Going mainstream: The Arrival of P2P Lending

The concept of online peer-to-peer lending platforms has caught the attention of SMSFs as the newest way to boost investment return and retirement income. As more operators emerge in Australia, Krystine Lumanta discovers what it entails and what trustees need to watch out for.

Peer-to-peer (P2P) lending markets overseas have already achieved some significant momentum. China’s P2P market alone topped $214 billion at the end of 2015. A recent survey also found the activity has become the country’s third most popular investment vehicle after bank deposits and stocks.

Further, loans originated across P2P lending platforms in the United States and United Kingdomexceeded $25 billion last year.

While Australia is still in its infancy in relation to this form of lending, the number of P2P operators popping up here should be regarded as an indication of what’s to come from this emerging asset class. For SMSF trustees, the arrival of P2P lending means they can lend money from their fund to borrowers, usually for amounts between $5000 to $35,000, to fund such things as mortgages, car loans or small business loans.

As a result, lenders can gain anywhere from between 8 per cent to 10 per cent return, which far outweighs the current low yields of term deposits.

Amid the low interest rate environment, continuing market volatility and the growing interest in alternative investment ideas from trustees, P2P lending already stands out as a viable option.

“We hear about SMSFs investing in start-ups now and P2P lending is a similar scenario in terms of the community investment concept,” Miller Super Solutions founder Tim Miller tells selfmanagedsuper. “It has a place particularly with younger trustees as they enter the market – that’s the world they live in, so that’s what they’re going to be more interested in.”

The state of play has remained unchanged with the big four banks controlling more than 85 per cent of all lending in the country, so it was only a matter of time before disruptors arrived. NowInfinity principal Grant Abbott believes the P2P concept will take off with SMSFs, based on the huge capacity for lending alone.

“Firstly, look at the amount of loans that are made in Australia to investors, then on the other side, there’s $600 billion sitting in SMSFs, which keeps on growing by $40 billion to $50 billion each year,” Abbott says.

“Trustees need to find a home for that money somewhere because there’s not a huge amount of investment opportunities for SMSFs, yet people need a return. The stats show the money isn’t going to offshore investments but actually stays within Australia, which means you have to look for new domestic asset classes.”

He says trustees that are proactive with their investments are already moving in.

“And as the market gets bigger we are going to see quite a lot of capacity that will be taken up by the SMSF market and it will be on the other side as well – SMSFs need limited recourse borrowing arrangements (LRBA),” he reveals.

“P2P gives them another opportunity to get it cheaper; they’re not going to have to pay a bank $3000 in legal fees, so it will be a better process for people under LRBAs.”

How it works

According to investment bank Morgan Stanley, the value of loans made through P2P lending platforms in Australia is forecast to reach $22 billion by 2020.

LendEx chief executive David Ruddiman says there’s been a massive surge in SMSF accounts being opened on licensed P2P lending platforms over the past 12 months.

However, this in turn has raised eyebrows around how P2P lenders are regulated.

“We believe that any online lending platform that brings together investors, or lenders, and borrowers via a single marketplace for a common enterprise is essentially operating a managed investment scheme (MIS) under the Corporations Act,” Ruddiman says.

“And because an interest in a MIS constitutes a financial product, marketplace or P2P lenders will generally be dealing in a financial product in a manner that requires an Australian financial services licence (AFSL).

“If they offer credit to consumers, they will also require an Australian credit licence (ACL).”

In addition to the licensing requirements, trustees must check that the operator of the P2P lending platform has structured its business to provide lenders with bankruptcy protection, that is, the operator’s business should be structured so that the platform and MIS are bankruptcy remote, he explains.

He adds: “They should have custodian arrangements in place to hold and maintain legal title to the investors’ cash holdings and any loan interests on behalf of lenders.”

Miller urges trustees to also ensure the fund’s trust deed and investment strategy specifically permit P2P lending, as it was currently in the realms of non-standard investments, and to exercise due diligence when it comes to the reputation of the lender.

UK-based lender RateSetter opened up to Australian customers in November 2014 and had surpassed $10 million in loans by last September.

More than 25 per cent of RateSetter’s loans are sourced from SMSFs and it has recently had its first adviser place SMSF funds into its platform, after being added to an approved product list.

