NO-ONE could have predicted half of the events which 2016 had in store for the peer-to-peer lending sector.
Company scandals, international trials, unexpected elections and evolving regulations made for an interesting year, and contributed towards the stunning growth of the UK’s P2P market in the latter few months of 2016. Throughout the year, uncertainty flourished. From Brexit to Trump, there were enough surprises to keep investors on their toes, and as volatility continued and interest rates plummeted, P2P lenders emerged as the real winners of the year.
By the third quarter of the year, UK P2P lending had hit £6.5bn, while globally the sector was valued at more than £106bn, a 271 per cent increase on the previous year. One by one, the UK’s biggest platforms reported record-breaking lending figures, while government initiatives such as the Innovative Finance ISA (IFISA) and the bank referral scheme ensured that P2P lending finally broke into the mainstream.
Here is a brief reminder of the year that was…
The year got off to a great start for the P2P sector, with the news that the UK peer-to-peer lending industry doubled to £2.2bn last year, with the number of borrowers increasing by 96 per cent. Furthermore, the British Business Bank revealed that 2015 saw a 75 per cent increase in peer-to-business lending, and urged SMEs to consider alternative finance in its Small Business Finance Markets Report.
However, there were early signs of big changes to come. In the US, Lending Club’s share price was down, and in China, Ezubao lenders were starting to question why the platform had suddenly gone quiet. Meanwhile, Brexit campaigning began in the UK, and in the US Donald Trump’s presidential campaign was in full swing.
This was the month that China’s P2P bubble burst. The country’s biggest lender, Ezubao, was revealed to have been a Ponzi scheme, and on 1 February 2106, 20 company executives were arrested on charges ranging from fraudulent fund-raising to illegally taking public deposits.
At its peak, Ezubao held funds of more than Y50bn (£6.2bn) from approximately 900,000 investors, many of whom did not recoup their investments. The scandal placed a spotlight on China’s $93bn (£75.35bn) P2P market, with regulators cracking down on lenders with a series of new restrictions including a detailed P2P registry.
Alarm bells began to ring when the Financial Conduct Authority (FCA) pre-emptively told the P2P sector that IFISA approvals might take longer than expected due to a large backlog of applications. By 30 March, only eight P2P firms were fully authorised by the regulator, and therefore eligible to offer the IFISA upon its launch. A further 44 firms were operating on interim licenses, and 42 others were still waiting for a response.
On 6 April, the game-changing IFISA was finally introduced, allowing consumers to make tax-free investments (up to £15,240 for the 2015/16 tax year) in P2P platforms for the first time. Originally mooted by George Osborne, the IFISA was widely seen as a tacit endorsement of the fledgling P2P lending space, which had been seen as a fringe investment option up until that point.
However, only platforms with full FCA authorisation and ISA manager status are eligible to offer the IFISA, and by the end of the year the ‘big three’ platforms (Zopa, Funding Circle and RateSetter) were still waiting, with just 17 firms able to offer the tax-free product to investors.
This was the month that the Lending Club scandal broke, leading to the resignation of founder and chief executive Renaud Laplanche.
The San Francisco-based firm was a pioneer of the P2P market, becoming the first P2P lender to register with the Securities and Exchange Commission (SEC), and the first raise an IPO. In fact, Lending Club raised $900m through its December 2014 IPO, making it the largest US tech issuance of the year. By the end of December 2015, more than $15bn in loans had been originated through its platform.
But in early 2016, loan activity began to slow down, and by May some major irregularities were spotted on the company’s loan books. Laplanche stood down amid an SEC investigation and chief finance officer Carrie Dolan followed in August. The company went on to post a second-quarter loss of $81.4m and a third quarter loss of $36.5m.
There is only one word to sum up June 2016: Brexit.
The surprise result of the EU referendum put the UK’s economic future in doubt and six months later the uncertainty remains. However, despite fears that the burgeoning fintech sector would suffer, the P2P sector experienced an extraordinary Brexit boost, as interest rates were slashed, sending disillusioned savers and investors in search of better returns. P2P lenders would go on to report three consecutive months of record-breaking loan volumes between September and November, while the low value of the pound encouraged investment trusts such as P2PGI to increase their exposure to UK lenders.
Up until now, P2P lenders didn’t know how the regulator felt about the sector. But soon after his appointment as chief executive of the FCA, Andrew Bailey was quick to clear up any confusion. In a Treasury select committee meeting, he told politicians that he was “pretty worried” about the way P2P lending was being sold, and compared the sector to failed bank Northern Rock. His comments were interpreted as a sign that he agreed with his predecessor Lord Adair Turner, who infamously said that P2P lenders “make the worst bankers look like absolute lending geniuses”. However, Turner backtracked on these comments at the LendIt conference in October, saying that P2P lending was “likely to become a stable, significant and useful part of our total credit supply system.”
The Brexit effect finally reached consumers in August, as the Bank of England slashed the base rate to an all-time low of 0.25 per cent in an effort to increase lending and stimulate the flagging economy. These interest rates had an almost-immediate effect on high street savings accounts, and by the end of November the average cash ISA rate was just 0.73 per cent.
This was bad news for savers, but great news for P2P platforms, who saw a massive uptick in new investor queries in the aftermath of the base rate announcement, sparking a record-breaking streak that would continue for the rest of the year.
Zopa took the world by surprise when it announced its first securitisation deal at the end of September. The £138m transaction represented the first ever securitisation of unsecured consumer loans in Europe and it was quickly oversubscribed, leading the platform to consider more issuances in the future.
In the third quarter of the year, US securitisation hit a record $2.3bn with more than half of the loans now backed by assets, and Moody’s predicted that the UK is set to see a securitisation boom of its own.
The annual LendIt conference put P2P in the spotlight again, as former FCA chief Lord Adair Turner spoke to the sector for the first time since his scathing comments earlier this year.
But the real news this month was happening behind the scenes. Throughout October, banks began to tighten lending requirements, and SMEs struggled to find finance in the wake of the Brexit fallout. By the end of the month, the government launched the long-awaited bank referral scheme, which will see major high street banks refer SME borrowers to sources of alternative finance, including P2P.
While the rest of the world got used to the prospect of a Trump presidency, the UK had the Autumn Statement to contend with.
As expected, Chancellor Philip Hammond used the speech to underline his commitment to the fintech sector with a series of new measures designed to encourage innovation and investment. Hammond allocated £2bn for research and development, alongside £400m to support scale-ups. Meanwhile, a fintech delivery panel and a fintech professional services hub were planned in Tech City UK, as part of the government’s measures to support the sector.
December was a month of transformations. Having announced the launch of a digital bank at the end of November, Zopa continued to ring in the changes with a full rebrand in December. Meanwhile, RateSetter completed another industry first by selling off £2.1m of bad loans to debt management company 1st Credit.
After months of consultation, the FCA finally laid out its regulatory plans for the P2P sector. Interim feedback suggested that the FCA would consider “setting investment limits to cap potential consumer harm” and suggested extending “mortgage-lending standards” to P2P platforms. Platforms largely welcomed the rules as the next step for the sector’s expansion.