Across the river from the InterContinental Hotel, this year’s venue for the annual LendIt conference, are the headquarters of some of the world’s leading banks. The towers of Canary Wharf overlook the hotel, and while they give off a sense of permanence, there is a feeling that the future instead belongs to marketplace lenders (MPL).
Over the last 12 months, the industry has faced accusations that it is run by amateurs unable to perform a proper risk assessment of potential borrowers, that it can’t survive during a downturn and is too risky for consumers. This, combined with the turmoil at Lending Club in the US and criticisms from Conservative MP Chris Philp that there is misalignment between MPLs and their investors, have arguably put the industry on the back foot.
But the sense at LendIt is that the industry is in its golden age. Samir Desai, chief executive of Funding Circle, in an opening talk at the conference outlined the three trends that show momentum is on the side of MPLs. Low interest rates, bank retrenchment and MPLs’ ability to harness the power of online and mobile technologies in connecting investors and borrowers add up to a bright future.
The Bank of England’s decision to reduce interest rates by 25 bps was one of the largest recruiters to the model, said Giles Andrews, co-founder of Zopa. He reported a significant increase in interest from investors in August as they continued their search for yield as low interest rates become the norm.
Regulation was one of the key topics for a number of speakers. The Financial Conduct Authority (FCA) held a review over the summer on the current set of regulations with a view to updating them to keep up with the pace of developments in the market. Christopher Woolard, director of strategy and competition at the FCA, reiterated its stance that it wants to see a “framework fit for purpose” as the market enters what he said was its mature stage, where growth is as not dramatic as in its early years of development. An announcement from the FCA regarding its review is expected before the end of the year, Woolard confirmed.
“Regulation is like a building development, where the firms are the architect of the houses and we are the structural engineers ensuring it is compliant with the legal process,” he said.
Both Desai and Christine Farnish, chief executive of the UK trade body P2PFA, rejected arguments that the sectors should be regulated like banks. “It is a new asset class and we need to think about it afresh,” she said. For Farnish, the key issues for regulators is to look at are the way MPLs promote themselves, ensuring investors understand the risks, and MPLs’ ability to carry out credit assessments on borrowers.
Desai rejected the hybrid model of operating, where banks hold some risk on their balance sheet (a view advanced by Philp). “The MPL model is about creating the most efficient intermediary and generating a great user experience, which is platforms’ inherent advantage over banks. If you’re committed to the hybrid model, then you’re acting like a bank.”
Under the Coalition government there was a big push towards encouraging the development of the MPL sector and the regulations reflected this. Christian Faes, chief executive of LendInvest, said it was part of helping the industry “get off the ground”, but was afterwards handed to the FCA to manage. With the elevation of Theresa May to Prime Minister shortly after the Brexit vote, the current government’s attitude is so far not clear, although it’s perhaps better to put that down to the fact that it is early days in the administration and there are bigger issues to tackle.
For now, MPLs are looking to increasingly diversify their funding base, attracting more investments from institutional investors, governments and privately managed funds. Neil Rimer, a partner at venture capital firm Index Ventures and an equity investor in Funding Circle, said the market has now reached a stage where there is recognition it is a real asset class. A second wave of startups pushing against incumbents, demonstrated in recent months, is proof of validation in the market and is forcing the existing firms to get smarter, he said.
Funding Circle and Zopa both began securitising their loans this year as a way of enabling institutional investors to channel money towards their platforms, a practice already happening in the US MPL industry. A report from Oxera, commissioned by the P2PFA, said institutional investors are increasing their interest due to “perceived positive net returns”. Nesta, a consultancy firm, found that 32 percent of P2P consumer loans originated in 2015 were funded by institutional investors.
The question of the industry’s ability to weather a downturn is one difficult to refute at this stage, although proponents can point to Zopa, established in 2005, as a case study. A sample of one may not offer too much insight at this stage, but it provides evidence, albeit only a small amount, that the model can work during a period of high volatility.
But for those looking to sit out until the market has survived a downturn, Desai had some cautionary words: “Frankly, you’re going to miss out on the asset class and it is those who are working in the industry now that will survive the downturn.”