SECURITISATION will play a key role in the growth of marketplace – or peer-to-peer – lending in the UK and Europe, a credit agency has predicted.
In a report titled ‘Marketplace Lending – A Growing and Dynamic Global Market’, DBRS said that “growth rates remain very high” in the UK and Europe and predicted that securitisation could help fuel this growth.
“The securitisation market offers marketplace lending participants a valuable tool for lending platforms, or their institutional backers, to obtain funding,” the report said. “The use of securitisation allows marketplace lenders to increase the velocity of their committed capital in order to allow continued new lending and volume growth.”
However, DBRS urged caution among investors, stating that marketplace lenders who opt for securitisation will “have to balance opposing goals of retaining skin in the game with growing the business”.
“Skin in the game is one of the major analytical considerations that results in ratings for the top classes of securitisations in the lower-investment-grade categories,” said the report. “However, with increased data availability that shows good historical performance that is demonstrated over more business cycles, solid risk management, evidence of solid underwriting policies and structural alignment of interests, higher securitisation ratings may be achieved.”
The report also warned of a number of growth hurdles that marketplace lenders will face. A lack of performance data “presents a challenge for the market, investors and participants to correctly evaluate what each respective platform is offering in comparison with its competitors,” DBRS said.
Regulation was also highlighted as a potential headwind. DBRS said it was concerned about the Financial Conduct Authority’s proposals to limit access for many UK-based retail investors, due to concerns that the industry has not properly conveyed the risks involved.
“This is a contradiction to its previous stance on the sector, which was supportive of it as a source of competition to traditional finance and an efficient way of connecting investors and borrowers,” the report added.
Finally, the analysts warned that the rise of institutional investment could place retail investors at a disadvantage. Despite this, the report noted that lenders have shown a willingness to act nimbly and quickly to shield against the risk of bad credit.
“There is potential for negative selection for retail investors, demand for higher yields and possible incentivising platforms into riskier credit,” said the report.
“To date, there has not been any noticeable deterioration in lending standards. Instead, increased scale allows many of the largest marketplace lending platforms to actively refine and strengthen their underwriting standards to be more competitive with better quality borrowers.”
Read more: P2P securitisation boom still on the cards