Peer-to-peer lending in the UK has grown rapidly over the past decade, but now faces new challenges from increased competition and regulatory oversight, not to mention the impending Brexit.
S&P Global Market Intelligence estimates in the 2019 UK Peer-to-Peer Lending Market Report that cumulative origination volumes increased at a compound annual growth rate of 175% between the first quarter of 2005, when Zopa Ltd. kicked off the industry, and the first quarter of 2019. The companies on our priority list, which is broken down into segments based on the primary lending direction – individuals, small and medium businesses, and real estate – generated 5 , £ 7 billion in 2018, up from £ 4.4 billion in 2017.
Institutional capital is increasingly fueling the growth in origination volumes. More and more platforms are seeking institutional capital as well as retail capital as they grow on a larger scale. However, the growth has also resulted in more competition, which can negatively influence underwriting standards and pressure rates. Platform closures and weaker credit performance in recent years have attracted closer scrutiny from regulators, who so far have mainly supported the development of the industry. Meanwhile, Brexit threatens the industry in various ways.
To read the full report on the UK Peer-to-Peer Lending Market 2019
Diversity of funding
The peer-to-peer lending model was originally intended to connect savers with borrowers through an online portal. In the UK, the retail investor base remains a large part of the funding base. One of the largest platforms in the country, Retail Money Market Ltd., specializing in personal loans, which operates under the name Ratesetter, continues to fund almost all of its loans with funds from retail investors. . However, trends in the industry indicate greater involvement of institutional capital. Zopa, which focuses on personal loans, and Funding Circle Holdings PLC, which focuses on SME loans, the country’s two largest platforms, both get about half of their funding from institutions. As platforms evolve, institutional capital is likely to become more attractive both because of the deeper pockets of these investors and for the purposes of diversification and stability.
Funding stability will be crucial as the industry grapples with growing challenges, including the worrying credit performance of recent years. The expected non-performance rates on the three biggest UK platforms – Funding Circle, Zopa and Ratesetter – for the most recent vintages of loans remain high compared to loans issued five years ago. 2019 saw no-performance expectations drop, but it also saw the biggest platform shutdown in industry history. Real estate firm Lendy Ltd. entered administration in May after a majority of its loan portfolio turned out to be non-performing. Peer-to-peer lending platform BondMason Ltd has voluntarily closed its core investment product, citing a weak outlook due to factors such as increased competition and increased regulatory burden.
Changing regulatory attitude
The Financial Conduct Authority issued new regulations in 2019 that will restrict the ability of platforms to market to new retail investors. Platforms will need to administer suitability tests to potential investors to ensure they understand the nature of the investment. Additionally, the platforms will be limited from marketing to new retail investors who do not meet certain criteria that would qualify them as sophisticated enough to invest in the platforms. These regulations will likely reduce the growth and profitability of the platform.
The FCA has always strongly supported the development of the peer-to-peer lending industry. In 2014, he announced a new category of regulated activity related to peer-to-peer lending that gave greater legitimacy to the industry and the business model. In 2016, the regulator launched the Individual Innovative Finance Savings Account, a tax-advantaged investment vehicle designed to house peer-to-peer loan assets. The vehicle was a boon to regulators intended to stimulate demand and industry awareness among retail investors. Although still small compared to more traditional ISA types of accounts, the vehicle is seeing rapid adoption.
Recent restrictions may indicate a willingness by regulators to control riskier competitive lending platforms‘ practices as the industry matures.
Brexit and historic financial institutions
Another concern for regulators is the UK’s imminent departure from the European Union and its impact on UK businesses. The ambiguity around the nature of Britain’s post-Brexit relationship with the EU has only heightened the sense of uncertainty. The peer-to-peer lending industry, while still relatively small and focused on the domestic market, will not be immune to the impact.
The level of consumer confidence has been declining since 2016, the year of the Brexit vote. Several lending platforms cited economic uncertainties as a source of concern. Funding Circle said the “uncertain economic outlook” was the main cause of the drop in demand for loans on its platform. The company slashed 2019 revenue growth estimates from 40% to 20%, causing its stock price to drop sharply earlier in 2019.
Although growing rapidly, peer-to-peer lenders still represent a small portion of global lending volumes. As a result, the big banks and big monetary financial institutions have not yet interfered much with the activity of the industry. However, if volumes continue on their current growth path, peer-to-peer lenders will become more closely involved in the financial system at large. It remains to be seen whether incumbent banks will view peer-to-peer lenders more as partners or as competition.