Has peer-to-peer hit problems?

Zopa closed to new customers as it struggles to match lender demand

Zopa is the UK’s oldest P2P lender and is one of the only companies to have been authorised by the Financial Conduct Authority (FCA) to provide an Innovative Finance Isa (Ifisa). But it has repeatedly closed to new money since December 2016 after finding itself unable to match soaring lender demand with borrowers to loan to. In December Zopa wrote to customers telling them that it was suffering a seasonally low period for borrower requests. 

And in March 2017 Zopa shut its doors completely to new customers and put in place a waiting list that has since swelled to 15,000 customers. Chief product officer Andrew Lawson says: "The constraining factor for us has been sourcing high-quality, low-risk borrowers." He says the platform is also experiencing higher demand from lenders as a result of its Ifisa launch, which it wants to satisfy before opening up again to new customers.

According to Intelligent Partnership, a far greater number of consumers apply to platforms than are accepted for loans, showing the issue is with creditworthiness not demand. According to its data, more than 213,000 consumers became borrowers through a platform in 2015 but more than 1.3m applied.

But Mr Lawson says that fighting over borrowers is getting more intense. “The borrowers we are looking for can get loans from high-street banks so we have to offer either better value or a better experience than them, and it is a fiercely competitive market."

Zopa customers unable to sell their loans

Existing customers have experienced problems selling on their loans too. Zopa differs from many P2P platforms by enabling investors to sell their loans to other customers (for a 1 per cent fee) instead of waiting out the full term.

However, in August 2017 investors were forced to wait up to 24 days to sell on their loans, rather than the usual 24-hour time frame. Mr Lawson says the delays were due to a surge in demand connected to the launch of its If Isa in June 2017, which overloaded the website. Zopa is offering all existing customers the chance to sell their existing loans, re-buy them within the Isa wrapper and receive back the 1 per cent sale fee customers usually pay on secondary loan deals. 

But the website's processes failed to cope with the higher demand, resulting in delays, and those customers are still waiting for rebates on their loans. Mr Lawson says he expects the rebate period to be completed before the end of the year. Zopa is now load testing its site before refunding existing customers who wanted to sell their holdings and re-buy them in an Ifisa and says it expects to start repaying fees as promised before the end of the year. After that point, Zopa hopes to re-open to new customers.

He says: "The loan sale delay was due to a queue in our platform process and nothing at all to do with supply and demand for sales on the secondary market. There is plenty of demand in the secondary market for customers wanting to buy the loans."

Zopa says it hopes to open up its waiting list to new customers after making sure that all customers wishing to invest in its Ifisa have been able to do so. But more than 80 per cent of existing customers having expressed interest in opening a Zopa Ifisa and existing customers continue to add more money to its platform, raising questions about whether there will be room for new money to enter.

Fellow P2P company Ratesetter says there is no issue with secondary market liquidity. It has facilitated loans of £300m through its secondary market out of a total £2.1bn in loans.

There is no guarantee, however, that you will be able to sell loans on the secondary market and in that case P2P platforms will not step in. Both Ratesetter and Zopa say they will not buy investors' loans in the event there are no buyers, despite being the facilitators of that secondary market. Mr Lawson says: "It would not be our default option to provide that backstop and we've never made that commitment. We operate a secondary market, but your ability to sell is always dependent on demand."

P2P providers say expect more defaults  

P2P platforms have also been warning investors about potentially higher defaults in the coming year. Platforms have provision funds put in place to pay out when investors default, but Zopa is retiring its provision fund this year. And earlier this year RateSetter intervened in three companies it facilitated loans with in order to protect its provision fund from a major hit.

Zopa wrote to investors two weeks ago to warn them to expect lower yields as a result of worsening credit quality among UK consumers.  It says it is "not expecting investors to lose money" as a result of rising defaults this year, but says they could expect to take home lower rates of return and that investors in its Zopa Plus product (its highest risk and highest return offering) could expect to earn around 0.7 per cent less in yield than originally forecast. The expected return from Plus loans originated from 2016 up to August have fallen from 6.3 per cent to 5.6 per cent.

The company has been reducing the number of loans it facilitates with higher-risk borrowers as well as tightening the underwriting on its loans over the past year in order to weed out borrowers more likely to default. That has reduced the rate of return on its loans and new Plus investments are targeting a lower return of 4.5 per cent, due to the the proportion of higher-risk, higher-yield loans has reduced from 30 per cent to 10-15 per cent. Mr Lawson says: "We’ve been concerned about the outlook on credit risk for the past 12-18 months. We’ve kept an eye on things such as household indebtedness and level of debt versus income and those are the kinds of indicators that have been making us nervous."

Currently, customers’ loans are protected by its Safeguard fund, which customers pay into in order to offset bad debt against interest on their loans. But the fund does not contain enough at current levels to protect investors against expected defaults. It stands at £12,568,385, according to Zopa, representing coverage of 0.89 times expected defaults. Future coverage when regular borrower payments are added is higher, at 1.05 times.

But from December this year no new loans will be protected by that fund, as it is being wound down. The company has overhauled its product line and replaced its old products – Zopa Access and Zopa Classic – with an Ifisa and Zopa Core and Zopa Plus, which are not covered by Safeguard and yield a higher rate of return. Zopa Core offers a rate of 3.7 per cent and Zopa Plus offers a rate of 4.5 per cent. It says those higher rates should compensate investors for the higher risk taken, but also claims that HMRC’s new tax guidance, which allows investors to offset P2P loan losses against tax, removes the need for the fund. Any customers with Access and Classic loans will continue to be protected by Safeguard either until it is depleted or until the last loans have matured, in 2022.

Earlier in the year Ratesetter also hit problems with bad loans and intervened to pay back loans directly in order to protect its customers – and the safeguard fund – from losses. Currently Ratesetter’s provision fund contains around £20.5m according to Mr Behrens, enough to cover expected losses 1.2 times. But that fund could have been severely dented earlier this year if Ratesetter had not intervened directly in several bad loans.

One of those concerned a £36m loan made by Ratesetter to motor finance company Vehicle Trading Group Limited (VTG), which fell into administration after taking on too much debt. Ratesetter acquired those loans earlier this year and incorporated that business into its own in order to run down the debts.

Those loans continue to perform. But in 2015 VTG had also used Ratesetter’s cash to lend £12m to an advertising company called Adpod, which got into financial difficulty. "It turned out the ad loan was performing far worse than anyone could possibly have imaged," says Peter Behrens, co-founder of Ratesetter. "We would never have made a direct loan to a company like that." Instead of letting the bad loan hit the provision fund, Ratesetter took over Adpod, restructured the business and is standing behind Adpod’s monthly repayments until the current £8m of outstanding loans are repaid.

"AdPod was a big liability that our customers should never have been exposed to," says Mr Behrens. "The fault was down to a combination of VTG’s management and our interactions with them."

The company also had an equity stake in George Banco, a consumer credit company that was acquired. Those loans have been repaid early to customers.

He says the company’s decision to stop lending to other lending businesses would prevent the same situation from happening again. The Financial Conduct Authority (FCA) wrote to lenders in February 2017 to tell them to stop lending to other lenders, in the latest sign that the watchdog is growing concerned with elements of the market.

Mr Behrens says: "We no longer lend to other lending businesses as a starting place and I think the credit infrastructure and governance infrastructure in this business and the risk, quality of governance and everything else is a completely different category. So there is just no way that anything like that would be possible ever again. It has been a salutary experience."

RateSetter expects a default rate of 2.5 per cent for its 2017 loan book and says ideally coverage would be higher, at about 1.5 times – and the company is currently building that up.