InvestmentsJul 31 2018

Breaking down P2P lending barriers

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Breaking down P2P lending barriers

The growth of peer-to-peer (P2P) lending, particularly during 2017, has been substantial, with more than £3bn lent last year, according to the UK Peer-to-Peer Finance Association. 

Asset-backed P2P, which backs loans with specific collateral, is one area that has grown in prominence. But the sector must still overcome a number of barriers before entering the mainstream.

Speaking at an FTAdviser.com breakfast briefing on asset-backed P2P last month, Jeffrey Mushens, policy director at the Tax Incentivised Savings Association (Tisa), said: “We see P2P becoming an asset category. That’s our goal – that they become a normal asset category for customers, advisers and asset managers to choose for a place to put their money.”

Mr Mushens did concede, however, that the sector’s infancy means various tests lie ahead. “It was a cottage industry and is still a bit of a cottage industry. We haven’t really been through a full market cycle – what’s it going to look like then? There’s all that nervousness,” he explained.

The importance of propelling P2P, as an option at least, to all consumers is such that it is placed very much front and centre of Tisa’s plans. The organisation helped encourage a number of providers to enter the Innovative Finance Isa space. But industry insiders fear there is still a disconnect between the perception of P2P and the reality.

Peter Marsland, business development manager at Octopus, explained: “There’s quite a lot of misinformation in the industry about what P2P actually is. People confuse things like debt-based securities and equity crowdfunding with P2P. Those are quite similar, but [are] not the same.”

Give it a platform

To tackle this and other issues, Mr Mushens outlined Tisa’s three key objectives. The first is around taxation, with his organisation entering dialogue with the Treasury to increase P2P’s eligibility for Sipp investments. The second objective is to boost education for consumers, advisers and providers on the merits of P2P, and the third aim is to overcome regulatory barriers.

He said: “Why does it take nine months to a year for a would-be P2P player to enter the market? Why shouldn’t it take five weeks? Why doesn’t it take five days?”

Some respondents stressed the need for such products to reach retail investors, and pointed to issues here.

“I think it needs to get on to the platforms,” said Michael Ktenas, senior risk consultant at Intrinsic. “If you’re investing £5,000 that’s a lot of hassle to open another account with a P2P provider.”

Mr Mushens said his organisation had spoken to platforms, but these had requested a product that can be priced easily. He conceded the market fell short on this front at the moment, but added: “Sessions like this will help, and the publication of monthly stats. Then maybe asset managers might start to think, ‘should I have a look at this as an asset class I should be investing in?’”

Paying the price

Advisers continue to remain sceptical about the merits of P2P, asset-backed or otherwise, with the majority sticking to more trusted conventional asset classes such as equities and bonds.

Chris Pearce, director at Pearce Management, said a major failure had been the sector’s inability to provide a secondary market.

“You have a situation where it isn’t just a case of matching buyers and sellers, you’ve actually got [the risk of] default, you’ve got people not being repaid, and the owner of the loans is just not in a position to find a price,” he said.

He added this was important because P2P had often been promoted as a low-volatility product. “Volatility is a function of having a secondary market – if there’s no secondary market you don’t know where the volatility is. If you go back a few years and look at mortgage-backed securities, which is essentially what this is, you could definitely see quite significant volatility.”

Mr Marsland, however, said that asset-backed P2P differed from mortgage-backed securities by not being a packaged product.

By default

Record low bank deposit rates and meagre bond yields have posed a problem for savers looking for lower-risk assets, but this has benefited the asset-backed P2P market. The ability of providers to offer higher yields has proved attractive to individuals who want greater returns without being exposed to the risks of equity investments. But P2P products have their risks too. A major one, as Mr Pearce alluded to, is the possibility of default. As such, the yields on offer are far from guaranteed.

“You can do all of the due diligence, but you can’t stop people defaulting from time to time,” Mr Marsland said. “There is no way that you can get rid of risk entirely – that’s why you’re earning 4 to 4.5 per cent.”

However, he noted that this could be mitigated, in part via diversification. “If some of those loans start going to default [but you have diversification], you’re not going to get the contagion into other loans in the portfolio,” he explained.

Diversification can also extend to a client’s broader investment portfolio. Some advisers see this as a key reason to promote the likes of asset-backed P2P, as its uncorrelated nature could provide a useful hedge when other assets are performing poorly.

P2P may not prove suitable for all clients, but Mr Marsland said there was a strong argument for both cautious and balanced investors to consider the sector.

“I don’t see any reason why this can’t fit in there. How good a long-term investment do you think things like government bonds are at the moment? I’d argue I’d be far more comfortable with [P2P] than I would government bonds,” he said.

However, Mr Pearce claimed further assessment was required. “It’s all about risk-adjusted yield – it depends which duration, which market. There are so many permutations on it,” he said.

For any investment involving property, arguably the greatest challenge facing consumers and providers is a lack of liquidity. Unlike cash or equities, it is difficult to buy and sell property at the drop of a hat – the mass property fund suspension in the aftermath of the Brexit vote provides a clear case in point.

Advisers, understandably, have voiced concerns about potential accessibility issues around asset-backed P2P. Patrick Lance, divisional director at Brewin Dolphin, asked: “When you talked about liquidity, whether it’s through this internal secondary market, or whether there is no buyer and [the provider] underwrites it, what timeline are we talking about?”

But some believe this is a misconception about the space. Mr Marsland suggested money could be accessed within a couple of hours.

Embracing regulation

Commentators also noted that support for the sector’s progression might come from an unlikely source. Financial regulations are typically more of a bugbear for intermediaries than an opportunity. The transparency demands of Mifid II have increased the workload for both advisers and managers this year. In their current form, the regulations have had little impact on the P2P space, but according to Mr Mushens this could change down the line, and the amendments could in fact help the sector achieve its goal of mainstream status.

“The European Commission is looking at making some changes to Mifid II and that includes P2P, so we expect consultations on the inclusion of P2P as a Mifid activity,” he said.

“If it becomes subject to Mifid II, it becomes a mainstream product. Providers have the opportunity to compete with more firms – competition is good at sharpening a firm’s intellectual elbow.”