Octopus Investments recently announced they’re going to be launching a peer-to-peer platform as an additional arm to their £5.5bn 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. AltFi spoke to Simon Rogerson, the CEO of Octopus, who 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 scrutinized the “new-wave” asset class. Jason Hollands of Tilney Bestinvest was forthright 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 revelation surely cements the notion that P2P lending as has now become a mainstream product now? With £2.722bn invested in 2015 according to Liberum Altfi Volume Index (UK), and over 50 active platforms on the market catering to approximately 250,000 retail investors, it is no surprise that this exponential growth in the market has attracted the likes of Octopus and Hargreaves - let’s not forget RateSetter’s partnership with FNZ in Autumn 2015 either.

Another thing, in 2015 36.4% of investment in Funding Circle, RateSetter and Zopa came from institutional deployment, according to AltFi Data. 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 (MW Eaglewood – Manager) bundle P2P loans from U.S marketplace lenders as well as the “big three” in the U.K and a wider rang of UK platforms.

There are arguably two critical tipping points that have stimulated the financial advisory community to take notice of marketplace lending:

1. Innovative Finance ISA

April 6th saw the introduction of the Innovative Finance ISA, or “peer-to-peer ISA” as it’s affectionately termed. This is expected to bring in a wave of savers disgruntled with the excruciating rates on offer by via traditional savings products, and now prepared for an alternative investment. 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 “big three” P2P lenders: Zopa, RateSetter and Funding Circle, amongst several most other major P2P platforms. This is due to a backlog in the FCA’s regulations authorization process: P2P platforms must have full authorization from the FCA – many platforms operating on interim permissions only at present – and have ISA permissions from the HMRC. Crowdstacker is one of few platforms that can offer the IFISA currently.

2. FCA regulated advising on P2P agreements

On the same date, 6th April, the FCA announced that it’ll be regulating P2P advice. IFAs that who 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”. Advisors will be held liable, basically.

So, 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-analytics tools and a portfolio management service would encourage affluent, possibly even high-net-worth investors to invest, should their advisors be willing to advise.

Jordan is a FinTech enthusiast and co-founder of UK’s no.1 peer-to-peer lending comparison service, where the everyday person can research, compare and feel empowered to invest and earn more money on their money. [email protected], @orca_money, www.orcamoney.com 

Background

The principal legislation regarding the regulation of payment services in the EU is the Payment Services Directive (“PSD”), which was transposed into Irish law by the European Communities (Payment Services) Regulations 2009.

The 2009 Regulations apply to institutions which execute payment transactions, provide money remittance services, issue payment instruments (e.g. credit cards), engage in merchant acquiring, or operate payment accounts (e.g. current accounts, savings accounts). These payment service providers include, for example, banks, credit card companies, online payment providers and merchant acquirers. The 2009 Regulations require such institutions to hold an appropriate authorisation from the Central Bank of Ireland (or another competent EEA regulator), and to adhere to minimum capital requirements and conduct of business rules.

A number of new measures have been enacted by the EU in the area of payment services recently. These include:

• the new Payment Services Directive (2015/2366/EU) (“PSD2”);
  
• the Interchange Fees Regulations (2015/751/EU) (“IFR”); and
  
• the Payment Accounts Directive (2014/92/EU) (“PAD”).
  

The principal changes arising from these Directives are:

• Extending the scope of PSD, to include previously unregulated activities;
  
• Limiting the scope of the exemptions from the requirement for certain activities to be regulated;
  
• Strengthening consumer protection and payment security;
  
• Reducing interchange fees (a fee paid between banks for the acceptance of card based transactions) which apply to consumer / non-commercial credit cards and debit cards;
  
• Creation of Basic Payment Accounts 
  
• Requirements for Comparison websites
  

PSD2

PSD2 was enacted by the European Parliament and Council on 25th November 2015 and  must be transposed into national law by 13th January 2018, with the provisions to come into effect on that date. 

