Christine Farnish, Independent Chair of the Peer-to-Peer Finance Association has written an open letter to Andrew Bailey, Chief Executive of the Financial Conduct Authority, concerning comments made during a House of Commons' Treasure Select Committee meeting. The Financial Times reported that Andrew Bailey statied that one of his concerns was that peer-to-peer lending platforms “get very near” to promising investors they will get their money back and will receive fixed returns and that the peer-to-peer companies taking fees without the loan risk was like the securitisation of subprime loans before the financial crisis.
Dear Mr Bailey,
I write, further to your oral evidence to the House of Commons’ Treasury Select Committee last week, with particular reference to your answers to questions asked by Chris Philp MP, raising concerns about the risks associated with peer-to-peer lending; a potential incentive mismatch related to fee structures within the sector; and the issue of reserve funds.
Peer-to-peer platforms exist solely because they create value to consumers on both sides of the platform: investors are able to earn fair predictable risk adjusted net returns that can outperform other investment products, whilst borrowers can access fast and flexible finance. Platforms offer borrowers a form of investment, and explicitly are not an alternative form of savings account: peer-to-peer products are not positioned as a deposit and nor is there an implicit guarantee.
In responding to one of Mr Philp’s questions, you cited the differential risk profile between a deposit contract and that for asset management; it is important that potential investors understand where peer-to-peer platforms exist on that spectrum. Parliament has recognised that peer-to-peer lending is distinctive and constitutes a new form of financial services activity – designated in the Regulated Activities Order and recognised as different from both bank deposits and conventional equity investment products. In considering its approach to peer-to-peer finance, I would hope that the Financial Conduct Authority would start from first principles, based on risks and benefits to consumers, recognising that it is neither about banks nor about asset management. Such an approach would be consistent with policies, publications and pronouncements made by the Authority.
Whilst it is the case that, within the peer-to-peer lending sector, there are different asset classes each with their own risk-return profile, overall, peer-to-peer platforms offer a lower risk profile than stocks and shares with less volatility. Individual platforms, as well as the sector in general, acknowledge responsibility in ensuring that potential investors are aware of the particular risks of this form of investment, and are committed to the principles of fairness and clarity.
The Peer-to-Peer Finance Association has been consistent from its outset in arguing for, and embracing, an appropriate level of regulation to facilitate innovation and the development of this form of alternative finance, whilst providing protection for consumers. Platforms continue to work closely with the Financial Conduct Authority on the full authorisation process, and current regulatory requirements are supplemented by the Association’s own Operating Principles, requiring all members to commit to high standards of business practice as well as exemplary levels of transparency: details of every single loan originated in the marketplace must be published. The value of this openness enables individual platforms to be judged on the basis of the credit risk performance of the entirety of their loan books.
As the growth of the peer-to-peer lending sector and the base of investors and borrowers has expanded so rapidly, the challenge of ensuring that all participants are fully cognisant of the nature of the opportunities and risks have intensified, and a process of familiarisation for consumers is recognised as critical. The sector accepts its responsibility for ensuring that those investing in peer-to-peer products understand the nature of their investment, and appreciate the degree of risk incurred. The Association audits the websites of individual platforms frequently, and feedback is provided. All members are required to publish in full the details of their loan books to ensure that investors are able to hold platforms to account on credit assessment.
I believe that a degree of mis-understanding has arisen in respect of the structure of fees within the sector. It is Mr Philp’s contention that there is a mis-alignment of incentives where those operating peer-to-peer lending platforms receive fees upfront based on the volume of loans originated. In your response to Mr Philp’s question (Question 61 of the session), you suggest that structuring lending through taking fees upfront creates uncertainties. A significant part of the fees charged for peer-to-peer lending are earned over the course of the life of the loan, and are not paid at the outset. Peer-to-peer lending platforms recognise the importance of ensuring that incentives are not skewed merely in favour of writing loans, irrespective of their long-term performance: an increasingly significant amount of income comes to the platforms during the later period of the life of the loans. Platforms do not engage in maturity transformation.
The existence and use of reserve funds in peer-to-peer lending is not universal, and specific to those platforms who have designed them into their business model. Where a peer-to-peer lending platform decides to create a reserve fund, it is important that investors understand that this does not infer a guarantee for their investment.
Mr Philp’s final proposition (Question 62) advocated co-investment of a proportion of a peer-to- peer lending platform’s loans to concentrate attention on making good credit decisions. As indicated above, the peer-to-peer lending sector has embraced a level of transparency which is unrivalled in financial services, and it is possible to make judgements about the calibre of credit decisions made by each individual platform in respect of their entire loan book through material which is already published. I would argue that ensuring that investors are empowered to appraise a peer-to-peer lending platform’s credit decisions and performance obviates any requirement to mandate co-investment. I would observe that it is not a requirement for asset managers to co-invest, despite incurring greater levels of risk within their investment portfolios.
