The introduction of new rules for the P2P sector could be the catalyst for more advisers to consider this fast growing market.
It is fair to say, to date, many advisers have not fully embraced the sector.
In a poll Intelligent Partnership conducted of advisers for an upcoming Alternative Finance Quarterly Update, less than 20 per cent said they had recommended P2P or debt based securities to their clients.
Just 2 per cent said they regularly recommended it.
Under current rules, even whole of market advisers are not obliged to consider P2P for their clients.
There has been a perception that it is less well regulated, it often does not fit nicely into standard due diligence methods, and the asset class is still relatively young and unproven with many platforms yet to experience a full economic cycle.
In turn, many P2P platforms have shown limited interest in attracting advisers.
Many do not currently have adviser portals.
Instead, they have focussed on attracting retail investors directly, and the vast majority of the marketing budgets of these platforms have been used to that effect.
The result is that both advisers and platforms are losing out.
A new, more standardised definition of default will also allow advisers to compare P2P platforms more easily. Engaging with IFAs has the potential to open up sizable investment inflows to P2P while offering advised clients an effective route to portfolio diversification with stable, inflation beating returns that could help shield some capital from market volatility.
The new P2P regulations, which came into force on Monday, may give both sides cause to reconsider.
For the platforms, the creation of the ‘restricted’ investor class limits the amount ordinary investors can invest in these platforms to just 10 per cent of their investable assets unless they are high net worth, sophisticated or receiving financial advice.
In other words, the IFA route has now become one of only three ways they can receive substantial investments from retail investors.
For those with minimum investments starting at £1,000 or more, the regulations will remove a large section of the population from their customer base altogether, unless an IFA is involved.
From the IFA perspective, the new regulations should also make the P2P market a more appealing one.
The new, more detailed disclosure requirements will help advisers with their due diligence, allowing them to more easily find detailed information about the risks, fees and charges involved, pricing data and a more detailed analysis of defaults and expected defaults.
Prescriptive rules for a risk management framework requiring platforms to gather information about a borrower to be able to sufficiently assess credit risk, systematically categorise them by risk and reflect this in the pricing provides a baseline for underwriting standards, which did not exist before.
Superior underwriting will remain a potential competitive advantage for some platforms, but the rules now guarantee a minimum standard.
In fact, platforms will now be expected to be able to demonstrate with reasonable certainty that any advertised target return rates can be achieved.
A new, more standardised definition of default will also allow advisers to compare the various platforms more easily.
Importantly, the FCA rules drive higher levels of professionalism.
P2P platforms should from now on have an independent compliance function, if it is proportionate.
Whoever is in charge of a platform’s risk management framework will need to be approved in the Senior Managers and Certification Regime (SM&CR).
One of the big risks in P2P platforms has traditionally been of a platform collapse.
The new rules include guidance in what platforms should consider to ensure that, if they were to go into administration, they have arrangements in place to ensure their loans continue to be managed.
The effect may be even more pronounced following the temporary market intervention from the FCA into mini-bonds, due to come into force at the start of 2020. Under these rules, investment in a wide spectrum of corporate bonds will only be allowed for sophisticated and high net worth investors.
Advisers who had previously been using these bonds to earn their clients a consistent, inflation beating return on a portion of capital will be forced to look elsewhere, and P2P could be one of the few options remaining.
There are still challenges of course.
Many advisers are still cynical about P2P, while many P2P platforms still see direct marketing as their best route to market.
Writing in an Intelligent Partnership Adviser’s Guide to P2P Lending last year, Octopus’s Sam Handfield-Jones noted: “With a vast array of products out there, each one offering a different risk-return profile, it’s more important that investors know exactly what they’re getting into. And advisers have a powerful role to play.”
It would appear that the regulator has agreed with this assessment.
Jonathan Minter is a senior editor at Intelligent Partnership
