What You Need to Know About the New IFISA Rules
The Innovative Finance ISA (IFISA) is changing this year. From 5 April, the IFISA tax wrapper will be extended to include long-term asset funds (LTAFs) and open-ended property funds for the first time. Investors will also be able to open multiple IFISAs per year, and partial transfers will be allowed between IFISA providers.
So what does this mean for Loanpad’s IFISA holders?
In short, nothing will change with your account unless you want it to. Any money which you have already invested in your IFISA account will remain invested, and your interest will continue to accrue as usual. For the 2024/25 tax year, you can choose to invest up to £20,000 in your Loanpad IFISA. However, this year you will have more IFISA options than ever before.
How is the IFISA changing?
The new IFISA rules have been designed to expand rather than limit the IFISA. If you have multiple IFISA accounts, from 5 April 2024 you can choose to reshuffle your portfolio and move money from one account to another. You can also open up additional IFISA accounts with other IFISA providers, just as long as you are careful not to invest more than your £20,000 tax-free annual ISA allowance.
You will also be able to use the IFISA wrapper to invest in LTAFs and open-ended property funds. LTAFs are regulated investment vehicles which allow professional and retail investors to invest in illiquid private market assets such as credit. Meanwhile, open-ended property funds are much more liquid and offer investor exposure to the property market.
Due diligence
As of 5 April, the tax year will restart, and your £20,000 annual ISA limit will be reset. With so much more choice in the IFISA market, it is important to ensure that you do not exceed this £20,000 limit across your portfolio of ISAs. Some IFISA managers have relatively high minimum investment thresholds of £1,000 or more, so this makes it all the more necessary to choose your IFISAs wisely to minimise the risk of losses.
No IFISA investment is protected under the Financial Services Compensation Scheme (FSCS), so there is no safety net if any loans go into default. All IFISA investors should be aware that there is a risk of losing some of their initial investment if the borrower is unable to keep up with their loan repayments. While this risk can never be eliminated, it can be managed.
Carry out your own thorough due diligence before making any new investment, and make sure you understand the risks involved. While past performance is no indication of future success, it is useful to check the default rate of a P2P platform or LTAF manager, as well as any publicly-available customer reviews and recent news stories.
Make sure you are comfortable with your IFISA manager before placing any money with them, and consider diversifying your investment by spreading your money across a range of loans, rather than backing just one or two projects.
Finally, educate yourself on the nature of the loans that you are backing, and any security that is in place. Check in with your loan portfolio on a regular basis and get in touch with your IFISA provider if you have any questions or concerns.
Peer-to-peer lending platforms earn their money in a few different ways. Many platforms make their income by taking an arrangement fee from the borrower when they originate a new loan. Others prefer to take a percentage of the loan payments, while some earn money through some combination of both.
| Don’t invest unless you’re prepared to lose money. This is a high-risk investment. You may not be able to access your money easily and are unlikely to be protected if something goes wrong. Take 2 mins to learn more. |
Loanpad’s success is testament to the hard work and expertise of the people who operate the platform behind the scenes. In this new blog series, we meet the team and learn more about their roles. First up is Neil Maurice, Chief Operating and Finance Officer.
- What did you do before Loanpad?
I started my career back in 2004 as an equity banker at UBS Investment Bank. I then qualified as a Chartered Accountant at BDO LLP in London. I spent about ten years at BDO in their financial services team specialising in a range of audit and consultancy work. As part of that role, I was part of the leadership team on a large remediation project at Barclays Bank focusing on the mis-selling of interest rate derivatives. This involved leading teams assessing whether a mis-sale had occurred and working to calculate any redress due.
I then moved to another multinational consultancy, Duff & Phelps and I was there for a couple of years focusing on a number of risk and regulatory projects for entities regulated by the Financial Conduct Authority (FCA). Then in 2018 I decided to branch out and that’s when I joined Loanpad.
- What brought you to Loanpad?
Louis Schwartz, Chief Executive of Loanpad and I have known each other for more than 20 years, so we’ve always had a link. Every so often he would reach out and ask my opinion on business matters because I have a background on the advisory side of FCA regulated firms, as well as an overall understanding of the way the business works.
Louis needed someone who could effectively fill several senior roles within the company – I filled the criteria and I was ready for a change.