The key changes contained in PSD2 are as follows:

• Third party providers (“TPPs”) of payment initiation services (which usually provide services between the merchant and the paying customer’s bank) and account information platforms, will be required to be authorised as payment institutions. This provision is designed to regulate TPPs which provide services in relation to activities such as mobile banking, and which are currently unregulated.
  
• The limited network exemption from the requirement to be authorised as a payment institution will be considerably narrower in scope. The revised exemption now covers services based on specific instruments that are designed to address precise needs that can be used only in a limited way, because they allow the specific instrument holder to acquire goods or services only in the premises of the issuer or within a limited network of service providers under a direct commercial agreement with a professional issuer or because they can be used only to acquire a limited range of goods or services. This provision may bring certain multi-purpose gift cards within the scope of PSD.
  
• Whilst ATM operators continue to be exempt from the requirement to be authorised under PSD2, independent ATM operators (i.e. those who provide services to multiple card issuers) are required to provide customers with the information on any withdrawal charges in accordance with the Directive. This measure was included due to the growth of independent ATM operators, particularly in rural areas, which were imposing charges on customers, in addition to any charges which may have been imposed by the card issuer. Although making ATM subject to PSD2 in full was originally considered, this was abandoned to allow the continuation of the provision of ATM services while ensuring clarity for customers on withdrawal charges. 
  
• The commercial agent exemption will be amended so that it will only exempt agents which act on behalf of either the payer or the payee, and not agents who act for both parties. This may have an impact on a number of cash collection agencies and bill payment facility providers who currently avail of the commercial agent exemption.
  
• PSPs will be required to comply with the transparency and provision of information rules of PSD, where the payment transaction entails funds being sent out of or sent into the EEA, or where the transaction involves a non-EEA currency. These “one leg out” transactions largely currently fall outside the scope of PSD.
  
• Customer liability for unauthorised transactions on a payment instrument will be reduced from €150 to €50.
  
• PSPs will be required to adopt enhanced security requirements for payment instruments. These measures will include “strong customer authentication”, which means a procedure for the validation of identification of a natural or legal person based on the use of two or more elements categorised as knowledge, possession and inherence. The two elements selected must be however be mutually independent, so that a breach or failure of one security measure does not compromise the reliability of the other(s).  This proposal may require many PSPs to change their business processes regarding customer authentication of payment transactions. As this was seen as a key provision for the protection of online payments, many of the requirements have been implemented through the EBA’s Guidelines of the Security of Internet Payments (which it issued on 19th December 2014 and which came into effect on 1st August 2015). 
  
• The transaction threshold for a PSP being categorised as a small payment institution (and therefore subject to less onerous regulatory requirements) will be reduced from an average payment transaction turnover per month of < €3 million to < €1 million. Therefore, some existing PSPs may no longer be categorised as small payment institutions and will be fully subject to PSD2.
  

IFR

The IFR was enacted by the European Parliament and Council on 29th April 2015, with the provisions to come into effect on a phased basis on 8th June 2015, 9th December 2015, and 9th June 2016.
The IFR arose primarily from a competition investigation into interchange fee rates. As a result of that investigation it was decided to introduce a limit on interchange fees of 0.3% for credit cards and 0.2% for debit cards (except for schemes with three parties, commercial cards, and cash withdrawals from ATMs or at the counter of a PSP). These limits apply to cross-border payment transactions from 9th December 2015, and will apply to domestic transactions from 9th December 2018.

The IFR will also:

• prohibit surcharges in relation to credit cards and debit cards;
  
• require payment card schemes and processing entities to be separate and independent;
  
• require the un-blending of merchant service charges for difference categories and brands of payment cars with different interchange fee levels;
  
• prohibit the imposition of any rule that obliges payee to “Honour All Cards” from the same payment card scheme;
  
• prohibit any rule preventing payees from steering consumers to a preferred payment instrument;
  
• require payee’s PSPs to provide the payee with certain information after the execution of an individual card-based payment unless explicitly consent is provided by the payee to this information aggregated on the basis of brand, application, payment instrument categories, and rates of interchange fees applicable to the transaction (acquirers may contractually agree to provide payees with this information on a periodic basis).
  

