14 April, 2016

Octopus Investments to Offer P2P Platform: Is Wealth Management Sector Adopting P2P?

Octopus Investments recently announced that it will be launching a peer-to-peer lending platform as an additional arm to their £6bn UK asset-management company. Upon launch of the P2P platform, to be called ‘Octopus Choice’, investors will have the opportunity to invest in a discretionary portfolio of asset-backed loans. Simon Rogerson, CEO of Octopus, had this to say:

The growth of peer-to-peer 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.

The wealth management sphere has been divided when it comes to peer-to-peer lending. The majority of advisory platforms and IFAs have heavily scrutinised the “new-wave” asset class. Jason Hollands of Tilney Bestinvest was quite forthright when declaring that his firm will not be offering an Innovative Finance ISA, and insists their client base would not be interested in a peer-to-peer investment:

The industry is still very young, with the world’s first P2P platform only launched to the public in 2005.

However, direct-to-consumer giant Hargreaves Lansdown has been vocal in its assurance that it will be providing its clients with a peer-to-peer lending option in Autumn 2016. This, alongside Octopus Investments' recent announcement may go some way to dispelling the notion that P2P lending won't enter the mainstream. With £2.7bn invested in 2015 in the UK, and over 50 active platforms on the market it is no surprise that this growth in the market has attracted giants likes of Octopus and Hargreaves.

Institutional Funding in P2P

In 2015, 30% of investment in P2P lending came from institutional funding. Whole loans (exclusive to institutional investors) were being funded through platforms like Funding Circle, whilst Zopa and RateSetter similarly sought institutional funding for loans (Zopa partnered with Metro Bank). P2P Global Investments and MW Eaglewood bundle P2P loans from U.S marketplace lenders as well as the “big three” (Zopa, Funding Circle and RateSetter) in the U.K.

There are (arguably) two primary factors that have stimulated the financial advisory community to take notice of peer-to-peer lending.

Innovative Finance ISA

April 6th saw the introduction of the Innovative Finance ISA, or “peer-to-peer ISA” as it’s commonly referred to. This is expected to bring in a wave of new retail investors and perhaps savers who are seeking an alternative to record-low rates in the market. The FT predicted over 400,000 new investors will surge onto the P2P market. This will probably not be the case. Only a handful of ISA Plan Managers can offer the IFISA presently, excluding the majority of P2P lending platforms, including the "big three", Zopa, RateSetter and Funding Circle. This is due to a backlog in the FCA’s regulatory process: P2P platforms must have full authorisation from the FCA and ISA permissions from the HMRC. The majority of P2P lenders operate under interim permissions. Crowdstacker is one of few P2P platforms that can offer the IFISA currently.

FCA Regulates Advising on P2P Agreements

On the same date, 6th April 2016, the FCA announced that it will be regulating P2P advice. IFAs that personally recommend a peer-to-peer investment opportunity to a client must be “assessed as competent” according to the FCA. Any P2P opportunity advised by an IFA will also “have recourse with the FSCS”. Advisers will be held liable for incompetent advice.

There are two potential catalysts to encourage the wealth management community to follow leaders, Octopus and Hargreaves. Will the temptation of a new ISA product, greater regulation (good or bad for advisors?) for investors and some momentum from big industry players be enough to tip the sector over to the…dark side…? Sophisticated investors require deeper, more granular, data analysis to make a decision when it comes to peer-to-peer lending. The attraction of rates 5% +, liquidity on the P2P platform and a “provision fund” doesn’t cut it. Data-analytic tools and a portfolio management service would encourage affluent, possibly even high-net-worth investors to invest, should their advisors be willing to advise.