The Peer-to-Peer Finance Association welcomes the Financial Conduct Authority’s recently- announced post-implementation review of crowdfunding rules as an opportunity to ensure an appropriate balance of regulation between protecting investors and borrowers, without stifling innovation and competition. It is important that consumers are able more easily to differentiate between the various levels of risk in the multitude of alternative finance investments and make informed decisions which reflect their own preferred exposure: for example, an equity-based crowdfunding product for a start-up enterprise carries a very significantly-greater level of risk compared with most peer-to-peer lending products. The regulatory regime should reflect these divergent risk profiles.
I look forward to continuing to contribute to the on-going debate about where the appropriate balance of regulation should lie. Consumers should receive appropriate levels of protection, but they also value the improvements which innovation in customer service, credit risk management, good value products as well as cost and product transparency which have accrued through the evolution of peer-to-peer lending: opening up this form of loans to retail investors, previously the exclusive domain of financial institutions.
I hope this is helpful, and am copying this letter to Chris Philp MP, and to Rt. Hon. Andrew Tyrie MP, as Chairman of the House of Commons’ Treasury Select Committee.
Independent Chair: Peer-to-Peer Finance Association
Funding Knight was placed into administration on 28th June and immediately bought by GLI for £750,000 with the promise of a further £1million of capital to finance ongoing operations.
GLI Finance is a specialist provider of finance to small and medium sized enterprises. Its ordinary shares are quoted on the AIM (GLIF) and its issued zero dividend preference shares are listed and traded on the main market of the London Stock Exchange (GLIZ). The loans are provided to SMEs through a variety of finance platforms in which GLI Finance has an equity stake.
The platforms in which GLI Finance is invested vary by geography, industry, size of lending and by type of lending. They include Global trade Finance, UK and US SME Lending, Offshore Lending, UK invoice discounting, European invoice discounting, Global multi-asset crowd funding and UK property-backed lending.
GLI Finance's ordinary shares closed virtually unchanged on the day, but has fallen from a peak of 58p in July 2015 to a low of 22.1p on Monday 27th June. The ordinary share price closed at 28.75p before the result of the EU referendum was announced.
Here is the press release on the London Stock Exchange:
The board of GLI announced in its strategic review update released on 16 February 2016 that it had not been possible to agree a way forward between GLI and FundingKnight, an online peer to peer lending platform. As a result, GLI became a passive investor with respect to its interests in Funding Knight Holdings Limited ("FKH"), the holding company for the FundingKnight group. These include a 23.4% interest in FKH's issued ordinary share capital with a carrying value of £2.481 million, a £1.001 million investment in FKH's preference share capital together with accrued interest of £0.290 million thereon and £0.525 million of loans provided by GLI to FKH.
On 28 June 2016, Greg Palfrey and Steve Adshead of Smith & Williamson LLP ("S&W") were appointed as administrators to FKH. The board of GLI is pleased to announce that, shortly after S&W's appointment, the Company agreed to acquire the respective entire issued share capitals of Funding Knight Limited ("FundingKnight", FKH's operating subsidiary) along with FKH's other subsidiaries, Funding Knight Services Limited and Funding Knight Corporate Services Limited, both of which are dormant (the "Acquisition"). Consideration of £0.75 million was paid in cash at completion of the Acquisition. As part of the terms of the Acquisition, GLI has also committed to provide Funding Knight with at least £1 million of further capital to finance its ongoing operations.
Funding Knight recorded unaudited turnover and a post-tax loss of approximately £0.61 million and £1.17 million respectively in the financial year ended 31 March 2016. FundingKnight's unaudited net assets at 31 March 2016 were approximately £0.13 million. £0.45 million of the consideration for the Acquisition will be applied by S&W in partial settlement of the Company's loan to FKH. The remainder of GLI's interests in FKH will be written down to £nil in the Company's balance sheet.
Andy Whelan, CEO of GLI said
"We believe FundingKnight is a fundamentally good business with strategic value. By acquiring the business at a low entry price, we will help secure the continued employment of the FundingKnight team and provide reassurance to the investors in FundingKnight loans and FundingKnight's SME client base that have existing loans or are seeking to borrow. In the medium term, we will be seeking to maximise the potential of FundingKnight in a way which is consistent with our strategic plans."
Landbay, one of the leading peer-to-peer companies, has closed its fixed rate product. Lenders who have enabled the Auto Reinvest option will have any funds lent on on the LIBOR tracker, which offers a lower rate of interest. We hope this is only a short-term change.
Here is the email send to lenders:
Due to an influx in demand for our Fixed Rate product, we regret to inform you that this product is currently unavailable for new investment.
