Peer-to-Peer Lending in the UK. Scott Murphy February 2014

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1 Peer-to-Peer Lending in the UK Scott Murphy February 2014

2 Overview Peer-to-peer lending offers a clear potential to increase competition and challenge the major banks Growth has been/is driven by a variety of factors including poor savings alternatives and a lack of bank lending Could produce greater returns for consumers, but at increased risk There is considerable potential for movement into different credit products It is vital that the regulatory framework protects consumers and ensures they are provided with clear information

3 An Introduction to Which? Started life in a rented garage in 1957 as a volunteer organisation A not-for-profit social enterprise & the largest consumer association in Europe Which? receives no government money, donations or fundraising income Our products and services help consumers make the right choices We give people information and advice to help them engage in markets - both private and public We campaign for positive change with a large numbers of consumers We recognise the best of business through our Best Buy and Recommended Provider schemes

4 How do the models differ? Traditional Banking Model FSCS (Compensation Scheme) Consumers Deposits - Decides on lending - Sets aside money for default - Manages loans - Manages liquidity Borrowers Peer-to-Peer Model Provision Fund (Compensation Scheme) Consumer Deposits Deciding who to lend to Sets aside money for default Manages loans Borrowers These roles are shared between consumers and the platform 1. P2P Finance Association, Lending Data, ,

5 Background to the UK market Industry in the UK began with the founding of Zopa, now the largest lender, in The market is growing at speed - In 2012 just 2% of Which? members had invested money with peer-to-peer lenders - a year later this had jumped to 9%. In November 2013 the best instant access savings account offered an interest rate of 1.6% (minimum deposit of 1,000). (Five years ago, in November 2007 the best interest rate available on a similar account was 6.41% representing a fall of 4.81 percentage points. 1,2,3 It is unsurprising that in this climate of low interest rates consumers are seeking out stronger rates of return. When surveyed, 81% of Which? members who invest with peer-to-peer lenders said they did so because savings rates on the high street are too low. 4 Coupled with inflation consumers want to protect their savings from being eroded. According to the FCA the crowdfunding market is currently worth 360 million in the UK. The P2P Finance Association reports that cumulative lending at the end of Q4. in 2013 hit 843 million compared to just 381 million at the end of 2012 growth of 121% AA, AA Internet Extra (Issue 12) Instant Access, Source: Moneyfacts November Sourced from Zopa historical rates 3. ICICI Bank, UK HiSAVE Savings Instant Access, Source: Moneyfacts November Online survey conducted between 4th April 15th April on the Which? Connect Panel members began the peer to peer survey of whom 389 had used a peer to peer website to invest money and 36 had used a peer to peer website to borrow money in the last two years. 4. P2P Finance Association, 3 February 2014.

6 The industry has seen rapid growth in the last four years During this entire period the BoE Base Rate was 0.5% 1. P2P Finance Association, Lending Data, ,

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8 At present, these companies are tiny but so, a decade and a half ago, was Google - Andy Haldane, Executive Director for Financial Stability at the Bank of England, March 2012.

9 Three key platforms dominate the UK market Established: March 2005 Lenders: 45,000 Borrowers: 71,000 Lent: 466,410,430 1 Market: Personal Loans - Credit Checks - Spreads risk by breaking investments into 10 chunks - Introduced Safeguard provision fund Established: August 2010 Lenders: 67,000 Borrowers: 1,200 Lent: 217,050,360 3 Market: Business Lending - Credit Checks - Spreads risk by breaking investments into chunks - Doesn t offer loans to start-ups Established: October 2010 Members: 120,000+ Lent: 172,290,284 2 Market: Personal Loans - Credit Checks - Has a provision fund to reimburse bad debt 1. As of 10 February 2014, 2. As of 10 February 2014, 3. As of 10 February 2014,

10 How do the models differ? Traditional Banking Model FSCS (Compensation Scheme) Consumers Deposits - Decides on lending - Sets aside money for default - Manages loans - Manages liquidity Borrowers Peer-to-Peer Model Provision Fund (Compensation Scheme) Consumer Deposits Deciding who to lend to Sets aside money for default Manages loans Borrowers These roles are shared between consumers and the platform 1. P2P Finance Association, Lending Data, ,

11 Consumers value higher returns, but are wary of higher risk, non-investment and defaults The initial lending rates were good but now the money is being reinvested at much lower rates than when I first invested - Ratesetter Two bad debts wiped out all my profits and put me into negative equity - Funding Circle I really like the idea that of social lending as opposed to banks who have lost any trust that they actually value their customers - Zopa 10,000 invested with them to lend on , as of now only 630 lent out! - Zopa Seems to offer better rate of return than banks, slightly higher risk mitigated by contingency fund - Ratesetter Money seems to be protected (but I know you can never be 100% certain). Return is above other saving accounts and money should not be tied up in case I need it - Ratesetter They held my money for 6-12 months and never invested it anywhere. They failed to answer my texts about what was happening. I had to get the Ombudsman to intervene before I got all of my money back - Danesfield I liked the concept despite the fact that banks offer greater protection. Govt investment backup in the form of a loan made me feel more secure. Which? recommendation was vital - Funding Circle 1. Online survey conducted between 4th April 15th April on the Which? Connect Panel members began the peer to peer survey of whom 389 had used a peer to peer website to invest money and 36 had used a peer to peer website to borrow money in the last two years.

12 Language is often used to draw comparisons with savings accounts ZOPA Ratesetter Funding Circle

13 What should regulation look like? We welcome the FCA s (Financial Conduct Authority) intention to regulate the peerto-peer industry in light of the greater risks consumers face. We welcome the introduction of minimum prudential requirements (to ensure loans can continue to be repaid in event of platform collapse). 1. We urged the FCA to make notification of the lack of FSCS cover an explicit requirement of disclosure regulation and ensure firms comply. 2. Platforms often market their site in terms of a savings product, whereas in reality it is closer to an investment. 3. We are concerned that the FCA proposes that firms may continue to use terms such as guaranteed protected or secure in relation to client money and any contingency funding. 4. The issue of cross-border websites marketed across Europe, but could be based anywhere and not subject to another countries regulation (e.g. Trustbuddy) 5. We believe the FCA s interpretation of the Distance Marketing Directive (DMD) cancellation rights but believe they need further clarification so that the rights apply when the consumer first funds their account. 6. We suggest that the potential for insider trading is monitored closely by the FCA.

14 The future holds expansion into new credit and investment offerings Potential for inclusion of P2P lending in the ISA tax free wrapper HM Treasury exploring this option statement by the Chancellor in March Budget. - Partly driven by sub-inflation rates on Cash ISAs and volatility in stocks & shares ISAs billion saved in adult UK ISAs (Stocks & Shares and Cash) in 2012/13 just 1% of this would double the size of the P2P market. 1 - Poses questions around inclusion in the FSCS saving or investment? Provision of other products P2P funded credit cards, overdrafts etc. - P2P funded mortgages e.g. LendInvest, launched in May 2013, lent 26.3 million. 2 It is vital that the regulatory framework protects consumers and ensures that they are provided with clear information 1. ISA Statistics, Sept 2013, p As of

15 Thanks for