Brokers and financial advisers have the power to send millions of new lenders and borrowers into the P2P sector, so what’s holding them back?
Depending on who you ask, financial intermediaries are either utterly essential or completely irrelevant to the future of peer-to-peer lending. On the one hand, they can open up a whole new world of funding options and investors. But on the other hand, ‘classic’ P2P is fuelled by individual investors and borrowers, so why complicate things by introducing a third party?
But there’s no getting past the fact that mortgage brokers and independent financial advisers (IFAs) have an enormous influence over large numbers of borrowers and lenders respectively. Brokers are already becoming fixtures in P2P property lending, driving borrowers towards platforms with the promise of competitive rates and flexible arrangements.
But IFAs have been much more cautious. Thanks to the retail distribution review (RDR), financial advisers are now liable for giving bad advice, perpetuating the problem of low-risk, low-interest recommendations. Furthermore, the very concept of P2P investment bypasses advisers and brokers by encouraging investors and borrowers to simply lend to and from each other. IFAs would be forgiven for seeing the P2P revolution as the next big threat on the horizon.
However, brokers have been much quicker to see the benefits in P2P lending, and the feeling is mutual. When it comes to property loans, brokers are vital, setting up much-needed loans and even carrying out some of the due diligence on behalf of the platform.
According to Landbay data, brokers facilitate around 90 per cent of the buy-to-let mortgage market, so any property lender would be understandably keen to win over the broker community.
“As with all other lenders in this space, we are heavily reliant on brokers,” says Julian Cork, chief operating officer of Landbay. “However, to maintain control and speed of service, we have a restricted distribution policy, operating mainly via our specialist intermediary partners.”
These “specialist intermediary partners” represent the main hurdle for mortgage brokers, as they gain access to the platforms themselves.
The broker market is dominated by a clutch of networks who can afford to hire master brokers to get the best deal for their members. This leaves the smaller ‘directly authorised’ (DA) firms priced out of the market.
Anthony Thornhill, a mortgage broker with Canter Holland, says that as a directly authorised firm, he does not do many deals with P2P platforms. However, he added that he would be willing to consider P2P lending if it were easier to deal with them directly, and not only via specialist intermediary partners.
“It would be more cost effective for us to deal directly with the lenders,” he says. “If the lenders were to allow more brokers to access them directly then we would be more likely to use them. However, some of them don’t want the hassle of having thousands of brokers calling into them – they want the handiness of a master broker.”
This may represent a missed opportunity for P2P lenders. Directly authorised firms have much more autonomy when it comes to working with new types of lenders, and they are more likely to go out of their way to accommodate specialist clients. They can also work more quickly and offer lower fees than their networked counterparts – two features they have in common with P2P platforms.
An upcoming ‘DA Alliance’ seeks to bring together more than 100 of these directly authorised firms to help them to access better deals from lenders, without having to join networks.
Martin Stewart, director of brokerage firm London Money and founder of the DA Alliance estimates that each one of the alliance’s 100 brokers could enable £40m of lending a year, making it a tantalising prospect for banks and alternative lenders alike.
“If I was a bank I’d be interested in that £4bn,” says Stewart. “But the first thing we are doing is getting momentum from the brokers.”
“Working with brokers is a much more cost effective way for us to attract borrowers,” agrees Cork. “Approximately 90 per cent of the professional buy-to-let mortgage market is broker-driven, so that’s where the lion’s share of business is for us.”
By contrast, IFAs still play a minimal role in the P2P sector. Although the rise of the IFISA has seen more and more IFAs (and their clients) consider P2P investments as part of their clients’ overall portfolio, the overall response among financial advisers has been muted to say the least.
Octopus Choice is the only P2P platform which is actively targeting the IFA market, building on its existing network of around 3,500 IFAs and holding regular seminars where they educate advisers on the benefits of P2P lending.
“Most P2P players haven’t quite cottoned on to the level of support that advisers require,” says Richard Wazacz, head of Octopus Choice. “At the end of the day, clients are trusting financial advisers with their hard-earned money. That means the adviser has to be comfortable that the product they’re recommending is suited to their client’s specific objectives – not to mention brought to market by a provider that can be trusted. It requires thorough and ongoing due diligence.”