High engagement levels are evident among its SMSF lenders, RateSetter chief executive Daniel Foggo reveals.

“We’ve got some early adopters and once they try it, they like it, so word-of-mouth tends to go from there,” he says.

“We don’t set our rates, it’s based on the supply and demand of money from our lenders and borrowers, so what we’ve found is that our SMSF investors, more than any of our investors, are quite engaged. They quite like that control and are looking for the best long-term return.

“Every borrower that takes out a loan with RateSetter pays money into our Provision Fund, which is held by Perpetual as a separate trustee. That money is held exclusively to compensate any investors from any late payment or default.”

Related-party rules

With new investment opportunities comes new risk, but especially for trustees acting as P2P lenders due to the strict related-party and in-house asset rules.

“From a lending point of view, the capacity for SMSFs to lend money has always been there, but it has always been riddled with the related-party issue,” Miller says.

“As soon as you say ‘SMSFs and loans’ in the same sentence, people get a little bit frantic.”

However, SMSF Association technical and policy senior manager Jordan George says when it comes to compliance, it would be difficult to stretch these boundaries because of the probability of landing in a scenario where a trustee loans money, via the platform, to a borrower who turns out to be an individual related to the fund.

“If you were trying to lend to a related-party through a P2P lending structure, you’d be doing it on purpose, you’d know you’d be doing it on purpose and it’d be very likely that you’d know you were breaching the rules,” George explains.

He says checking that the fund’s auditor has an understanding of P2P lending is a prudent step.

“If you were concerned with the arrangement possibly breaching any ATO rules, it’s always a good step to speak with your adviser,” he says.

“Check with your fund’s auditor that they have that understanding of what would cause an ATO breach or auditor contravention report.”

Adviser competency

With P2P lending fast becoming a popular form of financing in Australia, considerations around adviser qualifications and specific training for this type of investment have already come into question.

“Would it bring on an education requirement and will we see RG 146 providers offering other sorts of tiers to complete?” Miller poses.

“Because it’s clearly not a listed security, it’s not a term deposit or bank account, but I suspect there is going to be some licensing requirement for it and that could create a few hurdles for the industry.”

He adds the adviser piece will be another area to observe in terms of how dealer groups will respond to the demand for P2P opportunities and if their advisers will be permitted to recommend P2P lending to clients.

“Dealer groups dictate what their advisers can and can’t do and some of them impose fairly strict restrictions on their advisers,” he says.

Watch this space

The majority of the industry supports P2P lending and predicts it will make a considerable impact on SMSFs.

“Australia is still immature in a lot of these developments and maybe that’s to do with our population,” Miller says.

“But you just need to have a look at things like crowdfunding where we are a little bit behind the overseas markets, because once there’s momentum you will see P2P lending going from hush-hush to a more mainstream investment.

“As an example of a future investment for SMSFs, I can see it taking a slice of the pie.”

Ruddiman expects 2016 to be a defining year for the P2P lending industry in Australia.

“Not only do we believe that the sector will become more widely recognised and accepted as a genuine alternative for access to credit than the banks, but we will also see the emergence of platform operators that provide access to multiple loan types and borrowers through a single marketplace,” he reveals.

“Furthermore, by subjecting budding P2P operators’ business models to the scrutiny of ASIC’s (Australian Securities and Investments Commission) AFSL and ACL licensing process, we will be able to ensure that our emerging industry remains largely free of potentially unscrupulous operators.

“And it will, as a minimum, be able to ensure that there are base-level safeguards for lenders and borrowers utilising the services of these alternative online lending platforms.”

P2P in a nutshell

  • P2P lending is the practice of lending money to unrelated individuals or ‘peers’, but cuts out the middleman, usually a financial institution such as a bank, by using an online platform.
  • P2P operators in Australia must be registered with ASIC and hold an Australian financial services licence and an Australian credit licence.
  • P2P lending typically offers borrowers a lower interest rate than banks and an attractive return for lenders.
  • Examples of P2P lenders in Australia include RateSetter, Society One, ThinCats Australia, DirectMoney, MoneyPlace, OnDeck and Marketlend.
  • LendEx, in partnership with NowInfinity, will offer SMSF limited recourse borrowing arrangement loans, small business loans and consumer loans when it launches at the 2016 SMSF Association’s National Conference.

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