Retail investors have taken a back seat over the past year, but as the vaccine roll-out gains pace, Michael Lloyd asks when retail investment will take centre stage again…
“How we attract retail capital is our KFC secret recipe,” says Mike Bristow, chief executive of peer-to-peer lending platform CrowdProperty.
“We have many different ways. I’d love to tell you, but I can’t.”
Acquiring retail investors has always been a costly challenge for P2P lending platforms, and over the last year it has become even more difficult, thanks to tighter regulations, marketing restrictions, and of course, the pandemic.
When the Covid-19 crisis struck, investors panicked and started withdrawing their funds – a trend seen across the board in different asset classes.
Innovative Finance ISA provider Orca closed its investment aggregator model to retail customers in February; Growth Street initiated a liquidity event in March before beginning its wind-down in July; and in June, Propifi suspended its P2P platform and closed its IFISA.
Funding Circle and LendingCrowd both paused retail lending in order to focus on offering loans under the coronavirus business interruption loan scheme (CBILS).
Then in September, RateSetter – once the largest IFISA provider in the UK – shut its doors to new retail investors following its acquisition by Metro Bank. Although existing lenders can continue investing in P2P loans on the platform, it has stopped accepting any new IFISA clients.
“Retail-focused P2P lending, like the stock market and most other asset classes except savings, has seen a big retreat, as those who want to sell their investments outweigh those who want to buy,” says Neil Faulkner, managing director of P2P analysis firm 4th Way.
“Some platforms have also temporarily stopped new lending and many reduced new loan approvals, which also lowers the number of retail investors who have been able to lend.”
Before the Covid crisis, retail investor numbers in the sector were growing, but there were other obstacles to deal with.
New rules from the Financial Conduct Authority (FCA), introduced in December 2019, stated that P2P lending platforms could only communicate ‘direct-offer financial promotions’ to high-net-worth or sophisticated investors, those receiving regulated financial advice or restricted investors.
P2P platforms also had to enforce appropriateness tests before onboarding new investors to quiz them on their knowledge, which left some platforms worrying about a drop in the number of new investors joining.
As it turns out, a number of platforms have told Peer2Peer Finance News that the majority of new retail investors do pass their tests, reinforcing the argument that P2P’s retail investors are more savvy and informed than the regulator may realise.
Faulkner cites 4th Way data which suggests that although platforms continued to grow investor numbers after the new regulation was implemented in December 2019, it may have slowed in some cases.
“This means platforms are likely have higher costs to attract investors,” he says.
“Some platforms decided to close or to change their business models as a result, but the industry as a whole will be able to swallow the costs.”
With retail investment taking a hit, nearly a dozen platforms have told Peer2Peer Finance News that they are still committed to the retail market.
As the economy recovers, it is expected that investors will gain more confidence in investing again. And this, coupled with stock market volatility and record low interest rates, makes the P2P sector even more attractive to yield-seeking investors.
Both Funding Circle and LendingCrowd have promised to re-open to retail lenders once conditions start to normalise, although the platforms have admitted that this may take some time.
There has also been some anecdotal evidence that investors in these platforms – along with Growth Street, Propifi and RateSetter – may not have completely left the sector but have instead moved their money to different platforms. Assetz Capital, CrowdProperty and Ablrate have all reported transfer-ins from RateSetter and others.
This could lead to more competition in the sector, with P2P firms fighting for investors moving from platforms now closed to retail. And as every salesperson knows, it is cheaper and easier to keep an existing customer than to attract a new one.
Atuksha Poonwassie, managing director of Simple Crowdfunding, predicts that retail investment in P2P will pick up to pre-pandemic levels this year and continue growing.
“I think there is a place for retail investors in P2P,” she says.
“I think P2P lending will do very well for a number of reasons – to provide fixed returns is beneficial, and if we move into negative interest rates then people will want to look at options to make their money work for them and that will also depend on what market conditions are. You would expect the market to start bouncing back once Covid stabilises.”
