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Octopus Choice Peer-to-Peer Platform Review

31 May 2016

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© SIPP Investment Platform Ltd

Overview 2

Platform Operator 6

Financials & Business Continuity Planning 10

Security, Borrower Assessment & Borrower Default 12

Regulatory Compliance & Internal Controls 15

Liquidity 11

Disclaimer

This review has been prepared solely for use by subscribers to in:review (a trading style of SIPP Investment Platform Ltd) to assist in their review process on a proposed investment and assess its capability of being held within a member-directed pension arrangement.

Whilst the opinions set out in the review are given in good faith, they are only our opinions and views and should not be regarded as advice. Subscribers should therefore draw their own conclusions from the content of this review. The final decision on whether to accept or approve a specific investment rests at all times with subscribers.

This review is not aimed at individual investors and should not be discussed with, shown to or used by them. This review does not comment on the suitability of the investment for meeting the individual investor’s investment objectives. The risks stated in the review are not comprehensive and should not be relied on as such.

Accordingly, we disclaim all liability and responsibility arising out of your reliance on this review. We expressly exclude any liability for direct or consequential loss suffered by anyone as a result of relying on the content of this review, to the fullest extent permitted by law. Investments can fall in value as well as rise. Past performance is no guide to future performance.

Parties Involved 17

Summary 4

Contents

Download Review - Octopus Choice Prepared for Stuart Sheppard of on 08 Jul 2016

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Overview

Platform name: Octopus Choice (the “Platform”)

Overview: Octopus Choice is a new peer-to-peer lending platform launched by Octopus Co-Lend Ltd (the “Operator” and “Octopus”) which is a part of the larger Octopus Capital Ltd group (“Octopus Group”). The Platform will offer investors an open ended investment account with a current target return of 5%-6% per annum. Octopus will lend investors’ funds to borrowers secured by a first ranking charge against residential property.

Octopus advises that it expects investors’ funds will be invested across approximately 40 different loans and it shall reasonably endeavour to ensure that no single loan shall represent more than 5% of an investor’s portfolio (unless less than £1,000 has been invested).

Borrowers will be sourced through Dragonfly Property Finance (“Dragonfly”). Dragonfly is the trading name of five Octopus Group companies including the Operator, and is an established short to medium term lender with a current residential property loan book of £234 million.

Investors will receive monthly income equivalent to the blended monthly return on the loan parts they are invested in, although income can be reinvested on request.

Octopus (via Octopus First Loss Ltd, an Octopus Group company) will co-invest 5% of each loan alongside investors, and it will be in a first-loss position. If a borrower were to default and the security were to prove insufficient to meet the outstanding principal and any accrued interest (which Octopus deems to be unlikely – see Security, Borrower Assessment & Borrower Default below) Octopus First Loss Ltd would forfeit its 5% loan and any accrued interest before investors were to make a capital loss.

Once Octopus receives full authorisation from the FCA it intends to apply for approval as an ISA Manager.

Key details: Platform launch date: 14 April 2016

Amount loaned to date: £8.64 million

Minimum investment: £10

Maximum investment: £2 million

Investment increment: £0.01

Minimum loan per borrower: £50,000

Maximum loan per borrower: £2 million

Minimum loan term: 1 month

Maximum loan term: 60 months

Payments: Investors can either receive monthly interest in arrears or reinvest all interest payments over £10. In either scenario the principal remains invested in a portfolio of loans until the investor requests a withdrawal.

ISA available: Octopus will apply for approval as an ISA Manager as soon as full authorisation from the FCA is received (expected to be Q3 2016)

Currency: GBP (£)

Interest rates: Borrowers will pay fixed rates only.

Investors’ interest rates will depend on the individual loans they are invested in at any time

Current target return: 5%-6% per annum


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Investor criteria:

There are minimal restrictions on who can invest via the Platform; the Operator has advised that in the short term US investors and money transfers from non-UK credit institutions will be declined, and that AML and KYC checks are applied to each borrower and investor.

Investor reporting: Investors may access their account information through the Platform’s online portal or through the Octopus Choice App (which Octopus aims to launch over the summer). The information made available will include:

Platform terms and conditions

risk statement

amount of uninvested cash held

details of each loan invested into (including the amount invested and rate paid)

details of interest earned and interest paid on each loan

details of any loans in arrears and updates on the default process

Investors will also be able to request printed and email account statements

Fees & charges No fees are charged to investors.

Octopus charges borrowers up to 0.35% of the loan amount each month (i.e. up to 4.2% per annum). Octopus may also charge early repayment or loan extension fees to borrowers as appropriate.

Octopus’ monthly borrower fee is suspended on any given loan if interest and/or capital repayments have not been made, and will not recommence until all payments due to investors have been made.