P2P lending is still very much seen as an alternative investment, and not many advisers are willing to take any sort of risk with their client’s money unless they are completely confident in the product.
“Feedback from IFAs so far has been mixed,” admits Cork. “Some have not yet familiarised themselves with the market, whilst other more innovative advisers have really got to grips with it and can see the benefits certain products can bring for their clients.”
Indeed, the majority of the IFAs who were contacted for this article told Peer2Peer Finance News that they would not consider investing client money in the sector, largely because they view it as a new and unproven entity with an unquantifiable risk factor. This means that it is up to the platforms themselves to educate advisers on the huge potential for inflation-busting returns, while reassuring them on the risk.
“There’s a lot of caution and circumspection among IFAs regarding the mainstream P2P sector,” says Wazacz. “Track record is hugely important. The simple fact is that most P2P providers are unknown to financial advisers. They have little, if any, experience of engaging with intermediaries and, consequently, have little idea as to how they work, or the tools and resources they require.
“Across the UK, financial advisers collectively manage billions of pounds, while mortgage brokers continue to be the crucial link between borrowers seeking finance and the lenders eager to provide it,” adds Wazacz. “Neither camp is going anywhere – and nor should they. We’ve staked our name on helping financial intermediaries fulfil what’s arguably one of the toughest and most important jobs going: helping their clients manage their money.”
Of course, not every P2P lender has the resources, or the inclination, to woo intermediaries as Octopus is doing. Both brokers and IFAs are going to need to see hard evidence of the benefits of P2P, and even then they will still need time to observe the track record of each individual platform. While the IFISA has helped to draw some positive attention to the P2P sector, there is clearly still a long way to go before P2P platforms can attract the attention of the millions of new lenders and borrowers who rely on the advice of their brokers and advisers.
Despite this, Cork says that he “absolutely” sees both brokers and IFAs playing a larger role in the future of P2P.
“On the borrower side, brokers will continue to be our main acquisition channel for the foreseeable future,” he says. “And on the investor side, IFAs are now unable to offer their clients an honest whole-market view without including P2P investments.”
“The opportunity is massive,” agrees Wazacz. “I strongly believe that more and more advisers will look to P2P as a helpful addition to their investment armoury: a solid diversifier that can play a powerful role as part of a balanced portfolio.”
Five reasons why brokers and advisers are unwilling to work with P2P lenders
Peer2Peer Finance News spoke to more than 20 mortgage brokers and financial advisers who said they would not currently consider P2P lenders. These were the most common reasons:
- Lack of track record
The fact that P2P lending is still relatively new was enough to keep some brokers and IFAs at bay. They are concerned that P2P lenders have not yet weathered a downturn, and want to see proof of their staying power before recommending them to clients.
- Concerns over the risk factor
Both brokers and IFAs were concerned about the risk associated with P2P lending, particularly in the wake of the retail distribution review and other regulations.
“I think its potentially too speculative and I’m too proud of my professional indemnity insurance to go with that kind of thing,” said Richard Davidson of Crofton Financial Planning. “I tend to stick with the more mainstream investments.”
- Low volumes
A number of brokers complained that the relatively low volumes of property loans coming via P2P lenders meant that they felt it was not worth their while conducting the relevant due diligence required to work with them.
They pointed out that P2P platforms were competing with large, established banks who are currently offering very competitive rates on their property loans, although some added that P2P had the edge when it came to commercial property lending.
- Lack of client demand
Despite the ongoing popularity of the IFISA, the vast majority of IFAs told Peer2Peer Finance News that none of their clients were asking about P2P investments. This may be down to the fact that most of the largest, best-known P2P platforms are still awaiting approval to offer the tax-free wrapper.
- Poor visibility
Many brokers and IFAs simply said that they were not familiar with P2P lending, but expressed an interest in getting to know the sector a little bit better.
“We haven’t had a huge amount of experience with P2P lenders, but if there was more publicity out there about them we would potentially use them more,” said Anthony Thornhill of Canter Holland.