Joining an exciting startup is great fun. You’re forming it, you’re nurturing it, you’re deciding which way they go, what you pull, what you push. Its great fun, but its not for everyone. There’s no boredom.
- What is your day-to-day role in the company?
My formal title is Chief Operating and Finance Officer, which means the management of the day-to-day teams, loan underwriting, regulatory compliance, day-to-day operations, and finances fall under my purview.
- To what extent has the P2P lending market changed since Loanpad was launched?
Massively. When Loanpad was being conceived, P2P lending was a very exciting concept, in the industry. It was decentralizing finance and giving retail investors exposure to an asset class which historically only banks and large finance houses were able to have exposure to. And I think that as a concept, it was phenomenal and still is phenomenal. Why should the retail investor with £5,000 not be able to lend money on a piece of real estate, but a bank is able to do it?
Logically, the concept of P2P finance is a great idea and a great concept. Unfortunately, there were a number of P2P failures in the early days.
This resulted in more regulation around areas such as disclosure, financial promotions and senior manager accountability. The level of regulation has massively gone up, and this has made the sector less attractive for new entrants. The result is that a lot of players have looked to leave, and fewer have looked to enter.
The market has shrunk for certain, but I don’t think that’s a bad thing. It means that the good actors remain.
- What are Loanpad’s core values?
Trust, integrity, and morals. We invest every single penny of money as if it’s our grandmothers’. We believe in being open, transparent, highly ethical, and highly moral in the way that we act. And our main focus is always trying to ensure that investors get their money back. We don’t want to be in a position of losing people’s money. We can’t guarantee it, but everything we do is focused on getting investors money back or making sure we invest it so we expect to get it back. We don’t look for the fast buck, we don’t look for the high arrangement fees on a loan just so we can make the loan and get it out the door. We look at the security needed in order to recover the capital.
- How has the business evolved to meet customer demand?
We constantly look for ways to make the Loanpad experience simple, efficient and friendly, whilst of course meeting all regulatory requirements on a disclosure basis. We don’t believe in complicated interfaces, we don’t believe in having to press 95 buttons to get anywhere. That’s just not how we want to be.
We look to constantly react to our clients’ needs, and to make incremental improvements on our site and functionality to meet customer demand. We prioritise our customer care, and make sure that we respond to all queries in a timely manner.
- What are your plans and ambitions for 2024?
We are hoping to put out a large software release in 2024. Investors may not see a huge change on the front end of it, but behind the scenes it’s a rebuild of the back end. That’s going to mean that we’re going to be able to put through new features and new products much more quickly than we have done in the past.
I’d also like to launch an Apple Store and Google Play Store apps this year. Towards the end of the year, I’d like to improve our data transparency so we can actually show better graphics of our loan book and the splits between different lending partners and different loan types.
But beyond all of that, the big focus of 2024 is continue doing what we’re doing now and continue to serve our investors. We’re in difficult macroeconomic conditions, be under no illusion. It’s not an easy market and we just need to be laser focused on delivering over and over again in what we’re doing.
| Don’t invest unless you’re prepared to lose money. This is a high-risk investment. You may not be able to access your money easily and are unlikely to be protected if something goes wrong. Take 2 mins to learn more. |
Understanding Loanpad’s Sustainable Revenue Structure
Peer-to-peer lending platforms earn their money in a few different ways. Many platforms make their income by taking an arrangement fee from the borrower when they originate a new loan. Others prefer to take a percentage of the loan payments, while some earn money through some combination of both.
Loanpad does not charge any arrangement fees to the Borrower. Instead, the platform makes nearly all its revenue by taking a share of the interest payments made on each loan. On some loans Loanpad may charge a small administration fee to the lending partner.
“We earn money right alongside our investors,” explains Neil Maurice, Chief Operating and Finance Officer at Loanpad.
“We think that makes us more sustainable as a business, as it means that we can continue to make money as long as our loan book is active.”
Why doesn’t Loanpad generate more of its revenue from fees?
Arrangement fees are paid once at the start of the loan, and that’s it. Unless the loan is refinanced, the platform will not earn any more money from it after it has been funded. This may encourage some P2P platforms and unregulated lenders to increase their lending activity which could come at the cost of effective due diligence.
