If you use an independent financial adviser or wealth manager, they’ve probably never mentioned P2P lending.
This might seem strange: there’s been a lot of talk of how the peer-to-peer industry is “moving mainstream”, and volumes reflect that. In 2015, the online alternative finance industry in the UK grew to £3.2bn – an 84 per cent increase from 2014 – and alternative finance lending accounted for around 14 per cent of new loans to small firms.
And at the same time, institutional money has flowed readily into the sector. In the last six months, according to AltFi Data, it accounted for 40 per cent of involvement in the UK market – from almost nothing prior to 2014. But most of this money comes from specialist funds, and institutional money is notoriously fickle.
Financial advisers, however, still seem reticent. “They have always been very interested, but what’s needed is conversations. When we get them in a room and speak to them – show them our processes and due diligence – they become more positive on the space. That can give them the confidence to promote P2P lending to consumers,” says James Meekings, co-founder of Funding Circle.
Of course, for the industry, any interest should be welcomed. The UK alone is the second-largest wealth management centre in the world, with $1.6 trillion of client assets administered and managed at the end of 2014, according to Deloitte.
Tapping into this sector would provide some significant uplift for P2P – imagine if wealth managers apportioned just 3-5 per cent of clients’ money into alternative finance. For the investor, it means access to a sector that has historically been the preserve of institutions, but which can offer high yields, short maturities and diversification.
So should you expect to see P2P on the adviser menu any time soon?
Most advisers will say that, while they’re not against P2P in principle – often far from it – they want to see the sector go through a cycle before seriously considering it. As wealth management veteran John Spiers says (see below), while Zopa was around during the crisis, other major players weren’t – and 2007 and 2009 were unusual anyway because the level of bankruptcies was so low, owing to interest rates being slashed so fast.
Meekings is understandably more optimistic, pointing out that the industry has still weathered tough times, and platforms regularly run stress tests. “Our average return has been 7 per cent – gross return before losses and fees 10 per cent and annualised losses 2 per cent. So you would need losses to go up five times over before, in any year, there was a risk of you losing your money. This is a very risk controlled environment that has a large interest rate cushion.”
But there are also practical reasons why advisers aren’t going near P2P. As Spiers also points out, plenty of IFAs have been burnt in the past. Now, they have to demonstrate that they’ve done a certain amount of due diligence on each product they’re recommending and, as has always been the case, they want a fee for those recommendations. As one industry analyst bluntly puts it: “if the IFA hasn’t got a product to sell, he’s not going to recommend P2P. It comes down to whether something has a metric next to it that he can understand, then he can sell it.”
The story is plainly similar for restricted advisers – and analysis done by Chase de Vere earlier this year found that 13 of the UK’s 16 largest financial advice firms give only restricted advice: unless a product is an approved one that you’re sanctioned to recommend as an adviser, you’re not going to go near it.
But things are evolving. For starters, we’ve seen the fundification of the P2P industry. It’s big business in the US (where “P2P” has been entirely replaced with “marketplace” lending), and it’s growing here. There are investment trusts like P2PGI and Victory Park Capital. And Funding Circle launched its SME Income fund last autumn.
Read more: Securitisation has arrived in UK P2P
For advisers “funds are the way forward,” says Meekings. They can buy stocks, shares and funds and manage money on behalf of clients, and their existing tools mean they can buy a fund today. “It gives them diversification and global exposure – which is important, because diversifying across platforms [which can focus on just one area, like consumer credit], rather than assets, won’t necessarily do that,” he adds.
The issue of delivering practical tools with which to analyse the lending track records of platforms is something the industry is still working on. Doing so is important, as this is part of what puts off advisers who are looking for a scoring system to help them make informed decisions. AltFi Data is trying to change this by creating a benchmark for wealth managers and IFAs to refer to.
“The industry is working to create a scoring system for returns. This should be a function of the return and the shape, i.e. volatility, of that return. If advisers can study lending performance, based on meaningful and detailed data, they can begin to perform satisfactory due diligence,” says Rupert Taylor, co-founder of AltFi Data.
Then there are firms like LendingWell, Goji, and Intelligent Lending Advisers, which provide a mix of analytics, robo-advisory services and portal access to platforms for advisers and high net worth investors.
Read more: Does P2P need more than transparency?
Meanwhile, an evolution in products will be key. Meekings says that the focus now must be for platforms to “build wrappers which fit into wealth managers’ and IFAs’ existing processes”. But currently, increased activity has been down to input from the mainstream – in the form of the Treasury and established product providers.
The Innovative Finance Isa is already giving retail investors the opportunity to hold P2P investments in the recognisable wrapper. While many investors wait for the largest platforms to get approval from the Financial Conduct Authority (currently, only three smaller platforms have been given the okay), it has enticed big players like Hargreaves Lansdown into the ring. And it’s worth noting that investors can, even without the dedicated vehicle, populate a stocks and shares Isa or a Sipp with P2P investments.
Moreover, alternative investments heavyweight Octopus Investments launched P2P product Octopus Choice in April, enabling customers to target higher interest rates than deposit accounts, but with less risk than stocks and shares. “The growth of P2P lending shows no sign of stopping, and the sector presents a powerful opportunity for financial advisers to add value to their clients. But it’s currently being overlooked – and we want to change this,” says Simon Rogerson, chief executive of Octopus Investments.
Head of Octopus Choice Richard Wazacz says that the reception from the hundreds of financial advisers introduced to the product has been “incredibly positive. Advisers are proving themselves to be not only comfortable, but excited to recommend it to large numbers of their clients – seeing it as a new and welcome way of diversifying their portfolios.”
And he’s not the only one who’s optimistic – Meekings is confident there will be significantly more activity over the next 12 months. It looks like continuing to write P2P off as too alternative for retail investors will become increasingly difficult.
John Spiers, founder of Bestinvest and EQ gives his take on P2P
It’s possible we’ll see some activity at the top end of the market, yes. But I’m personally pretty sceptical that this is going to become a major activity for advisers.
First, it’s hard to see what role the adviser is going to play: clients can go direct to the platform, and with most, you don’t cherry-pick individual loans, you just put your money in and it’s automatically spread across the loanbook.
Second, most advisers have been burnt before by putting money into unconventional options, then they’ve found themselves in front of the ombudsman. Third, there are already several quoted investment funds. And finally, if you look at the advice market, the individuals within it don’t have the skills to do loan decision-making – they are not credit controllers.
Frankly, I find it unbelievable that people haven’t learnt their lesson from the securitisations we saw eight/nine years ago. Things like provision funds are positive features of the industry, but there is very little doubt at the moment that there’s great competition to get the borrowers, and that means pressure on your credit control departments to get loan rates higher.
I don’t want to come across as a total doomsday scenarioist; I welcome competition from the banks, who seem to have given up completely in terms of helping businesses to grow. But this does need to be done properly. There’s no doubt in my mind that we need to see a proper credit cycle before we can make a proper evaluation.
This article appears in the July edition of City A.M.'s Money magazine, out today.