First they got the FCA approval, then they got ISA manager status. But the IFISA is just part of Landbay’s plans for growth this year, as chief executive John Goodall tells Peer-to-Peer Finance News…
Congratulations are in order for Landbay, which gained full approval from the Financial Conduct Authority (FCA) in the week before Christmas 2016 after a rigorous 14-month application process. At the time of writing, less than two dozen platforms are fully FCA authorised, making it a covetable achievement.
“As the whole industry has found, it’s gone on far longer than people anticipated,” John Goodall, co-founder and chief executive of Landbay, tells Peer-to-Peer Finance News. “We, like most other platforms, applied in September or October 2015 and like most platforms we anticipated that we would be authorised in time for the 2016/17 ISA season. Even as late as March 2016, we felt that was likely and we would get authorised the next month.”
But it was not to be, and the buy-to-let lender’s application process dragged on for another nine months. Other established platforms have been waiting even longer, while a number of newer, smaller players have leapfrogged the queue.
“The conversations had been ongoing; questions, changes, people moving on from the FCA…By November we felt had no more questions to answer. And then it happened pretty quickly,” Goodall continues.
“Once we got to the week before Christmas, we assumed it would get carried over to the New Year so it was a good little boost to get approved when we did.”
Luckily, HMRC authorisation as an ISA manager was far more swift, following just a few weeks later. Now that Landbay has both FCA and HMRC approval, it can offer its own Innovative Finance ISA (IFISA) – the tax-free wrapper around P2P investments that has been dominating the industry’s collective mindset since former Chancellor George Osborne first mooted the concept back in July 2015.
Landbay expects to launch its IFISA in the first half of February. Will it be the ‘game-changer’ that the industry has been hoping for?
“This year it’s important we become a mainstream buy-to-let lender in terms of how borrowers see us,” says Goodall. “We’re looking to grow the retail side of the business, mainly through our partnership with [online estate agent] Zoopla and the IFISA.
“In the short term I don’t think there will be a huge wave of new investors coming on to platforms, but I think P2P will get promoted more strongly in the press and on comparison sites. I think the industry will get greater exposure because of the ISA, which will bring it into the mainstream.”
Read more: 23 firms now approved to offer IFISAs
ISAs aside, FCA authorisation brings with it a host of new advantages and opportunities. Having the regulator’s stamp of approval could help to attract institutional investors, potential partners and customers who may not have considered the company before.
“We’ve felt it already, even without an IFISA, that being authorised has had positive benefits on the number of people signing up to the site and the number of people investing,” explains Goodall. “It’s almost a tick, that you’ve passed that level of due diligence”.
Even Landbay’s relationship with mortgage brokers has improved as a result of the FCA approval. Goodall thinks that because they are regulated themselves, they feel more comfortable dealing with a regulated, authorised entity.
Changes at the top
Osborne’s departure from the Treasury last July created a period of uncertainty for P2P, as the IFISA lost its godfather and no one knew how his successor Philip Hammond would feel about the industry.
The previous government was broadly acknowledged to be an enthusiastic supporter of the fintech sector and Goodall does not feel the same level of support from the current administration. “Take the IFISA for example, that was driven through by George Osborne,” he says. “For P2P that’s a material step change. And if you look at some of David Cameron’s trade missions to promote fintech, he was bringing people like Rhydian [Lewis, chief executive of RateSetter] and Giles [Andrews, chairman of Zopa] on them. Looking at the New Year’s Honours list a year ago, Samir [Desai], Giles [Andrews] and Christine Farnish all got accolades, so there was definitely recognition of the sector.
“So I’m not saying the government’s anti,” reiterates Goodall, “but I don’t think it was just Osborne. Sajid Javid, Cameron…there were a number of prominent senior cabinet ministers at the very top who were hugely pro fintech. At the Innovate Finance conference last year, David Cameron sent a personal video message and I think Osborne showed up for some of it. We haven’t had that same level of engagement.
“Part of it is that the government has more obvious priorities,” he adds, referring to the ongoing Brexit negotiations. “So I’m not saying that the government is anti, it’s just not as outwardly pro and supportive as the previous one.”
Landbay had to amend a key element of its business model before the City watchdog would give it the green light. The platform had to stop pre-funding its loans with an institutional partner – which sped up how quickly it could lend out investors’ money – in order to comply with the 36h regulations that P2P lenders must fall under.
It was “clearing out” these pre-funded loans that contributed to Landbay’s lending coming to a near-standstill over the summer, but Goodall says that it will not create a material time laggoing forward.
“From February onwards it will be a few days or a few weeks in some cases, so in the grand scheme of things it’s not going to have a material impact on people’s returns,” he says.
