If any company could be expected to remain enthusiastic about peer-to-peer lending, it might be one that registered its shares under the stock ticker “P2P”.
But even P2P Global Investments, the first investment fund dedicated to the sector when it launched in 2014, admits the initial “frenzy” of interest has died down.
It is considering changing its name because it no longer accurately reflects the fund’s interests. “People may have to work too hard to figure out what we do,” said Lindsey McMurray, managing director of Pollen Street Capital, which took over management of P2PGI last year.
In the years after the financial crisis, investors and politicians enthused about the new crop of peer-to-peer providers, which promised to upend the lending market while providing a better return for savers. These groups were set up to enable consumers to lend to each other and small businesses directly through websites, effectively cutting out the big banks.
As the sheen around the sector has dulled, however, and some of the smaller providers have run into trouble, many groups have changed focus.
This month, Zopa — the original peer-to-peer lender, which launched in the UK 13 years ago — became the first of its kind to be awarded a full UK banking licence, allowing it to offer traditional products such as fixed-term savings accounts. Recently listed Funding Circle announced its largest commitment from an institutional investor to fund loans through its platform.
Jaidev Janardana, chief executive of Zopa, stressed that peer-to-peer funding would keep growing in absolute terms, but said it would become a relatively less important part of the company’s business over time.
“We think of ourselves as a financial services company. Yes, a peer-to-peer business is a part of it, but it is only one part,” he said.
Ms McMurray said investors “overfocused on the back-end bit saying ‘this money goes from one peer to another’. But the core competence is the ability to underwrite credit and deliver good front-end applications and smooth customer journeys — none of those things are different from any other lender.”
She still believes opportunities exist for specialist and tech-driven lenders in areas where mainstream banks struggle to meet demand, she said. However, P2PGI now works with “very few” of the high-profile platforms that connect retail investors with companies or individuals looking for loans.
Mike Bristow, chief executive of property lender CrowdProperty, suggested that some companies have tried to take advantage of the hype around peer-to-peer without making effective business plans. “We said we’re brilliant at property, let’s apply that with a peer-to-peer funding model. Whereas certain companies just started with peer-to-peer and looked for an asset class to fund with it.”
The Financial Conduct Authority has raised concerns about the peer-to-peer sector after finding that a fifth of investors had put more than double their annual income into platforms that often failed to fully explain the risks involved. It is consulting on changes that would make it much harder for regular retail investors to fund loans.
In its submission to the FCA’s review, Zopa argued that a firm that exposes investors to prime consumer loans with target returns of 4.5 per cent should not face the same rules as a company that advertises a 12 per cent return through short-term property loans.
A recent crisis at Lendy, a peer-to-peer lender that specialises in property development finance, and the collapse in March of Manchester-based Collateral, which was operating without a licence, drew further negative attention to the sector just as companies were fighting to prove they are not too risky for retail investors.
The Financial Times first reported in October that Lendy was fighting legal claims from one of its biggest borrowers, who had threatened to sue the company and many of its investors.
An FT analysis of Lendy’s loan book showed that more than two-thirds of its outstanding loans were past due. The company, which originally lent against marine assets before expanding into property, considered selling its loans to distressed debt investors. This month it overhauled its leadership team and said it would make changes to almost every area of its business including governance, financial controls, liquidity, collections and compliance.
In an update to investors before Christmas, the company acknowledged that “a number” of its loans would not be fully repaid, raising the prospect of investors losing up to tens of millions of pounds.
Executives at rival lenders say Lendy’s problems do not reflect an inherent weakness in the industry, but are concerned they could still have a knock-on effect on other providers.
“The FCA have got to do what they’ve got to do, they’re obviously concerned and they’ve got to protect the investors,” said the chief executive of another lender that funds entirely through retail investors. “What worries me is if they use this as an excuse to take the easy way out and just crack down on everyone.”