PAD

PAD was enacted by the European Parliament and Council on 23rd July 2014 and must be transposed into national law by 18th September 2016, with the provisions to come into effect on that date.

The main purposes of PAD were to provide for increased access to payment accounts, transparency around fees for their operation, and the standardisation of terminology used for services in connection with payment accounts. PAD’s main features in this regard are:

• A fee information document (including a glossary of terms used) and a free annual statement of fees;
  
• Moves to standardise terminology for services connected to payment account (through EBA Guidelines);
  
• The creation of basic payment accounts by credit institutions, which must be available to all consumers (subject to certain limited exemptions on public policy and security grounds) free of charge or subject to reasonable fees (not linked to transaction volumes on the account), and which must enable at least the following basis services:-
  

            o all services necessary to open, operate and close the payment account,
            o services enabling funds to be placed in or withdrawn from the account,
            o execution of direct debits, payment transactions through ha payment card (including online) and credit transfers (including standing orders); 
 

• The provision of a switching service to enable any consumer to easily move their payment account to another PSP (including requirements to provide customers with information on switching, access to information free of charge about existing standing orders and direct debits, and assistance with switching to PSPs in other Member States);
  
• The requirement to have Comparison Websites (run either by public or private bodies) which must comply with certain requirements including that the websites:
  

         o be operationally independent of PSPs by giving equal treatment in search results,
         o clearly disclosing ownership,
         o set out clear, objective criteria upon which the comparison will be based,
         o use clear and unambiguous language,
         o provide accurate and up-to-date language (and state the time of the last update),
         o include a broad range of payment account offers (covering a significant portion of the market, or where not doing so having a statement clearly indicating such),
         o provide an effective procedure to report incorrect information published fees;

• A requirement for access to effective and efficient alternative dispute resolution procedures for the settlement of disputes concerning rights and obligations under PAD (including, for example, a refusal by a credit institution to provide a consumer with access to a basic payment account). 
  

________________________________________
For further information, please contact:
Chris Martin     
Senior Associate
T: +353 1 6644 471
E: [email protected] 
Chris Martin is a Senior Associate in Eversheds, Dublin, and advises a broad range of financial service providers, including domestic and international banks, payment institutions, investment firms, funds, retail credit firms and credit servicing firms. He advises on regulatory and compliance issues including consumer protection, conduct of business, anti-money laundering and financial sanctions, corporate governance, passporting and general prudential matters. He also assists institutions with interactions with the Central Bank, including in relation to authorisations, corporate restructuring, thematic reviews and enforcement matters.

Peter Oakes of Fintech Ireland. a leading fintech and regtech expert, looks at the recent work of Irish regtech startup Corlytics

A few weeks ago The Financial Times reported that failures in customer reporting have cost the world’s top investment banks $43bn in fines over the past seven years.  This was the single most expensive compliance issue, according to research undertaken by Irish regtech start-up Corlytics.  Corlytics research also found that the main types of failure and wrongdoing resulted in fines totalling $150bn for 10 US and European banks between 2009 and 2015.  Corlytics is, as the name suggests, an analytics firm. 

In addition to the customer reporting compliance failures, other issue that caused significant financial and regulatory issues for large banks included rigging foreign exchange rates, money laundering to product mis-selling to name just a few.

"The seven years of fines have taken a heavy toll on the banks, wiping out the equivalent of a staggering 14 per cent of their equity capital."

The pool of banks covered by Corlytics’ work are Barclays, Bank of America, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan, Morgan Stanley and UBS. The seven years of fines have taken a heavy toll on the banks, wiping out the equivalent of a staggering 14 per cent of their equity capital.  

John Byrne, chief executive of Corlytics, said client reporting failures were the source of substantial fines for banks in a wide variety of cases, including misleading customers about investments and not communicating clearly enough with borrowers. “It can involve any aspect of client disadvantage or loss due to inaccurate or misleading reports or communication,”.

