How transparent is the peer-to-peer lending sector – and what does transparency actually mean to the industry’s key players? Michael Lloyd investigates…
Last month, we were glued to our TVs as we watched Anti-Corruption Unit 12, better known as AC 12, spend all their time and resources hunting for the truth and catching crooked cops.
During the six seasons of the hit BBC Series Line of Duty, the concept of transparency was repeatedly tested, sparking many conversations about what transparency actually means – both in the fictional world of AC-12, and in real life.
Line of Duty concluded that while the fictional police force could be transparent, there is plenty of room for improvement. The peer-to-peer lending sector is no different in that the majority of platforms and investors believe the industry is doing its best to be as transparent as possible, while also occasionally falling short.
Recently, Peer2Peer Finance News conducted an exclusive survey of restricted, high-net worth and sophisticated P2P investors, and found that 70 per cent believe the sector is “slightly” transparent.
Almost one fifth (17.5 per cent) of respondents said they believe the sector is “very” transparent.
These are rather promising statistics for a relatively young sector which has just been hit by its first economic downturn.
“It’s at a reasonable place at the moment,” says David Turner, co-founder and director of Invest & Fund.
“Lenders have an ability to assess platforms to a reasonable degree now and you can see that with the amount of money lent through platforms.”
But improvement is clearly still needed, with 12.5 per cent of investors reporting they do not think the sector is transparent at all.
David Bradley-Ward, chief executive of Ablrate, believes that this is a particular problem for platforms with access accounts, which do not always tell investors where individual loans go, or what liquidity is available to lenders.
Peer2Peer Finance News’ survey included similar feedback, with some investors citing honest information about liquidity as a key indicator of transparency, while another respondent highlighted diversification and how many loans go to the same borrower.
“It’s a lot more transparent than some fund sectors but there’s always room for improvement,” says Bradley-Ward.
“I think in some P2P platforms you’re just investing in a diversified portfolio across a bunch of loans and you don’t know where each goes to and I think platforms need to be more transparent in what they mean by normal market conditions.”
While it appears some improvement is still needed, the majority of platforms believe the P2P sector has become more transparent over the past year, and this can partly be credited to the regulator.
In December 2019, the Financial Conduct Authority (FCA) introduced a raft of new P2P regulations, which included measures to boost transparency. All platforms are now required to publish detailed disclosures relating to how they undertake due diligence, how they characterise risk and price an agreement, what will happen in the event of the platform failing, and ongoing disclosures regarding individual agreements.
The rules also mandate for detailed publication of the expected and actual default rate of all P2P agreements the firm has facilitated by risk category, shown as an Outcomes Statement published annually. However, while these statistics must be reported to the FCA, there is no requirement for platforms to make this information public.
Atuksha Poonwassie, co-founder and managing director of P2P property lender Simple Crowdfunding, believes that data transparency in the sector has improved over the past year and that the sector is already in a new era of data transparency.
“Over the past year I believe platforms have started providing more information in terms of how they are performing,” she says.
“The new rules shine a light on it. Platforms were providing information, but the rules enforced it.”
However, Stuart Law, chief executive of Assetz Capital, disagrees and says he does not believe it has improved at all.
“Platforms are giving out the same information,” he says.
“And there are the complicated issues of the pandemic and trouble comparing data in 2020 to previous years so I’d say transparency in many ways has gotten worse.”
Despite making it more difficult to compare to historic data, the Covid-19 pandemic has amplified the need for greater data transparency.
“It’s very important to give people the information because there are so many moving parts,” Law adds. This is reflected in Peer2Peer Finance News’ survey which revealed that investors are especially interested in the risk management of P2P platforms.
It found that 82.5 per cent of investors see information on underwriting processes and risk assessment as an important indicator of transparency, while 77.5 per cent value insight into the management team and corporate governance.
Some investors prioritised information about the financial stability of a P2P company as a key indicator, while one respondent called for transparency about the runbook for P2P bankruptcy and loan default management and another wanted to see that the platform’s business plan and profitability milestones are being met.
