Peer-to-Peer Lending 2016: Year in Review
It’s little over a week into 2017 and already we’re seeing peer-to-peer lending (P2P) make headlines. As we prepare for what is expected to be another landmark year for the industry, we reflect on 2016 – a year in which unprecedented events took place on the global stage.
But how did P2P fair in 2016? Let’s take a look at some of the key themes of the year.
IF ISA: Flat 2016 vs Prosperous 2017
April 6th, 2016 has been a much anticipated date ever since the Chancellor's budget announcement in 2015. This was the date that a new ISA would enter the UK market.
The Innovative Finance ISA (IF ISA) was heralded as the stamp of approval that would propel peer-to-peer lending in to the mainstream, and this government backing would surely incentivise more people to lend across P2P platforms through a tax-efficient wrapper. P2P platforms must be fully FCA authorised and HMRC ISA plan manager approved in order to offer an IF ISA. This level of regulation implies an added level of security, which, if unfamiliar with P2P lending, may be over-presumptuous - P2P lending is a regulated industry, but the assets lent to (businesses and consumers) are not regulated. There is no FSCS protection for investors.
The 6th came and went. The Innovative Finance ISA unveiling didn’t quite live up to the hype, for one primary reason: most major platforms didn’t have the required authorisation from the FCA to offer IFISAs. The “Big Three” lenders (Zopa, RateSetter and Funding Circle) are still awaiting full authorisation from the FCA allowing them to offer Innovative Finance ISAs (assuming HMRC approval). This hasn't stopped them from marketing their imminent IFISAs to their investor-base. When will they actually be able to offer them? That is still unknown.
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Fortunately, the application backlog is beginning to shorten. More P2P lenders are becoming fully authorised, including Lending Works and Landbay - the only P2PFA members to achieve full FCA authorisation. Lending Works is making preparations to launch the Lending Works IF ISA in early 2017 having recently received ISA plan manager status from the HMRC.
A few more platforms have passed the regulatory test and will be hoping to offer IF ISAs by April (new tax year). At present, however, only two P2P lending platforms advertise Innovative Finance ISAs to UK retail investors: Crowdstacker and Crowd2Fund.
The citizens of Great Britain turned out in droves to vote in the EU referendum on June 23rd. A date which will be etched in the history books as the moment Britain decided to divorce itself from the European Union. The impact Brexit will have on peer-to-peer lending is still largely undetermined, as are the overall ramifications of the exit on Britain, but what is clear is that our economy – and society – will be affected.
As economic conditions impact the capability of a borrower repaying their loans, P2P lending could face a testing time ahead. Investor portfolios may see P2P as a resolve in time of economic volatility, however, as P2P loans are not listed on an exchange and are therefore not impacted by market fluctuations; the returns are more stable and predictable, albeit carrying a higher degree of capital risk.
The "Brexit effect" took hold almost immediately. Mark Carney, the Bank of England Governor, announced a 0.25 per cent cut to the base interest rate in summer 2016. It remains at the same 0.25% per annum rate now and will do for some time, it is predicted. UK savers have been effected, and, with Cash ISA rates at a lowly 1.2%, people will be looking to alternative solutions.
Institutional Influence On P2P
It was evident by the end of 2015 that institutions were investing in peer-to-peer lending – with interest rates in the region 5% + and the regulator working closely with platforms, it has come as little surprise. In 2015, 40% of capital lent to P2P borrowers came from institutions like banks, local authorities and funds. Metro Bank partnered with Zopa; Australian investment bank Macquarie partnered with LendInvest to lend £40m to property borrowers; P2P Global Investment surfaced as the major global fund to invest in UK P2P platforms; and the British Business Bank continues its lucrative partnership with Funding Circle.
*Your capital is at risk when investing in peer-to-peer lending. You will not be covered by the Financial Services Compensation Scheme.
As 2016 wore on, major P2P lenders were increasingly shifting towards an institutional investor audience, as was demonstrated with the securitisations of Funding Circle and Zopa loans, respectively.
Platforms Adapt and Change
Zopa stole headlines in peer-to-peer lending in the latter quarters of the year. The announcement of the platform’s landmark securitisation preceded changes which have effected Zopa investors. Zopa customers have seen new money transfers halted, as the platform seeks borrowers to balance the credit lending process.
2016 was a year of unprecedented events. In Great Britain, it became clear that the next couple of years will be extremely testing socially, politically and economically. P2P generally had a good year, despite the underwhelming arrival of the Innovative Finance ISA and some reputation damage as a consequence of illegal activity overseas with respect to Lending Club's tribulations. P2P lending still delivered some of the most attractive risk-adjusted returns on the market, and with no major impact from summer events, yet, 2017 is looking prosperous: more platforms FCA authorised, new IF ISAs onto the market, and financial advisers hopefully beginning to recommending P2P investments as new independent research tools enter the market.