“The issue we see with that model is it could encourage a lender to want to lend now,” says Maurice.
“There will be a subconscious view that you need to lend in order to make money. So if your entire revenue is built off arrangement fees, if you don’t lend, you don’t make money; you can’t pay salaries and you can’t keep the lights on.
“If the loan goes sour in six months time and goes into default, the lender will be able to keep their arrangement fee and the people who will lose out are the investors.”
Loanpad looks at things differently. More than 95 per cent of the company’s revenue comes from its net interest margin.
“For example, if we lend out a loan at eight per cent, we will pay our investors six per cent and we will take that two per cent in the middle,” explains Maurice.
“The result of that is that we don’t have an incentive to go into a deal just to make money up front. We only make money throughout the whole term of the loan, along with every other retail investor. So if a loan goes bad after three months and the borrower stops paying, Loanpad also stops receiving its interest.
“Our interests are completely aligned with our investors. We only make money when they make money.”
How much money does Loanpad make?
Loanpad has been profitable monthly since mid-2021. Whilst past performance is no guarantee of future success, Loanpad’s track record demonstrates the prudent management of the business to date, and its ability to generate profits through the interest earned on its loans.
“We have been profitable for a number of years,” says Maurice. “Because of our net interest margin structure, our modelling shows that Loanpad will continue to be profitable even under a wind-down scenario. We think our investors appreciate this as they get additional reassurance from knowing that their money is being invested with a company which has strong financials.”
| Don’t invest unless you’re prepared to lose money. This is a high-risk investment. You may not be able to access your money easily and are unlikely to be protected if something goes wrong. Take 2 mins to learn more. |
How Loanpad Built an £80m Loanbook in Five Years
Since Loanpad opened for business in late 2018, the platform has grown to a current loanbook size of over £80m with zero capital losses to date. As the platform aims to reach at least the £100m mark by the end of 2024, it seems like a good time to pull the curtain back and share a little bit of the Loanpad growth story.
How did Loanpad grow its loan book to over £80m in just five years?
The main driver of the platform’s growth has been word of mouth. Loanpad was founded by Louis Schwartz in 2015 and launched in 2018 after Neil Maurice joined the firm. Their objective was to build a business that was simple to use with a product that people wanted, that could provide a risk-adjusted return.
“It caught on,” says Maurice. “Word of mouth picked up. And as a result of that, people just came back to us over and over again, and they told their friends and families.
“It all goes back to our values, that by delivering and by honouring our commitments and by responding to people in an efficient, honest and open manner, it gave our investors comfort and trust in our business and we built it from that.”
No investor losses to date
It also helps that there have been no investor losses to date. Loanpad has always been careful to communicate the risks as clearly as possible to all potential investors, but the platform has also worked hard to mitigate the risk of capital losses. All Loanpad loans are secured against UK property, with an average loan-to-value of 41 per cent. This means that even if the property value somehow fell by 59 per cent, it could still be sold to repay investor capital. It is worth noting that during the global financial crisis of 2007-2008, UK-based property values fell by an average of 20 per cent.
In practice, the majority of Loanpad loans are unlikely to reach the stage where the underlying asset has to be sold through a receivership process. Loanpad works with a limited number of lending partners who have been thoroughly vetted by the firm. Throughout the duration of the loan, Loanpad is in regular communication with these lending partners to ensure that the borrowers are meeting certain milestones. Any possible issues which could impact the loan’s repayment can be flagged early, allowing the platform to take measures to protect investor capital and interest. Investors are also updated regularly on the progress of every loan, so that they can keep track of their portfolio as closely as they like.
£100m milestone
Loanpad’s ethos has allowed the platform to grow organically and steadily over the past five years, despite the changing P2P lending landscape. Increased regulation has led a number of competitors to leave the market, and many of their investors have opted to move their money into Loanpad. This in turn has allowed Loanpad to fund more loans and further expand its loan book.
It has also become easier to originate loans over time, due to the expertise that Loanpad has built up and the relationships that the company has developed with its lending partners. That means that there are more investors, funding more loans than ever before. But for Schwartz and Maurice, it is important that this growth continues to be organic and reflective of the company’s values.
“If we wanted to be a £2bn loan book in a year, it would risk the integrity of the business,” says Maurice. “That’s not what we want to do.”
