Innovative Finance ISAs: What the papers say

Peer-to-peer lending: A ripple of fear (Saturday, 26 March)

Demonstrating its global appeal, The Economist takes a close look at P2P lending and securitisation in the United States. It begins by arguing that, "In a financial landscape that ranges from the dreary to the disliked, peer-to-peer lending stands out." The Economist then goes on to explain that P2P lending has "lowered interest rates for many and expanded access to credit", before discussing the hyper-growth of leading US P2P platforms Prosper and Lending Club.

However, The Economist warns that US P2P lenders "are not immune to the burdens that weigh down their conventional rivals." The slowing US economy and rising bad debts have led to higher interest rates being asked of US P2P borrowers. Meanwhile, Lending Club's share price has plunged below $9, from last year's peak of $25.

Summing up the P2P market across the Atlantic, the Economist concludes that "the problems of P2P lending may be overstated...securitisations [of P2P loans into bonds] may have slowed, but they have not stopped. Defaults remain manageable...[and market] growth may slow, but it is unlikely to stop."

P2P technology provider launches with lenders to offer IFISA (Wednesday, 30 March)

Writing for the Financial Reporter website, Rozi Jones unveils the launch of Goji, a fintech (financial technology) firm that "enables P2P platforms to gain access to new investment products and markets," including the new IF ISA. Goji's latest clients include Landbay, ArchOver and our very own Assetz Capital.

The article quotes Stuart Law, co-founder and CEO of Assetz Capital, who explains, "To date, Assetz Capital has lent more than £100 million with investors gaining around £10 million of gross interest as a result. Roughly speaking, if the IFISA had been available 12 months ago, £4 million of that interest would have been in the pockets of investors, rather than collected as tax. The availability of the IFISA will therefore revolutionise the savvy investor’s portfolio."

Peer-to-peer lending: What will happen in a downturn? (Wednesday, 30 March)

Writing for City AM, Harriet Green, deputy business features editor, ponders what will happen to UK P2P lending during the next economic downturn. During the global financial crisis of 2007/09, Zopa was the only UK P2P lender, yet its co-founder and executive chairman, Giles Andrews, explains, "Our investors made a positive net return of 4% during [2008]... a period when other asset classes were delivering negative returns."

One concern is that, during an economic downturn, some platforms may be more willing to accept lower-quality borrowers and "loss rates are unlikely to be the same across different platforms", according to Andy Sweeney, head of fixed-income products at Ablrate.

Crucially, Harriet explains that "This [different lending standards] means that risk levels between platforms may diverge sharply, underlining the need for investors to understand how the debts they’re lending into are structured."

Robert Wardrop, executive director of the Cambridge Centre for Alternative Finance at Judge Business School adds that "the crucial message for investors is to think about the different variables within the loan itself: is it consumer or business lending; how are proceeds being used; is it secured or unsecured?"

In short, for P2P portfolios to remain robust during the next UK recession, investors must diversify their lending across P2P platforms, business sectors and durations. Meanwhile, reduced bank lending could present growth opportunities for nimbler, swifter P2P lenders.

Lifting the bonnet on an online lending business (Wednesday, 30 March)

In a long and detailed piece for the Financial Times, Kadhim Shubber looks at the transparency and data-sharing that is commonplace in the UK P2P market, versus old-school banking, which was "opaque and shrouded in mystery."

With many firms offering online 'dumps' of their data, this allows analysts and investors to "look under the bonnet" of P2P platforms. Kadhim studies in detail data from RateSetter, one of the UK's 'Big Three' P2P lenders. What Kadhim found were some large (multi-million-pound) secured or unsecured business loans from RateSetter, including several to conventional loan companies.

Kadhim draws two conclusions from his in-depth analysis of RateSetter's large and highly diverse loan book. First, that such transparency can "give competitors a blueprint of the inner workings of your operations." Second, that "these details don’t tell us if such lending is responsible or irresponsible, or whether or not investors are being properly compensated for the risk they are taking."

Kadhim ends by explaining that Ratesetter, in common with Assetz Capital and other leading P2P platforms, is "awaiting approval from the Financial Conduct Authority [FCA], after which they will be able to wrap their loans up in an ISA."

FCA warns of bottleneck in P2P platform approvals (Thursday, 31 March)

Finally, on the subject of FCA approvals, Huw Jones, writing for Reuters, warns that "A flurry of companies is queuing for authorisation to open peer-to-peer (P2P) lending platforms to take advantage of a new savings product." This bottleneck in processing applications by the FCA means that investors may face a limited choice of P2P ISAs when they launch next Wednesday.

Huw explains, "The FCA said it had fully authorised eight firms to operate P2P platforms, which enable people to lend small amounts of money to other individuals or firms, such as tiny start-ups developing new Apps, offering an alternative to banks. A further 86 firms are waiting for approval, with 44 of them given interim permission."

Huw again quotes the FCA as warning, ""Only P2P loans on platforms operated by firms with full authorisation will be eligible investments for the Innovative Finance ISA." "We are working closely with individual firms to ensure they meet the rigorous statutory standards and are authorised as quickly as possible," the financial watchdog added.

In other words, while the industry is all geared up to launch Innovative Finance ISAs, the same cannot be said of its hard-pressed regulator!

RISK WARNING: "As with most forms of investment, peer-to-peer lending carries a degree of risk to your capital; in this case, if borrowers were unable to repay their loans. At Assetz Capital, we seek to reduce this risk to our investors by taking asset security on every loan, with the added benefit of a discretionary Provision Fund for some of our investment accounts."

- April 4, 2016