargon wary of recommending that their and acronyms. They will be explained Get up to date on the size and clients invest in something that doesn’t throughout the report, but for the sake of growth rates of the market and have a long track record and that they clarity a few key terms are discussed here. what drives them themselves do not fully understand. This This report is about Peer to Peer Discover how government lack of understanding and reluctance can lending (P2P lending). This is support, regulatory reform, also be extended to the para-planners, sometimes referred to as Market institutional investment and compliance departments, PI brokers and Place Lending (MPL) or online lending. growing track record are bringing back office teams that support advisers.
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