“Our investors love the fact that our customer support is so responsive, they like the diversification of the portfolio, they like the fact that they can see the property and they like that we update them every 90 or 120 days on every single deal.”
“That sense of community only makes our platform stronger.”
| Don’t invest unless you’re prepared to lose money. This is a high-risk investment. You may not be able to access your money easily and are unlikely to be protected if something goes wrong. Take 2 mins to learn more. |
P2P INSIDER
Supercharge your understanding of Peer to Peer investing todayInside Loanpad: Founders Reflect on Growth, Values, and Vision
LS = Louis schwartz – CEO
NM = Neil Maurice – COO & CFO
Robert Murray-Brown of ECF Buzz sat down (virtually) with the new disruptive Fintech, Loanpad, to talk about their start up journey and what they hope the future holds.
Q – Loanpad was founded in 2016 but you held back on the soft launch until 2019. Do you think that caution has helped you and why?
LS: I wouldn’t say the delay was down to caution but rather the planning phase for our business, the FCA authorisation process and the build of our bespoke technology which of course required rigorous testing. With that said, it certainly gave us time to sit back and assess the market and it became increasingly clear that our USPs needed to be lower-risk and simplicity.
NM: I joined the business in 2018 just a few months before FCA authorisation was granted. It was a period of immense change in the peer-to-peer lending market not to mention the wider economy. These changes gave us some time to assess the market whilst conducting software testing and building in new features that we made available at launch in early 2019. We firmly believe that reputation is everything and therefore we took a few extra months to launch with a more tailored offering.
Q – How has the Pandemic altered your plans and how have you all coped with remote office working?
LS: The pandemic certainly caused some disruption in the second quarter of 2020. Since then, however, we have seen very strong growth, far stronger than before the pandemic. We think that with the current uncertainty in the wider economy, a model like ours (lower-risk) is even more attractive. Coupled with the fact that other platforms have dis-continued retail lending, we see a huge opportunity for continued growth.
NM: When we built out 3-year forecasts from launch, we certainly did not foresee a global pandemic in the middle of it. Nonetheless, the Pandemic has given us the opportunity to demonstrate the resilience and strength of our business model and I am delighted that we have seen continued growth.
As a Fintech, we built our business from the outset to allow and support flexible working which meant we were able to adapt extremely quickly to remote-working. We continue to share ideas and work together daily like we did before albeit virtually instead of in-person.
Q -The P2P market has grown and then retrenched somewhat on the back of some poor results from some of the larger players. What is it about Loanpad and your management which makes you different?
LS: From a lender’s perspective, our main USP is that our investors are very heavily sheltered from any losses. Our maximum LTV is 50% and current average is c.40%. So we think many investors have opted to go down the risk-curve (from higher-risk p2p providers) and look for something with additional protection like Loanpad offers. In addition, the experience and first-loss support provided by our lending partners appeals to many lenders.
From a business perspective, the fact that that we work with professional lending businesses means that a) we have a huge cost advantage relative to our peers in respect of loan administration and management and b) we can scale at a much quicker speed than would be the case if we were originating loans directly in the marketplace.
NM: We were fortunate to come into the industry slightly later than others. We sought to keep our costs low and focus on building a stable, profitable business at a sustainable rate of growth.
We strongly believe that the team is our greatest asset. Many of the team has either worked together or known each other for over two decades. We come from a wide range of backgrounds including lawyers, accountants, software developers, bankers and entrepreneurs. This eclectic mix means that we are able to see opportunities from all angles and the team has developed a very close working relationship over the years.
Q – How hard was it getting full FCA and ISA approvals
LS: The FCA authorisation process took some time as our application spanned some significant changes in the regulatory approach in the peer-to-peer industry. We continue to have an excellent relationship with the FCA. We strongly support the FCA’s authorisation process in that only the right businesses with appropriate compliance and operational functions led by experienced management become authorised.
The ISA Manager approval process came after the FCA approval process and took less time. However, being an ISA Manager requires strong operational processes to not only manage ISAs but also to report on them as required by HMRC.
Q – Which would you say is more important for a start up – a great idea or a great team……and why?
LS: They are both important of course. I would have to say a great team is more important though. Put simply, a bad team could make a mess of even the best idea. Our team comes from different backgrounds which provides a variety of perspectives when considering changes or new features.