Similarly, Stuart Law, chief executive of Assetz Capital, forecasts retail investment to return to pre-pandemic levels in 2021 and for his platform to start lending at decent volumes in its auto-invest accounts in the second quarter.
“The tide will turn,” he says.
“There are not many places you can put your money and earn a decent return with a decent level of security over it. We definitely believe retail P2P will be back in force soon.”
While there is still plenty of scope for growth in the retail market, industry onlookers believe that the success of retail-focused P2P will ultimately be dictated by regulation – and the next big regulatory challenge is the FCA’s consumer investment proposals.
The City watchdog is currently analysing the feedback from its call for input on the consumer investments market, which will be used to shape its work for the next three years.
Within the call for input, the regulator proposed that investment products should be simplified, while higher-risk products should be labelled with traffic-light colour coding in an effort to better communicate risk.
Many platforms and industry stakeholders have raised concerns that this will deter retail investors from P2P.
“It would scare people off well-managed investment houses and could put off platforms too,” Law says.
“Without risk there is no return and very few people can live without a return. People will need to take risk and the FCA will cause a lot of poverty if it drives them away from making any sensible return.”
Poonwassie agrees and says that if the country moves into negative interest rates, with the cost of inflation, people will get poorer and will need other places to invest their money.
“If you then restrict retail investors from accessing investment opportunities in a regulated environment where they are exposed to risk, it reduces a huge avenue for them to learn about and access investments,” she says.
“I think the platforms do highlight risks for investors already.”
Poonwassie says that platforms have implemented risk warnings and appropriateness tests to weed out investors that do not understand P2P.
This is something that has been highlighted by the UK Crowdfunding Association (UKCFA), which took part in the call for input.
Bruce Davis, director of the UKCFA, is disappointed that the regulator did not mention any of the work the sector has conducted to protect retail investors.
He is also concerned that the FCA was not clear on what it meant by simple investment products and says that retail investors should not be pushed into the unregulated space.
“We’ve laid out the challenges here,” says Davis.
“We need a system that protects against vulnerable consumers but does not stop retail investment being something where people have a degree of choice and control over where their money goes and aren’t just being given what might be considered vanilla products which might meet some of their needs but pushes them to find investments out of the regulated space.”
However, others believe that the traffic light proposals would not deter retail investors from P2P, for example, those familiar with it, or that if it does, it would only be a positive and put off those who do not understand the sector and cannot afford losing their capital.
“It’s going down the lines of food packaging which makes it clear what you are consuming,” says Mike Bristow.
“If it stops people that shouldn’t be investing or makes people stop and think a little more, that’s fine.”
P2P platform JustUs has always worked on a colour-coded scale of low, medium and high risk, similar to how many other P2P lenders offer low, medium and high-risk products.
“Wider acceptance of that would make the product more easily understood,” says Lee Birkett, founder of JustUs.
“For me, it’s just a common-sense approach that wouldn’t deter investors, but may even encourage them.”
Whether it be due to regulation or the high cost of acquiring retail investors, the consensus is that more platforms will leave P2P in favour of institutional funding.
But that doesn’t mean that the days of the retail P2P investor are numbered. There are limitations for institutional-only funding models. Retail money is stickier, and offers the sort of granular diversity that institutions can’t always provide.
And Covid-19 is only a temporary opponent – as the crisis ends with the vaccine rollout, retail investment should bounce back as well.
Retail investors are still out there, searching for returns in a low-interest rate environment, and they are prepared to do their own due diligence and educate themselves about the value of alternative investment options.
The P2P sector was created to serve these people, and it will continue to serve them as long as the demand remains. There may be fewer retail-focused platforms than there were a year ago, but this is an indication of the resilience and flexibility of the P2P sector. This is a sector with a proven ability to create innovative, effective solutions to funding problems. That’s the not-so-secret recipe of retail P2P.