Peer-to-Peer Lending: Bridging the Data Gap
A strange thing happened in April last year, when the regulator allowed financial advisers to recommend peer-to-peer (P2P) lending to their clients. What happened was – nothing. At least not to begin with.
The P2P lending industry had rather assumed that, once advisers were permitted to suggest their clients consider P2P investments then, provided they were suitable for the client concerned, they would do so almost automatically. But they did not and, although the broader market has become more and more interested in P2P investments since the end of last year, there has yet to be the take-up that might have been expected from advice themselves.
To an extent, this reflects a certain wariness for the P2P lending sector among some advisers, which is based on a lack of familiarity with the asset class. But there is a much bigger problem – the lack of peer-to-peer lending research, meaningful data about the sector and a dearth of tools with which to interrogate what little information is available.
Shortly after April 2016, advisers would have been confronted with a new asset class about which there is no agreed way to reach a judgment. How would recommending this asset class to clients play with compliance officials? And how easy would it be for them, or for disgruntled investors, to claim a P2P recommendation did not constitute suitable advice? If you are an adviser, these are perhaps some primary concerns when researching peer-to-peer lending.
Such concerns may have been magnified many times by the prospect of a downturn in the economy or the markets – or even a return to full-blown recession. In such a situation, for clients to lose money on mainstream investments may be regrettable but, sad to say, commonplace. By contrast, an adviser whose clients have lost money on P2P lending may feel a lot more exposed. So why would you, the adviser, take the risk?
In short, there has been a lack of independent peer-to-peer lending research that allows investors and advisers to benchmark P2P platforms. Independently assessed default and return rates have been hard to find – as have been industry-wide figures on subjects such as the total size of the market.
This matters increasingly as the P2P scene grows ever larger. There are now more than 50 P2P platforms and, in the three years from 2014 to 2016 alone, lending grew from £1.25bn to £3.13bn, providing credit to both consumers and businesses. Currently, just over 177,000 retail investors are active in this space. By 2020, it is estimated 2.7 million people will be investing in P2P lending.
They will need independent data, analysis and insight to guide their decisions. For a financial adviser or sophisticated private investor, the provision of independent research from a credible source will be of critical importance – as P2P becomes more widely accepted, it may form a greater portion of a client’s portfolio. The research must be of a high standard when considering an alternative investment, as it is your due diligence which will be called into question.
The growth of P2P lending and the arrival of the ‘Innovative Finance ISA’ – a version of the Individual Savings Account that can contain approved P2P platforms – has showcased the need for data and insight. Meeting this need is far from easy because there has, until now, been very little information out there – but also because there is a lot of complexity in this market.
Most importantly, there have been a lack of standardised metrics to judge P2P investment the same way you would another asset class. Clear and homogeneous data on default rates, bad debt rates or on platforms’ financial standing would allow advisers to benchmark products a lot more easily – and accurately.
Each borrower is different, as is each platform. Expertise is limited, and all the more valuable for that. Essentially, peer-to-peer lending is a form of investment that comes down to risk appetite. How much risk is the investor prepared to assume? It is an alternative investment and should be assessed with a high degree of scrutiny.
That means the data has to be assembled, interrogated and made available. The process should be independent of the industry, credible and robust. An adviser’s compliance responsibilities must be facilitated. They must be able to compile reports and share with their clients as part of the mandatory advice process. In short, the information and tools required should be at an adviser’s fingertips.
The P2P sector has nothing to fear from such transparency. On the contrary. More and better information, properly scrutinised, should show P2P investing has a good story to tell.
To take one example, we suggested earlier that some advisers may fear an economic downturn could leave P2P investors especially vulnerable to loss. In fact, nothing could be further from the truth. P2P lending is actually a very good way to invest across economic and market cycles. P2P investments are not on the stockmarket – investors are lending direct and so P2P investments are not influenced by large shifts in the market.
Other than the negative effects on the businesses concerned of unemployment and an economic slowdown, P2P lending is uncorrelated with such cycles. It is, in short, a diversification tool. It is also, let it be said, a yield tool at a time of generally low returns – P2P lending returns an average 5% a year.
There is a tremendous opportunity for P2P lending to be promoted to retail investors either through advisers or directly to more sophisticated clients. But for peer-to-peer lending to achieve its full potential, it needs an environment that is much richer in information and analysis.