NM: That’s a tough one! I would say a great team. Building a start-up is a life-changing, amazing experience. It’s extremely hard work and you get to know the team (and their families) as part of the journey. Given what it entails, I would only be interested in building a start-up with a great team. I am beyond fortunate that we have a fantastic team at Loanpad who continue to dedicate their time and energy to building a world-class business.
Q – Many start ups fail because they simply run out of cash – either through over trading, lack of sales volume or control of their GPM or all three. Is controlling the impressive expansion of Loanpad to date an important part of your success?
LS: As a retail lending platform, it is important that both sides of the business (investors / loans) grow together. Whilst our model allows some flexibility with this, it is not something that can be built too quickly without reducing quality. We are very happy with our growth rate (over 150% in 2020) and would hope to see similar levels of growth moving forward.
We are strong believers in building a business on solid foundations. We keep daily control over our costs and margins are now close to operational break-even.
NM: Absolutely. The age-old expression of ‘cash is king’ is paramount. We are trusted with investors’ money and that trust comes with a responsibility to ensure that we run a stable and compliant business where we never compromise quality.
Q – On expansion do you have plans to tackle new markets – say for example Europe?
LS: We would like to enter new markets one day, yes. However, as our home market offers considerable room for growth our focus is very firmly there for the foreseeable future.
Q – If there was one thing you could ask the Government to do to help start ups like yours, what would that be?
LS: Boost the scope and benefit of SEIS and EIS. For example, increasing EIS allowance to 50% which I think would give a considerable boost to promising start-ups by encouraging more people to back them.
Q – And finally when the day is over, what book or music do you turn to, to relax and recharge the batteries?
LS: It seems to be increasingly hard to find time for either but I do love listening to many kinds of music if I had to pick a favourite it would probably be the Beatles. As for reading, I am not one for fiction, I prefer to read factual biographies or educational materials.
NM: Given the current pandemic, any relaxation time is largely taken up by home-schooling and acting as IT home-support for my four young children! However, when time allows, I enjoy reading crime novels and dystopian literature. As for music, my playlist appears to be stuck on anything from the 90’s.
Loanpad Collaborates with Mercedes F1 and UCL
We are extremely proud and thankful to the Loanpad development team who utilised their engineering backgrounds to work side by side with Mercedes F1, UCL and UCLH to successfully develop breathing aids for the NHS in the fight against Covid-19.
This is how the story unfolded.
Two members of the Loanpad team, Jamie Robinson (CTO) and Alex Blakesley (Lead Software Engineer) were called upon for an emergency meeting with a team of engineers and medical staff from UCL, Mercedes AMG HPP and UCLH to discuss the possibility of designing a new breathing aid to help with Covid-19.
The newly formed team created a plan to reverse engineer a ‘CPAP flow generator’ to help the NHS treat patients suffering from the virus. CPAP stands for Continuous Positive Airway Pressure and, as the name suggests, provides the patient with oxygen enriched air at a slightly higher pressure than normal. This keeps the patient’s airways open enabling them to breathe more easily.
Whilst a CPAP device does not replace a ventilator, the team understood that it can be given to those patients who are not in a critical condition. Therefore, this frees up the NHS’s short supply of ventilators for patients that are most in need, thereby lowering the incredibly high demand for them.
“Time was not on our side” according to Alex. “So we agreed to have a finished design for the device within 48 hours. To do so, we reverse-engineered an old design, instead of trying to develop a new one, which meant that many of the necessary permissions were already in place, saving valuable time”. Jamie continued “the team completely redesigned an existing CPAP device and had the first prototypes produced for hospital testing within three days!”
Merging the high level of expertise from the engineers at both UCL and Mercedes with the clear guidance of doctors at UCLH, the UCL / Mercedes ‘Ventura’ was produced, consisting of only 32 components which simplifies and expedites the supply chain. If it receives approval by doctors in the coming days, the team could facilitate production of 1,000 devices per day within a week.
Enquiries are now coming in from all corners of the globe, and we are excited to follow the progress of this fantastic achievement over the coming days.
We want to reiterate again how proud we are of Jamie and Alex and want to thank them and the wider Ventura team for achieving so much on behalf of the NHS in such a short space of time.
