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Six Trends Driving the Growth of the UK P2P Lending Market
The growth of the UK market over the past 12 months has been fascinating to watch.
At Lend Academy my focus has been primarily covering the US P2P lending market but this year, with our first LendIt Europe conference (taking place November 17 in London), I have taken a much greater interest in the UK market.
When I look at the UK I see a vibrant P2P lending industry that is poised for explosive growth in the next couple of years. There are six key trends that I see driving this growth.
The inclusion of P2P lending in ISAs
The tax treatment of P2P lending has been a challenge for investors in both the UK and the US. In the United States we have Individual Retirement Accounts (IRAs) and that is the way many investors choose to invest. The inclusion of P2P lending in ISAs is going to open the floodgates for individual investors in the UK. Suddenly, savers will have a high yield alternative for their ISA money and many will choose to invest in the P2P lending platforms. This should mean a huge influx of retail investor money.
Arrival of Institutional investors
The individual investor has been the driving force so far behind the growth of P2P lending in the UK. But that is changing. This year marks the beginning of a transition where the institutional investors are recognizing the potential of this asset class. We had the launch earlier this year of Eaglewood Europe’s P2P Global Investments fund (symbol: P2P), a publicly traded closed end fund that is deploying £200 million primarily across UK and US platforms. There was a large investment by London-based alternative asset manager Arrowgrass in Zopa and some hedge funds are now getting involved. Some may bemoan the fact that we are losing the P2P aspect but I think this is a natural evolution of this asset class. Platforms are still committed to the retail investor and institutional investors allow the platforms to scale and reach profitability more quickly.
Participation of the High Street banks
Earlier this year Funding Circle announced a partnership with Santander UK where the large bank will refer SME borrowers to Funding Circle. Since then there has been talk of making this mandatory for large banks that turn down SMEs for a loan. Whether or not this new regulation is enacted I expect to see more deals like the Funding Circle/Santander deal that will drive more borrowers to the P2P lending platforms.
I have to give credit to the UK P2P lending industry for being proactive in their approach to regulation. Through the P2P Finance Association the industry has actively lobbied the UK government to enact sensible regulations of P2P lending. In April this year the FCA regulations began and all platforms must now adhere to a set of rules including minimum capital requirements, backup loan servicing and other measures designed to protect investors. Another little discussed reform is the relaxation of pension rules that gives the over-55 crowd access to their entire pension pots in retirement. Both these changes are positive moves for the industry.
Support from the British Business Bank
I think it is difficult to overstate how important the support of the British Business Bank has been for the growth of the P2P lending industry in the UK. In late 2012 the government announced it would invest £20 million in Funding Circle loans, taking a small percentage of every loan. At that stage Funding Circle was barely two years old and suddenly it had the direct support of the UK government. Earlier this year this program was expanded with another £40 million committed to Funding Circle loans. Other platforms such as Zopa, Ratesetter and MarketInvoice are also benefitting from this direct investment. By doing this, the government is not only deploying capital to these platforms but is providing the entire industry with increased credibility and awareness.
Higher yield options
The UK P2P lending industry has been dominated by the “big three” (Ratesetter, Zopa and Funding Circle) for some time. These companies all have a deep track record of positive returns to investors but the yields have been relatively low in the mid-single digits. In many ways this has been good for the industry, as the leading companies have implemented strict underwriting to protect investor money. Today, there are new higher yield options emerging with MarketInvoice offering double digit returns, Assetz Capital and LendInvest both offering high single digit returns (backed by collateral) and several newer platforms also claiming higher returns. While these higher yields often come with higher risk the fact is that investors now have a range of potential yield options.