A series of emergency government-backed loan schemes have upended the P2P sector, for better or for worse. Michael Lloyd investigates…
For years, peer-to-peer lending platforms, industry bodies, and Peer2Peer Finance News have been lobbying the UK government to ‘back our industry’.
What we wanted was more recognition of the role that P2P can play in supporting British businesses and small- and medium-sized housebuilders, while offering inflation-beating returns to retail investors.
But almost a year on from the introduction of the government’s emergency loan schemes, there is a sense that we should have been more careful what we wished for.
By 13 December 2020, £69.13bn had been handed out via government-backed loan schemes, as part of an unprecedented push to save small- and medium-sized enterprises (SMEs) during the Covid-19 pandemic. Theses included the coronavirus business interruption loan scheme (CBILS), the coronavirus large business interruption loan scheme (CLBILS) and the bounce back loan scheme (BBLS).
There has never been an SME lending roll-out on this level in the history of UK finance. The message from the government was clear – businesses need money and they need it quickly.
This is what P2P lenders were built for. Yet to date, just four P2P lending platforms – Funding Circle, Assetz Capital, LendingCrowd, and Folk2Folk – have been approved to offer CBILS, and just one platform – Funding Circle – has won approval to offer BBLS. Some industry stakeholders have said that this is simply not good enough.
David Bradley-Ward, chief executive of Ablrate, says that his platform did not gain accreditation for CBILS as it was unable to secure the institutional funding required by the government before the original 30 September deadline. The deadline was later extended to 30 November, and then to 31 March 2021.
“The British Business Bank (BBB) was very upfront with us and explained we couldn’t take part in CBILS because we weren’t able to get the institutional funds in place to lend under the scheme by its then-deadline of 30 September,” he says.
“But with the extensions it turns out we could’ve done it.”
The requirement to secure institutional funding lines has prevented many P2P lending platforms from taking part in the government lending schemes.
Property-backed P2P lending platform Proplend wanted to launch a CBILS Innovative Finance ISA whereby the crowd could fund emergency loans via the tax-wrapper, but this idea had to be scrapped when the government confirmed that only institutional funding was allowed for the scheme.
It is believed that retail investors were excluded from the scheme out of an abundance of caution – one year into the pandemic, the economic cost is still not clear, and it is understandable that the government would want to protect retail investors from facing a potential cliff-edge of defaults.
Stuart Law, chief executive of Assetz Capital, believes that the government opted to exclude retail investors from the schemes in order to avoid it becoming political football.
“There will always be arguments from people, but when you’re trying to save the economy the last thing you need is reputational risk from people who have a voice and can get too close to the government,” he says.
“Similar to Brexit, the government knows half would support retail involvement and the other half would cause a headache for politicians. Institutions are not the type to complain unlike people.”
But finding suitable institutional investors can prove difficult.
Although Folk2Folk was accredited to the CBILS scheme in July 2020, it has not yet been able to start lending due to the challenge of finding the right sort of institutional funding. Although the platform has continued its non-CBILS lending throughout the pandemic, and it has institutional backing for non-CBILS lending, it says that partnering with institutions for CBILS has proved more difficult.
“Any arrangement we enter into with an institution has to be on the right terms for them, us and our borrowers so it’s not as straightforward as with retail investors,” says a Folk2Folk spokesperson.
“Institutions have their own complex requirements which is why conversations are ongoing.
“Any conversation with an institution about CBILS would have evolved to talk about non- CBILS. It’s harder to agree terms when it’s CBILS.”
The institutional-only bias in the government lending schemes has already changed the P2P marketplace. Funding Circle and LendingCrowd were two of the most popular retail-focused P2P platforms prior to CBILS. But after they were approved for the scheme, both platforms paused retail lending.
Meanwhile, alternative lenders in the unsecured SME space have been unable to compete with incredibly cheap bounce back loans being offered to businesses.
After the schemes distorted the cost of credit for SMEs, Rebuildingsociety adapted to its new normal by onboarding more appointed representatives last year. More recently, Crowd2Fund has blamed its reduced deal flow on this market distortion.
Despite these negative effects on non-accredited lenders, most lenders understand that the schemes were essential for the economy, and any market distortion is a temporary unintended consequence that will end when the schemes close for applications.