This doesn’t affect your current Fixed Rate investment, but if you have funds in the Fixed Rate product with the auto-reinvest option switched on, in order to prevent you losing out on any interest we will auto-reinvest your funds from next month into our Tracker Product that has an annualised interest rate of 4.0%.
Our Tracker Rate product has a number of features designed to give you a solid return, at a variable rate of interest:
- Your rate of interest is 3.35% pa above LIBOR* (London Interbank Offered Rate). When LIBOR changes, your Tracker Rate changes too.
- Withdraw or sell your funds on our secondary market at any time. Withdrawals typically take 1-2 days and are dependent on funds being available to replace your investment.
You will still be able to request a withdrawal from the Fixed Rate product via our Secondary Market. We currently have more pending demand for this product than anticipated withdrawals. When we have new Fixed Rate loans available for investment, or if the demand for withdrawals from the product approaches the current demand for investment, we will reopen the product for investment.
As always, withdrawals are dependent on the reallocation of your loan parts to new investments, via our secondary market.
We apologise for the inconvenience this may cause, and if you’d like to discuss your investment please contact us. We’re here to answer any questions you may have.
If you do not wish for your interest to be automatically reinvested into the Tracker product please log in to your account and switch your ‘Auto Reinvest’ setting to ‘Off’.
The upcoming referendum on the UK's continued membership of the European Union is certainly a contentious issue with viewpoints becoming polarised. A recent poll on the P2P Independent Forum showed a bias towards members favouring an exit rather than remaining, but the comments the discussion provoked on both sides shows how difficult this has become.
So what would a "Brexit" mean to peer-to-peer lending? The simple and honest answer is "we don't know" and those that have a definitive answer - either positive or negative - would be high in guesswork. If the UK were to vote to leave then there would be some uncertainty in the short term, however if the UK voted to remain there would be continued uncertainty in the longer term, especially - as expected - if the vote was close. Uncertainty may mean changing interest rates or churn within the employment sector and that could affect people's finances, positively or negatively.
In terms of peer-to-peer lending there is nothing exclusively EU-based that would affect the sector within the UK. The concept of peer-to-peer lending started within the UK, and the UK continues to be a leader within fintech. Lenders with funds in Euros may face greater currency fluctuations if the UK were to leave, but with underlying problems in some Euro areas, having funds in Euros does carry some longer term risk regardless.
The referendum is likely to be decided by factors other than simple economics, but if the UK does vote to leave we'll be covering any potential impacts that could affect lending.
Leading P2P provider Folk2Folk have joined the select club of peer-to-peer companies that have lent more that £100million. Based in Cornwall the company has a growing high street presence as well as the internet. To date Folk2Folk has not experienced any defaults.
Here is the full press release:
Following a strong start to 2016 Folk2Folk, a leading peer-to-peer lending company, is pleased to announce that it has passed the £100 million milestone of loans funded, highlighting the success that the company has enjoyed since it launched in 2013. The milestone demonstrates the strong demand in the company’s platform as Lenders and Borrowers are attracted by Folk2Folk’s simple, secure and transparent model.
Folk2Folk brings together investors seeking attractive and secured returns, and borrowers looking for access to affordable capital to develop and grow their business. The company has seen a huge inflow of investment over the last 12 months and has introduced funding to hundreds of businesses. More than 70% of Folk2Folk investors are repeat lenders, demonstrating the strength of Folk2Folk’s product and the confidence lenders have in the company.
In addition to passing the £100 million milestone, Folk2Folk has launched a recruitment campaign to help with its long term growth strategy and national expansion. Folk2Folk has appointed a new Head of Business Development and Sales, Matt Waterfield, to help widen the company’s reach and deepen its professional networks throughout the country. Matt brings with him a wealth of financial services experience, having previously held the position of General Manager for the Middle East & Africa for Friends Provident International, an Aviva company providing investment and savings products, for over a decade.
Matt represents the first of up to 10 appointments planned in 2016 which will allow Folk2Folk to further their strong operational progress, and build on the successes that have taken place over the past year – increasing their lending by over 100% in 2015, launching its national Legal Panel, and winning the AltFi Best Lending Platform for Small Businesses Award 2015. As part of its national expansion, the company also plans to open a further branch before the end of 2016.
Folk2Folk’s Chief Executive Officer, Jane Dumeresque, said: “We are delighted to pass the £100 million milestone, which demonstrates both the strength of demand from lenders and borrowers and their confidence in our product. We take great pleasure in knowing that Folk2Folk has facilitated funding for many small businesses, helping them realise their ambitions. It is an exciting time for Folk2Folk and this achievement represents only the start as we continue to grow and drive the business forward.”
Folk2Folk has facilitated millions of pounds of local investment by introducing lenders to borrowers in various industries including renewable energy, house building, agriculture, leisure facilities and land and property acquisition. The funding has helped to deliver a broad range of projects encompassing farm diversification, property development, equestrian centres, wedding venues, and golf courses.