Method of choice
Octopus Choice has done the unthinkable and wooed the adviser market. Sam Handfield-Jones, head of the peer-to-peer property lender, tells Danielle Levy how it’s done…
MORE THAN two and-a-half years since peer-to-peer property lender Octopus Choice launched, it has succeeded where other platforms have failed: namely, by gaining traction with the financial adviser market.
Today, more than 1,000 advisers are registered on the Octopus Choice platform and it represents the most popular P2P platform for advisers in the UK. While consumers can also invest via the platform, Octopus Choice was set up to cater for growing demand amongst advisers and their clients for an alternative to cash and mainstream asset classes, like equities and bonds. Advisers currently make up 60 per cent of the platform’s user-base, with direct clients accounting for the remaining 40 per cent.
“The whole approach was: how can we build a product that works for advisers? We hit the pavement and met as many people as possible to help us shape how we built the product,” explains Sam Handfield-Jones, head of Octopus Choice.
The ultimate objective was to build a platform which offered advisers and their clients a healthy yield, generated by property-backed loans that are underwritten by sister company Octopus property.
“We wanted to build something that met customer expectations, and would be a reliable and positive addition to a client’s portfolio,” Handfield-Jones adds. “By that I mean an alternative to sit between cash and equities, a lower volatility part of a client’s portfolio.”
Octopus Choice puts together a portfolio of loans on behalf of the customer, targeting an interest rate of around four per cent a year.
Since launch in 2016, Octopus Choice has funded more than 400 loans, totalling close to £200m. Around 71 per cent of these loans are for buy-to-let properties, 16 per cent are bridge-to-let, eight per cent are commercial and six per cent are bridging loans. Meanwhile, the average loan-to-value for commercial property stands at a maximum of 65 per cent, while for residential it is 76 per cent.
“Octopus Choice allows you to get a yield from property without the hassle and with much more diversification,” explains Handfield-Jones. “Plus, because you are lending you are taking less asset risk, so you are less exposed to changes in the property value than if you owned a buy-to-let property. It was about creating a choice for advisers and their clients.”
So, why has Octopus Choice succeeded where other P2P platforms have struggled?
Handfield-Jones puts the platform’s success down to a number of factors. Firstly, the attractions of the underlying asset class and the platform’s lending process. He notes that buy-to-let property remains attractive for professional investors, with Octopus Choice offering investors an alternative to buying directly.
He explains that investors can benefit from a portfolio of property loans that are secured by a first charge and typically have a conservative loan-to-value ratio of around 60 per cent. This represents a very different proposition to investing in unsecured consumer loans.
“And Octopus invests five per cent in every loan in what we describe as a ‘first loss position’,” he adds. “Whether you invest £10 or £1m, Octopus Choice puts in five per cent with you. If there is a problem with that loan, we lose our five per cent before the customer or investor loses a penny of theirs.”
Handfield-Jones points out that Octopus Property has lent £3.5bn over the past 11 years and has lost 0.01 per cent in capital over this time-frame.
The platform aims to make it as easy as possible for advisers to invest in P2P loans. “For the financial adviser community specifically, it is about having the functionality to manage their clients, arrange whatever charging they have agreed with their clients, and a place where they can look at suitability and third-party due diligence to help them to go through their process of ensuring suitability as a product,” he says.
“It is very different building a product for financial advisers versus direct-to-consumer because the adviser’s job is to make sure the decisions they make for clients are the right ones, based on the product provider’s track record, the type of investment, the underlying client, their stage of life and their own investing goals.”
When it comes to Octopus Choice’s direct clients, Handfield-Jones has concerns about investor marketing proposals made in the Financial Conduct Authority’s recent consultation paper on the P2P sector. These could see platforms restricted to marketing to those who are certified or self-certify as sophisticated or high net-worth investors.
While he has no issues with the regulator’s suggestion that appropriateness tests should be introduced to help investors to assess the potential risks associated with P2P lending, he is concerned that the proposals could ultimately cause P2P to become the preserve of the wealthy. In his opinion, it would be a very unfortunate consequence to exclude the masses from accessing an above-inflation return on their investments.
“It is relatively easy to do [an appropriateness test], but what we want to avoid is this becoming a high-net-worth proposition,” he explains. “You have got an ISA that is designed for anyone to use, so to restrict an ISA product to become a high-net-worth product does not make much sense.”
Although the industry has a duty of care to make sure that consumers understand what they are investing in, they should also be given the choice to invest their money sensibly, Handfield-Jones adds.
“Taking the path of standardisation, providing appropriate information and insight into the risk profile of these products is preferential versus making it difficult to invest,” he says.
Although the UK’s plan to leave the EU has created uncertainty, Octopus Property – which underwrites the loans on Octopus Choice’s platform – continues to see strong demand from professional landlords who are buying into residential and commercial property. Handfield-Jones points to reports from different regions across the UK, which indicate that demand for rental properties continues to outstrip supply.
“Yes there is uncertainty, but the UK continues to be a great place to do business across so many areas of the economy – and that is not going to change overnight,” he asserts. “I think statistics and surveys are showing that although activity has slowed, there is still underlying structural demand for these asset classes.”
When it comes to the business itself, Handfield-Jones acknowledges that Brexit may make it harder to hire talented people with the right skill-set. Fortunately, the company has created a potential solution by launching a digital academy to train people with the skills that the business requires.
“In a relatively short space of time, we can train people to a fairly high standard if you can apply that learning in real time,” he says. “That is one of the reasons we launched our academy – to allow us to remain competitive.”
The initiative went live over the summer and was driven by the view that technology is critical to Octopus Choice’s success over the next decade.
“Any business that isn’t adopting technology at the core will struggle over the next decade,” Handfield-Jones remarks.
Looking ahead, the company has ambitious plans to improve its Innovative Finance ISA (IFISA) functionality by launching a digital end-to-end ISA transfer process. They plan to do this by integrating their system with the banking system. This means that if an individual decided to transfer a cash ISA, they could do so digitally by bank transfer.
“This cuts the transfer time down to days rather than weeks,” he comments. “Also, as it is digital you can track the status and progress of that ISA. We are hoping to be one of the first to launch this into the UK.”
Octopus Choice launched its IFISA last year and started accepting existing ISA transfers at the start of the year. So far, the platform has attracted 2,500 new IFISA customers and typically sees 50 to 60 new IFISAs opened each week. Handfield-Jones expects these numbers to increase rapidly over the next five months.
It has certainly been a positive year for Octopus Choice and Handfield-Jones hopes that 2019 will bring even greater success.
“In the future, we want Octopus Choice to be a multi-billion-pound platform – and I think there is the potential for that to happen,” he states. “Right now it is about continuing what we are doing, continuing to lend conservatively and providing investors with a lower volatility return.”
This article featured in the December issue of Peer2Peer Finance News, now available to read online.