Corlytics’ work shows poor disclosure to clients was a factor in the $25bn of fines paid by US banks in a 2012 settlement for abusive foreclosure practices. The second most expensive issue for the 10 banks was failures in how they sold residential mortgage securities, which resulted in a penalties total of $27.7bn.  The banks meanwhile paid $20.2bn in fines in relation to securitisation failures. “Rate setting” fines came to $14.6bn, partly stemming from banks’ manipulation of foreign exchange and interest rates.

Mr Byrne said that while many banks have “experienced serious issues with regulators, some have not”.
“The data seems to indicate that the less diversified a bank, the lower the regulatory risk,” he added. “This may be because with fewer business lines, [internal] controls can be better understood and implemented.”
The high point for penalties was 2014, when banks paid $56.2bn in fines for compliance issues ranging from foreign exchange and interest rate rigging to flaws in selling mortgage securities. Banks paid fines of $40.2bn in 2013, and $38.2bn in 2012.

Banks’ penalties came to just under $10bn in 2015. However, European banks are braced for substantial fines this year when they find out how much they will pay for mis-selling mortgage bonds.

The fines do not cover most of the £30bn that UK banks paid for mis-selling payment protection insurance. This is because Barclays and HSBC are the only two British companies that rank among the world’s top 10 investment banks, and therefore are included in Corlytics’ work.

Corlytics has assembled a database about banks’ penalties based on disclosures by authorities with powers to levy fines.

The Dublin-based company sells the database to banks looking to pinpoint areas of weakness, and regulators which want to know how their penalties compare to others.

€50k funding now available for international entrepreneurs

Early-stage companies in manufacturing and the internationally-traded services sector from around the globe are being invited to consider doing business in Ireland. Enterprise Ireland has launched a competitive fund aimed at supporting worldwide start-ups and entrepreneurs who are willing to relocate to Ireland.

Under the terms of the Competitive Start Fund (CSF), successful candidates will receive €50,000 in cash to support their business development. Interested applicants have until 3pm, GMT, Wednesday 6 April to express their interest and submit an application.

Shortlisted projects will be invited to travel to Ireland to pitch to the evaluation panel on Wednesday 1 June. Travel costs, up to a maximum of €1,000 per applicant, will be covered by Enterprise Ireland. Candidates successfully awarded the funding will be required to move to Ireland, however Enterprise Ireland will also offer assistance to entrepreneurs who need a visa to live and work here.

Qualifying sectors include: manufacturing and internationally-traded services, such as the following subsectors: Internet, Games, Apps, Mobile, SaaS, Cloud Computing, Enterprise Software, Lifesciences, Fintech, Food, Cleantech and Industrial Products.

The maximum support available is €50,000 for a 10% ordinary equity stake in the start-up company. This investment shall be released in two equal tranches, the first of which will be released to successful applicants only when they provide confirmation of additional new cash investment for equity of €5,000. This new investment in equity of €5,000 by the successful applicant is to occur after the relevant call close date.
 
If you what to know more get in touch with us at [email protected] before close of business on 4th April if you wish us to assist with your application. Please put "€50k funding now available for international entrepreneurs" into the header of your email.  Alternatively you can approach Enterprise Ireland direct at www.enterprise-ireland.com before the closing date.

‘Marketplace Lending’ defined

Before we delve into the eagerly awaited Innovative Finance ISA coming April 6th it would be worthwhile explaining this term, ‘marketplace lending’.

In 2014 the Economist coined peer-to-peer lending ‘Banking without banks’, despite this sentiment being the vocal outcry of UK peer-to-peer platforms, it no longer rings true. Peer-to-peer lending used to be a two-sided network of lenders and borrowers; direct lending between ‘peers’. In 2015, 1,031 institutional funders were reported to have been involved in financing deals across UK alternative finance platforms. 45% of UK platforms reported institutional activity, compare to 28% in 2014. Nesta shed more light on this trend in their annual report.

Image 1: Nesta report: 2016

As you can see, this innovative asset class, “peer-to-peer” lending has become entrenched in institutional funding.