“In some ways it makes it easier actually, as it’s a slightly cleaner model and reduces a little bit of complexity for the business.”
The other factor was of course a three per cent increase to stamp duty on second homes, which came into effect on 1 April 2016. This led to an extremely busy first quarter of 2016 as people rushed to get deals done ahead of the change, but slowed down the buy-to-let market during the latter part of the year. Goodall expects lending in the sector to pick up again and forecasts flat to five per cent growth in 2017.
The tax changes could actually provide an opportunity for Landbay, argues Goodall, as people are now setting up limited companies to purchase buy-to-let properties, in order to circumvent the tax change.
“A lot of the big banks don’t accept limited companies, so we see a massive opportunity for us where buy-to-let business will move away from the high street banks towards the specialist lenders,” he says. “So the market opportunity for us with these changes are quite strong.”
Buy-to-let is not the only sector feeling the weight of change. P2P is bracing itself for a regulatory crackdown, after the FCA’s hard-hitting interim feedback statement in December.
“I suspect the FCA probably started the authorisation process not knowing a huge amount about the industry or the platforms and how they operated,” says Goodall. “And obviously now they know quite a lot because they have had a deep look at many of the platforms.
“Most of the feedback seems to be around transparency and marketing promotions and how you speak to your customers, as opposed to operational things. I think the Peer-to-Peer Finance Association (P2PFA) has adopted best-in-class practice in terms of communication and transparency. It doesn’t mean it won’t tighten up but I think with the P2PFA we’re probably not too far away from where the FCA will end up.”
Apples and oranges
Goodall echoes a commonly-raised point among the industry, that it is very hard comparing risks among the various P2P platforms when they all have such different business models.
“P2P is not in my view an asset class,” he says. “Fundamentally you’re making a decision – am I investing in mortgages? Am I investing in business loans? Am I investing in consumer unsecured? Am I investing in development finance? All of those have phenomenally different risk profiles and the returns on offer are quite broad.
“So the danger is that if we end up in a situation where there’s a ‘smoking kills you’ type warning for P2P, saying it is all risky, it doesn’t necessarily help the consumer choose between the different types of assets.”
Landbay has not been profitable since its launch in 2013 and Goodall does not expect the company to break even until 2018. He attributes this to investment into technology, which the company brought in-house in 2015.
“We’ve made a big investment in that and you don’t reap the rewards of that for quite a while,” he says. “It takes quite a while for that to feed through in terms of functionality of the platform.”
Goodall hopes Landbay will be lending out £1bn annually in three or four years’ time – big aspirations, considering the platform lent out £22.5m last year. Institutional investment is crucial in scaling up the business.
“The mortgage industry we’re in is worth £35bn a year,” he says. “Banks are always going to be material, but we have an opportunity because of the size of the market and the changes within it to become a lender that lends over £1bn a year. So we think over a three or four year plan that is achievable.
“We want to get a mix of funding. We think the retail bit is always going to be an important component of it, but I don’t think we can get to that scale solely on retail money.”
The platform is solely funded by retail investors at the moment, but Goodall predicts the balance could swing towards institutional money this year.
“It’s something we’ve worked quite hard on over the last six to nine months,” he says. “We’d expect to deploy quite a lot of institutional capital over the course of the year. We think that’s good for retail investors, to show that we’ve gone through that process with institutions. So for us it’s quite a key year to really grow.”
…Funding Circle’s recent $100m equity investment
“It shows that their investors are very confident. $100m (£81.3m) is not to be sniffed at. Last year, with the Lending Club scandal and the credit performance of Prosper, a lot of the news about P2P has not been positive. I don’t think there was any major fundraising last year for the platforms so it’s quite a good sign that investors are backing the sector again.”
…buy-to-let in central London
“It’s very hard to let in central London as yields are very low. Even though rents are high in London, property prices are far higher than they should be relative to the rent. As a landlord, if you want income from rent relative to your investment it’s not the best place to do it.
“If you look further out, zone three and outwards, that changes somewhat, outside of certain prime areas like Richmond upon Thames and Hampstead. As soon as you get into areas where you can buy properties for less than £750,000, the yield improves and it’s more similar to the rest of the South East.”
“We’re in a situation with loose monetary policy where there are supposedly asset price bubbles everywhere, whether it be consumer debt, property, the bond market, or the stock market. I think all these things are linked together, as interest rates are so low people are looking for yield.
“Property prices have definitely slowed down and yields are still relatively low. Rents have not risen anywhere near the pace that property prices have done, so actually for landlords it’s less profitable than it used to be, particularly with the changes that have come in.
“There’s a fundamental housing shortage in the UK and even in 2008/9 when house prices came down by 18 per cent in the space of a year they recovered very quickly. If it was a genuine bubble they would have gone down and stayed down.”