By Neil Maurice
How Loanpad Is Weathering the Covid-19 Storm
A little over a month ago, Loanpad HQ discussed a range of topics for upcoming blog posts including the upcoming IFISA season, importance of cybersecurity and loan due diligence. Fast-forward to today and our team are primarily working from home, stock markets have suffered losses unseen in decades and the world has united in its efforts to battle and defeat Covid-19.
Like many other businesses, we will do whatever we can to support the country so that we can all get through this together.
First and foremost, we join everyone in hoping that the best experts in the world manage to contain the fallout as best possible, slow the spread and ensure the availability of medical treatment for everyone. Our business has a strong ethical stance and we hope that at times like this we will see the very best traits of humanity come to the fore where we strive to help and care for all those around us who may need our help in many different ways.
The P2P market is by no means immune to the impact of Covid-19. Like other asset classes, the sector has seen an increase in withdrawals with many platforms effectively banning the ability of investors to access their money.
In these times, investors should realise that P2P firms vary significantly in risk appetite, structure and makeup of loanbook. Investors should do their homework on the various platforms and see what is on offer. Some of the questions you should consider include:
- What security is there? P2P platforms either make unsecured loans to businesses and individuals or loans secured against some form of tangible asset, like property. Unsecured loans by their very nature are higher risk as investors have no recourse if a loan goes into default. Loanpad only makes secured loans against property to ensure the property can be sold if necessary to recover your money.
- If security is taken, what are the loans to value? Even when security is taken, P2P platforms can decide how much to lend as a percentage of the security value. The higher the loan-to-value (LTV), the higher the risk as there is less of a cushion if valuations fall. Loanpad’s risk-averse business model only lends up to a maximum of 50% LTV with a current aggregate LTV of 28%.
- Are commitments made to future loans? P2P platforms often ‘commit’ to property development loans where the funds are only released during the course of the loan. Without having set aside these funds at the outset, they will often have to rely upon either continual repayments from other loans or more deposits. Given the structure of lending partners, Loanpad does not commit to lending any future money.
- What interest rates are offered? P2P platforms offer a wide range of interest rates linked to different account types and access times. The general rule of thumb is that the investors take on higher risk for higher return. Loanpad prides itself on lower-risk loans while still offering competitive rates.
We continue to believe that P2P has a firm place in investors’ portfolios. In recent days, the level of withdrawals at Loanpad has decreased to a trickle and we are seeing an upturn in deposits from both new and existing investors.
We do not see a material increase in risk of capital loss on any loans. Our loan structure is designed to outperform in tough market conditions. This is because our conservative appetite for risk (very low LTV property lending only) serves to shield our investors from falls in the property market which ‘may’ result from significant drops in the financial markets (as we are currently witnessing).
It is important to remember that the performance of loans on our platform is not directly correlated to the stock market and is in fact one of the advantages of using Loanpad.
We have always believed that most retail investors simply want to earn a fair return on their money that comfortably beats inflation in any foreseeable market conditions. That is what Loanpad aims to do and we fully expect to be able to do so even in these volatile times.
Written by the Loanpad team
Understanding the FCA’s Changes to Peer-to-Peer Investing
Since early December 2019, anyone who has tried to invest on a peer-to-peer platform has noticed a string of changes, most notably the introduction of investor categorisation and the requirement to take (and pass) an appropriateness test.
This is due to new regulations from the Financial Conduct Authority (FCA) who are seeking to improve the internal governance and systems of peer-to-peer platforms whilst ensuring that only those investors who understand the features and risks can invest.
However, why have these new regulations been put in place and can they really help put trust back into a sector that has seen its fair share of bad press and insolvencies?
Contrary to popular belief, recent insolvencies within the sector have not caused a knee-jerk reaction at the regulator. These changes have been on the cards for years. If we cast our minds back to the beginning of 2014, we had the UK peer-to-peer market running towards the £1 billion. Peer-to-peer was quickly becoming a household name and there was a lack of consistency in marketing, disclosure and corporate governance.
At that time, the sector was regulated by the Office of Fair Trading and, in mid-2014, the regulatory torch was passed over to the Financial Conduct Authority (FCA). Initially, existing companies received provisional authorisation whilst new entrants had to go through a full FCA authorisation process.