·         32% institutional funding P2P consumer lending

·         26% institutional funding P2P business lending (total)

·         25% institutional funding P2P business lending (real estate)

AltFi Data called this in Spring 2015, when they published statistics on institutional funding within the three largest UK platforms: Funding Circle, Zopa and RateSetter.

Image 2: AltFi Data: estimated aggregate institutional participation in Funding Circle, Zopa and RateSetter originated loans 2014 – April 2015


It is almost one year on, and evidently the darky grey line has continued to rise. What assertions can we draw? Well, as borrower numbers increase, lending institutions can facilitate the loans where retail investors can’t; there aren’t enough of them. With over 10,000 UK SMEs and 600 commercial property developments funded in 2015 (P2P business lending) it is no wonder institutional activity has become an underpinning feature of marketplace lending.

·         It took 490 P2P investors (avg) to fund a typical real estate loan of £522,333 (2015), demonstrating the volumes required to fund an average loan.

Also, the institutional grip on peer-to-peer consumer lending has become even tighter. UK consumer lending in P2P is still considered a retail investor’s game, but it was reported that institutional investment rose significantly towards the close of 2015, having had modest involvement at the beginning of the calendar year.

·         £288m was lent by institutional funders across consumer lending platforms in 2015 accounting for 32% of total market volumes.

More can be found on institutional activity in the Nesta report, page 40 onwards.

To reaffirm institutional funding of peer-to-peer loans, AltFi published stats on Funding Circle, who, by Autumn 2015, were funding whole loans preserved for institutional lenders (not retail investors) at a rate of 50% of total monthly loan volumes (see: July whole loans vs fractional loans graph 1).

Innovative Finance ISA (IFISA) will boost retail investor numbers 

 Now that peer-to-peer lending UK could be conceived as a “thing of the past”, having evolved into marketplace lending, we can assess the impact of the Innovative finance ISA on this now very much institutionally affected market.

The Innovative Finance ISA, or ‘peer-to-peer ISA’ as some are calling it, will allow retail investors, or retail savers to look for an alternative investment, to earn tax-free interest on their annual allowance of £15,240 in 2016. Investors can open an IFISA with a single P2P platform, investing their allowance, or accumulated allowances, to earn higher interest rates than those offered by the other two main ISA products: cash ISA and stocks & shares ISA. There are some complexities to this new ISA, so read ‘Innovative Finance ISA 2016: overview’ for a better understanding of how it works,

Peer-to-peer lending real estate platforms are reportedly lowering their minimum investment with the prospect if the new Innovative Finance ISA. An influx of retail investors will come onto the P2P market looking to ‘increase their exposure to the UK property market, not only owning their home, but also in other ways, such as investing through peer-to-peer lenders’ according to Guglielmo de Stefano of AltFi.

·         Real estate peer-to-peer platforms expect the IFISA to boost the market volume in 2016 by 51%. (Nesta report)

An influx of 405,000 new retail investors is expected this year in light of the introduction of the IFISA. Of 1,020 UK adults surveyed, 19% exclaimed they would open an ISA and start actively saving. An important thing to remember is that P2P lending is an alternative investment product, and not a savings product. Retail investors, savers, whatever they deem themselves, will not be covered by the FSCS if funds are lost.

To conclude, peer-to-peer lending has evolved into marketplace lending with institutional investing permeating the industry. The Innovative Finance ISA will stimulate retail savers and investors alike boosting the marketplace lending industry. With more retail investors coming onto the market what affect will this have on the dichotomy of institutional lenders and retail investors? 2016 will be a testing year for marketplace lending, and with only Zopa and RateSetter marketing their peer-to-peer ISA products how much of an impact will the Innovative Finance ISA actually have. 

Jordan is a FinTech enthusiast and co-founder of UK’s no.1 peer-to-peer lending comparison service, where the everyday person can research, compare and feel empowered to invest and earn more money on their money. [email protected], @orca_money, www.orcamoney.com