“The schemes were 100 per cent essential, making sure business lending carried on at required levels, rather than an immense collapse of funding that would have decimated the UK economy,” says Law.
“Regardless of some difficulties, they were incredibly effective, well-designed in the short time available and had the effect of continuing finance to the UK SME economy which would have dried up and vanished without the government support.”
Adam Tavener, chairman of Alternative Business Funding, agrees with Law that urgent, government-backed SME funding was necessary. However, he warns that the rapid deployment of these funds may have unintended consequences for CBILS-approved lenders.
“There will be huge number of defaults and some individuals have abused it with no intention of paying it back,” Tavener says. “But they needed to get the money out of the door.”
Business processing and software provider Target Group has predicted that up to 60 per cent of bounce back loans will never be repaid. Since these loans are 100 per cent guaranteed by the UK government, this means that taxpayers could be left with a £29.5bn bill from bad debts caused by BBLS defaults.
CBILS loans only come with an 80 per cent government guarantee, meaning that CBILS providers will have to shoulder the responsibility for the remaining 20 per cent of any defaulted CBILS loans.
Funding Circle has provided approximately 25 per cent of the CBILS market. By mid-December 2020, £19.64bn had been distributed via the CBILS scheme. 25 per cent of that figure is £4.91bn. If 10 per cent of these loans default, Funding Circle would be left with a £98.2m bill.
In its latest trading update, the platform said as of 15 November it had originated £1.35bn in CBILS loans and approved £1.85bn in loans under the scheme.
“I have huge concerns about the high levels of default being predicted,” says Brian Bartaby, founder and chief executive of Proplend.
“What this means is that once the 12-month interest free period is over, lenders and platforms who have facilitated these loans will need to allocate a huge amount of time and resources in chasing bad debts.”
Several platforms – including Funding Circle – have expanded their collections team in recent months, and there have been reports of government officials contacting private debt collection companies to see if they could take on loans to seek repayment, in return for a fee.
Historically, the average default rate across the entire P2P sector has remained fairly consistent at around two per cent. The P2P sector has worn its low default rate as a badge of honour, but there is a fear that a series of CBILS and BBLS defaults could artificially push this sector’s average default rate up, compounding the trust issues already experienced by a sector which is frequently mis-labelled as ‘high risk’.
And then there are the businesses which have been left out of the government’s lending schemes. The approval rate for CBILS has continually been around 50 per cent, which suggests that a large proportion of companies are missing out on funds that they desperately need.
These same firms may turn to alternative lenders for funding, which may encourage some platforms to relax their credit requirements in order to maintain a healthy deal flow.
In less than one year, CBILS, CLBILS, and BBLS have completely changed the P2P landscape, both for borrowers and for lenders. There are now fewer options for retail investors to access P2P loans, while borrowers are less likely to consider P2P platforms as their first port of call when cheaper, easier government-backed loans are also available.
Instead, there is a risk that P2P lending platforms could become the lenders of last resort – competing with the full might of the UK government for access to good quality SME loans.
Assetz Capital’s Law has praised the BBB – which oversaw the schemes – and the Treasury, for their quick response to the SME lending crisis, and says that the schemes have been successful in encouraging SME lending during the crisis.
And the BBB seems to have been equally impressed with the alternative lending community’s ability to rise to this challenge and help UK businesses.
“Marketplace lenders, including P2P platforms, remain an important part of the finance landscape for smaller businesses, both within the emergency schemes and in the market more generally, offering greater choice and often streamlined application processes,” says a BBB spokesperson.
Only time will tell how effective the government lending schemes have been at supporting the UK economy and saving SMEs from failure. In the meantime, every P2P lending platform deserves credit for reacting quickly to a rapidly changing economic environment.
Funding Circle and LendingCrowd have both pledged to reopen to retail investors as soon as they are able to, and other platforms have expressed an interest in taking part in any post-CBILS funding scheme.
When the pandemic is over and the costs have been tallied, there is every reason to believe that P2P could emerge stronger than ever before, with a queue of eligible institutional investors and a track record of government co-lending.
Until then, P2P lending platforms will just have to keep doing what they do best – providing life-saving loans to SMEs, funded by savvy, yield-seeking investors.