Some platforms are already making these changes.
Bradley-Ward says that Ablrate will soon launch a repayment analysis section to show repayments that are made and how many are late, as well as new technology to allow lenders to draw down better levels of data.
“There will be more data-driven transparency where lenders can see where their money is going,” he says.
Meanwhile, other platforms, such as Simple Crowdfunding, believe that change is continuous.
“It’s finding the best way to be able to do that to provide more information,” says Poonwassie.
“It’s a continuous process, not just something you stop and start – you’re always looking for ways to improve information sharing and data transparency.”
Jatin Ondhia, chief executive of Shojin Property Partners, which is working on standardised metrics with European counterparts, says that standardised product definitions, risk metrics, performance reporting and due diligence framework is needed to improve data transparency in the sector.
“For the sector to grow, standardisation is vital – without this it will always remain fractionalised,” he says.
“Individual investors are the ones that pay for this – as they are unable to reap the benefits of being able to make the best investment choices and profit from true diversification.”
Ian Anderson, chief operating officer of ArchOver, agrees, saying it can only benefit the industry but will be difficult in practice.
“It can only benefit the industry, and in certain sectors (property lending is a good example) we think it could work,” he says.
“However, making everyone work from the same play book, sharing investors and combining secondary markets will be difficult to pull off – after all, these are the core elements of any lending business and partly defines their value – sharing these elements may be a step too far for many of them.”
Assetz Capital’s Law also agrees that more standardisation is needed in theory but believes that regulation around data transparency and reporting statistics should be simplified and a standardised default definition is needed from the regulator.
“That would help,” he says.
“You can’t compare one platform with another on many levels such as platform risk, lending risk and defaults. It’s missing lots of data and is not very clear at all.”
Neil Faulkner, managing director and head of research at 4thWay, believes that the FCA should enforce a minimum disclosure about people, processes and results on platforms’ websites.
“I think more platforms should voluntarily publish full loanbook data,” he says.
“I think that platforms should explain lending costs, liquidity and target lending rates more regularly and more clearly in non-legal language, above-and-beyond the legal disclaimers and risk pages that they are already required to do, which are too dry and too fleetingly observed for some investors to properly take in the full implications.”
This is backed up by 90 per cent of the investors from Peer2Peer Finance News’ survey who cited loanbook data, borrower rates, default rates and returns as key indicators of transparency that they look for in platforms.
However, Mike Bristow, chief executive of CrowdProperty, does not think more regulation is needed, although he believes platforms should provide more data to investors.
“Not enough information is displayed from some platforms,” he says.
“I think platforms need to start realising that showing data is a good thing and attracts lenders. People need to think more strategically rather than thinking it’s just about ticking regulatory boxes.”
Thinking strategically could be part of the answer as well as collaborating to execute new ideas.
At the P2P Investing Summit on 29 April, a virtual event hosted by Peer2Peer Finance News and AngelNews, one P2P lending industry stakeholder called for a borrower register to prevent people from using the same personal guarantee (PG) with multiple lenders.
P2P platforms are wholeheartedly behind the idea, but some recognise it will be difficult in practice and should possibly go even further to a portal where lenders only have to undergo ‘know your customer’ and anti-money laundering checks once in order to invest on multiple platforms.
“A simple PG register is a good idea, but it is only part of the solution,” says ArchOver’s Anderson.
“A register has to offer a lot more than ‘flat data’ such as a simple confirmation of an existing PG. A PG register will only be as successful as the number of lenders prepared to participate, and those participating need to be a wide range of players across all business lending sectors, not just P2P.”
We could well be heading into a new era of data transparency with platforms recognising change is needed and are thinking about how to bring this about.
Similar to the AC-12 police unit, P2P platforms are committed to improving their transparency, making it easier for investigative investors to spot the clues they publish in order to decide whether or not to invest in them.