The FCA used this time wisely to understand the peer-to-peer platforms, the investor base and develop a view on whether additional and / or more specific rules would be required. However, as we know over the last 18 months, whilst this was happening, cracks began to form, and this resulted in the failure of a few platforms.
After rounds of consultations, the FCA implemented its new rules for the peer-to-peer sector on 9 December 2019. One of the most visible changes to investors is the need to undertake an appropriateness test. This has been implemented by the FCA so that only investors who adequately understand the features and risks of each platform and peer-to-peer in general are able to invest.
Looking around the sector, we see some variances in the way that each platform has interpreted and thus implemented the new rules. It will inevitably take some time for conformity to occur across the various platforms. In addition, we see the FCA seeking to clarify and enhance the new rules following a period of review and embedding during 2020.
Ultimately, peer-to-peer lending remains a bigger household name than it was five years ago. The introduction of new rules seeks to ensure it sits alongside historical more traditional investment classes and the key is for investors to assess each platform on its own merits, risk levels and usability.
We see 9 December 2019 as a turning point for a new, more professional, era for peer-to-peer lending with platforms demonstrating increased transparency, additional safeguards to mitigate platform risk and more accountability on the part of the individuals running p2p platforms.
The future looks very green indeed.
Loanpad on the Future of P2P Lending
Loanpad’s Chief Executive Officer, Louis Schwartz, and Chief Operating Officer, Neil Maurice, give their views on recent events in the Peer-to-Peer industry and what it means for the future.
Industry
The P2P industry, like many others, has been hit by a number of corporate failures in recent times.
As an industry, our concern must be with investors who not only have their assets frozen but also may suffer losses on their investments through a combination of both loan impairments and professional fees. This is extremely unfortunate and, whilst all investors take risks, it raises many questions on operational controls, lending processes, due diligence and investor information disclosure.
Whilst a relative newcomer, we firmly believe that these corporate failures should not reflect on the wider industry. Loanpad, alongside our competitors, should focus on running our businesses in a stable manner, complying with all relevant regulation and guidance and putting the investor at the forefront and centre of any decision being taken.
We set out below a few of our thoughts on sustainability and navigating the P2P course.
Platform Risk
One of the biggest areas of risk that has come into very sharp focus in recent months is platform risk.
A fundamental principle of P2P lending is that investors should be exposed to borrowers’ credit risk (the risk of loans defaulting) but not materially to the credit risk of the platform. This is one of the things that differentiates P2P lending, where platforms simply act as an intermediary on behalf of the borrower and lender. Whilst at face value this is of course true, the recent administrations have quite clearly demonstrated that investors have been exposed to the good standing of the platform in ways other than borrowers’ credit risk.
So how are investors expected to be able to determine the level of platform risk when evaluating any platform?
The first thing many investors will look to is the size of the platform, with the supposition that bigger is safer. Whilst in many cases this would seem logical, in the world of P2P we remain unconvinced by this argument. This is primarily because no P2P platforms would appear to have reached profitability on a consistent basis, and some are still showing significant ongoing losses.
With the FCAs minimum regulatory capital requirements in place, losses can only be sustained via new equity being raised. However, the “golden years” of ever-increasing equity injections appear to be dwindling. Quite simply, platforms must now become self-sustainable to survive over the coming years and we envisage large-ranging changes to platforms’ business models.
So back to the question – how can investors reasonably evaluate “platform risk”? Sadly, with much difficulty and imprecision as most available information is historic.
However, the introduction of the new FCA rules in December 2019 will go some way to helping investors evaluate platform risk through clear disclosure on loans under management, fees and the rate of interest charged to borrowers. In addition, all platforms will need to adequately disclose their wind-down plans so investors can compare and contrast the approach platforms are taking to wind-down.
At Loanpad, despite being just 9 months post-launch, we anticipate reaching profitability and self-sustainability by 2020. This is as a result of our unmovable focus on sustainability ahead of exponential early growth.
Our focus is to steer the business to profitability whilst continuing to provide investors with (what we believe to be) the market-leading P2P product.
Revenue Models
One of the issues identified through the corporate failures to date is that many platforms generate a significant proportion of their income at the time of loan origination. Whilst perfectly acceptable to charge fees, this creates an inherent need to originate new loans to fund operating expenses which in turn relies on regular loan repayments and / or new investment.
