Peer-to-Peer

Lending in the UK

Scott Murphy

February 2014

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

An Introduction to Which?

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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

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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

How do the models differ?

1. P2P Finance Association, Lending Data, 3-2-2014, http://www.p2pfinanceassociation.org.uk/wp-

content/uploads/2014/01/Peer-to-Peer-Lending-Data-2013-Vf.pdf

Consumers Deposits

- Decides on lending

- Sets aside money for default

- Manages loans

- Manages liquidity

Borrowers

Consumer Deposits

Deciding who to lend to

Sets aside money for

default

Manages loans

Borrowers

Traditional Banking Model

Peer-to-Peer Model

These roles are shared between consumers

and the platform

FSCS (Compensation Scheme)

Provision Fund (Compensation Scheme)

Industry in the UK began with the founding of Zopa, now the largest lender, in 2005.

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%.5

Background to the UK market

1. AA, AA Internet Extra (Issue 12) Instant Access, Source: Moneyfacts November 2013.

2. Sourced from Zopa historical rates www.zopa.co.uk

3. ICICI Bank, UK HiSAVE Savings Instant Access, Source: Moneyfacts November 2013.

4. Online survey conducted between 4th April – 15th April on the Which? Connect Panel. 4510 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.

The industry has seen rapid growth in the last

four years…

1. P2P Finance Association, Lending Data, 3-2-2014, http://www.p2pfinanceassociation.org.uk/wp-

content/uploads/2014/01/Peer-to-Peer-Lending-Data-2013-Vf.pdf

During this entire

period the BoE Base

Rate was 0.5%

- Andy Haldane, Executive Director for

Financial Stability at the Bank of England,

March 2012.

At present, these companies

are tiny…but so, a decade and

a half ago, was Google

“

”

Three key platforms dominate the UK market…

Established: March 2005

Lenders: 45,000

Borrowers: 71,000

Lent: £466,410,4301

Market: Personal Loans

- Credit Checks

- Spreads risk by breaking

investments into £10

chunks

- Introduced “Safeguard”

provision fund

Established: October 2010

Members: 120,000+

Lent: £172,290,2842

Market: Personal Loans

- Credit Checks

- Has a provision fund to

reimburse bad debt

Established: August 2010

Lenders: 67,000

Borrowers: 1,200

Lent: £217,050,3603

Market: Business Lending

- Credit Checks

- Spreads risk by breaking

investments into chunks

- Doesn’t offer loans to

start-ups

1. As of 10 February 2014, www.zopa.co.uk

2. As of 10 February 2014, http://www.ratesetter.com/

3. As of 10 February 2014, www.fundingcircle.com

How do the models differ?

1. P2P Finance Association, Lending Data, 3-2-2014, http://www.p2pfinanceassociation.org.uk/wp-

content/uploads/2014/01/Peer-to-Peer-Lending-Data-2013-Vf.pdf

Consumers Deposits

- Decides on lending

- Sets aside money for default

- Manages loans

- Manages liquidity

Borrowers

Consumer Deposits

Deciding who to lend to

Sets aside money for

default

Manages loans

Borrowers

Traditional Banking Model

Peer-to-Peer Model

These roles are shared between consumers

and the platform

FSCS (Compensation Scheme)

Provision Fund (Compensation Scheme)

Consumers value higher returns, but are wary of

higher risk, non-investment and defaults…

1. Online survey conducted between 4th April – 15th April on the Which? Connect Panel. 4510 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.

“Two bad debts wiped

out all my profits and

put me into negative

equity” - Funding Circle

“The initial lending rates

were good but now the

money is being reinvested

at much lower rates than

when I first invested”

- Ratesetter

“£10,000 invested with them

to lend on 02-01-2013, 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

“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

“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

“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

“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

Language is often used to draw comparisons with

savings accounts… ZOPA

Ratesetter

Funding Circle

What should regulation look like?

We welcome the FCA’s (Financial Conduct Authority) intention to regulate the peer-

to-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.

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.

- £57 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

1. ISA Statistics, Sept 2013, http://www.hmrc.gov.uk/statistics/isas/statistics.pdf p.9

2. https://www.lendinvest.com/ As of 11-02-2014

It is vital that the regulatory framework protects

consumers and ensures that they are provided with

clear information

Thanks for listening!

scott.murphy@which.co.uk

@ScottMurphy89

www.which.co.uk