At Loanpad, our income is generated from a Loans Under Management margin such that we earn income on a daily basis in the same way as when our investors do. This ensures that our income is stable irrespective of the level of new loans originated in any given period.
In the coming month and years, we envisage greater scrutiny on how platforms earn their revenues and the sustainability of the underlying business models.
Governance & Wind-Down Plans
Perhaps the most intriguing factor of these corporate failures is the role of governance and wind-down plans.
The overarching aim of a wind-down plan is such that the Board tracks and identifies when a wind-down should be triggered and then initiates the wind-down of the loanbook in an orderly fashion. Importantly, this must in good time before a business runs out of cash to operate.
Whilst each circumstance is different, we believe that strong corporate governance, a tight control on costs, clear and measurable indicators of the need to initiate a wind-down and full financial planning for the wind-down period are essential in any P2P platform.
In our opinion, the alternative to an orderly wind-down is falling into insolvency by way of administration or liquidation. This is the scenario that should be safeguarded against as otherwise the risk to overall recoveries and fees undoubtedly increase. Whilst wind-down plans must consider their interaction with general and insolvency law, we believe that the initiation and completion of a successful wind-down plan should occur before any insolvency process is required.
Wind-Down Planning – Loanpad’s Approach to Stability
Neil Maurice, Chief Operating Officer of Loanpad gives an overview of wind-down plans and shares some views on Loanpad’s wind-down approach.
What’s central to any business?
As with any business, there is no guarantee that Loanpad or any peer-to-peer lender can or will choose to operate forever.
Since the financial crisis in 2008, we have seen a raft of corporate failures both within financial services and in other sectors. Whether it’s lenders in peer-to-peer platforms, counterparties in investment banks or holidaymakers in tour operators, all failures have one thing in common – customers.
Customers, or within peer-to-peer lending – investors, are and should always be the centre of any business throughout its lifecycle. Unfortunately, history has taught us that corporate failure has often caught firms unaware and customers or investors have been left with uncertainty over both whether and when they will get their money back.
What are wind-down plans?
At Loanpad, we see it as critical to have plans in place to both identify when our business is no longer viable and to implement plans to wind-down any outstanding investments or loanbook before an insolvency process is required.
The FCA has put increasing emphasis on the need for peer-to-peer lenders to have adequate and proportionate wind-down plans in place to avoid what it deems as “disorderly failure”. Within peer-to-peer lenders, one of the FCA’s concerns is that loans continue to be administered if the platform ceases to operate for any reason.
The overarching aim of a wind-down plan is to help ensure that existing loans continue to be managed, monies recovered from borrowers in a timely and efficient manner and then ultimately repaid to investors without the need or even consideration to enter any form of insolvency.
What are Loanpad’s wind-down plans?
We built our wind-down plan taking into account our business model and web-based platform and considered the best interest of investors in respects of efficiency and costs.
Our wind-down arrangements consist of a plan to manage the wind-down of the loanbook internally (alongside our lending partners). Staffing requirements and operating costs have been assessed and we have capital set aside (which will be increased proportionately with the size of the loanbook) to keep things running smoothly.
In addition, our lending partners take on contractual obligations to investors / Loanpad insofar as management and reporting are concerned and, combined with their “first loss / skin in the game”, this is unlikely to be treated lightly even in a wind-down scenario.
Loanpad believes its business model provides for an orderly and less resource-intensive wind-down due to the following factors:
- Loanpad earns money on a daily basis based via an “assets under management” margin, therefore Loanpad is not dependent on new business for its revenue;
- The lending partner approach means that the day-to-day management of the loans is undertaken by established and experienced lenders with our supervision and monitoring; and
- All investors are in the same pool of loans so there are no difficult or time-consuming allocations to be administered on a loan-by-loan basis.
What will the future hold?
As the industry works through a number of peer-to-peer platform failures, lessons continue to emerge to assist us and the rest of our sector in improving our wind-down plans.
We hope that new regulations coming into force will ensure that all peer-to-peer lending platforms have wind-down plans to cater for all reasonable eventualities. Whilst all platforms are competitors in one sense, we are first and foremost partners in the common aim of securing the continued growth and sustainability of the sector and ensuring good practice throughout.