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Highlights: The wider Octopus Group is a large retail fund management

company with over £6 billion of assets under management as of 31

March 2016 – giving the Operator a significant regulatory framework

and financial services track record to draw on

With a net profit of £36 million, net assets of £80 million and strong

year on year growth, Octopus Group’s last accounts for the year to

30 April 2015 demonstrate a robust financial model

Octopus will co-lend 5% of each loan alongside investors and will put

its own loan in a first-loss position

Each loan will be secured by a first charge over residential property

with a maximum loan to value ratio of 70%

Investors will be diversified across approximately 40 loans, mitigating

the risk associated with individual borrower defaults

Dragonfly will source the Platform’s loans, and its loan record is

substantial with a low default record

Octopus intends to use its own balance sheet to provide liquidity for

early investors seeking an exit

Considerations: This is a new launch that may not prove successful

The secondary market is relatively untested: early investors seeking

a complete withdrawal could potentially have to wait up to 60 months

for a full exit from all of their loan parts (although Octopus advises

that it may use its own balance sheet to purchase the loan parts of

investors seeking an exit)

Investors investing larger amounts (there is a cap of £2 million per

investor) may find that being diversified across only approximately 40

loans is too few

The underlying assets are limited to residential property - a

residential property crash could potentially lead to a capital loss for

investors

At up to 4.2% of each loan per annum, Octopus’ fees to borrowers

are quite high, which will reduce the net return investors can expect

their investment to achieve (although these fees have been factored

into the target return of 5%-6% per annum)

Summary: The Octopus Group has established itself as a major force in the alternative investments sector and currently has over £6 billion of assets under management. It is now branching out into peer-to-peer lending with Octopus Choice, which it is pitching as a happy medium between saving and investing.

Although termed Octopus Choice, investors‘ options are limited to only one open-ended account and the Operator will allocate investors’ funds on a discretionary basis into secured residential property loans. The minimum investment is £10 and the minimum loan part is also £10, so for an investment of only £400 Octopus will aim to allocate investors across 40 loans - and each loan will be secured with a first ranking charge over residential property with a loan to value ratio capped at 70%.

All residential property loans will be sourced, assessed and processed by Dragonfly. Octopus advises that Dragonfly has had only seven loans default since its launch in 2009 and these seven led to a write off of £1.1 million of fees and accrued interest and only £6,000 of capital. For a loan book comprising 2,228 redeemed loans totalling in excess of £1.27 billion, this is very good.

In addition to the security outlined above, Octopus will co-lend 5% of each loan alongside investors, and will invest in a first-loss position. This should help ensure that the calibre of loans financed by the Platform remains steady and provide an added layer of protection for investors should a borrower default.

Summary


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Summary continued: Nevertheless the Platform is wholly invested in residential property loans and so is vulnerable to a property crash. If this were to happen investors may find themselves making a capital loss.

A major stumbling block for newly launched peer-to-peer platforms is one of deal flow. Until a platform gains sufficient traction in the market it can struggle to attract sufficient investors and borrowers alike. An imbalance of either will often lead to investors’ funds sitting idle or borrowers waiting an inordinate amount of time to receive funds. Octopus’ model looks poised to sidestep both of these issues.

Octopus (via Octopus Administrative Services Financial Ltd, an Octopus Group company) will finance a number of Dragonfly’s loans and carve up each loan it finances into individual loan parts, upon investor demand. As and when investors subscribe to the Platform, it will assign an appropriately sized loan part to each investor. Through this process of legal assignment every investor enters into a single and separate credit agreement with the borrower in respect of each loan part. Investors therefore have an enforceable first charge which is administered by the Operator in its capacity as loan trustee. Ultimately this approach means that investors’ funds should be deployed with minimal delays but it requires a substantial capital outlay that other new platforms would struggle to compete with.

The biggest test for the Platform will be liquidity for investors seeking an exit, and with loan terms spanning up to 60 months (and an average loan term of nine months), investors seeking a full withdrawal of funds may have to wait that long until they are fully divested.

Octopus will endeavour to expedite this process as much as possible by selling an investor’s loan parts to incoming investors, and anticipates that once it has gained sufficient traction in the market this process will be same day. Octopus also advises that it may use its own balance sheet to facilitate liquidity for investors, and that this will be done in a transparent way with Octopus declaring how much it has used its own balance sheet to facilitate exits. However, this is not a guarantee of liquidity and so early investors may need to ensure that quick access to funds is not their priority, and hope that Octopus’ success in alternative investments can be repeated in alternative finance.


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Operator name: Octopus Co-Lend Ltd

Company number: 08913299

Incorporation date 26 February 2014

FCA status: Interim permissions granted with Interim Permissions reference number 665121.

Full authorisation was applied for in October 2015

Address 33 Holborn, London EC1N 2HT

Telephone 0800 294 6848

Experian credit assessment: Very low risk (100)

Website: www.octopuschoice.com

Lending history:

Octopus Choice is a new launch and only 20 loans have been funded through the Platform as of May 2016. However, Dragonfly will source all borrowers through the Platform and it has a significant track record in this area.

Octopus has provided a funding line to Dragonfly since its launch in 2009 and it acquired the company in 2013. To date, Dragonfly has lent in excess of £1.9 billion, and had £610 million of active loans at the end of 2015. Dragonfly’s current residential property loan book comprises £234 million in buy-to-let and bridging loans, and is summarised below:

Buy-to-let Bridging Total

Total loans (£m) £123.19m £110.71m £233.90m

No. of loans 280 175 455

LTV 61.56% 51.91% 56.99%

AER 9.31% 12.06% 10.61%

Average term (months) 32 12 23

Capital lost in last 5 years (£m) 0.00 0.004 0.00

By total amount lent, the majority of loans are for less than £500,000, however there is a significant number of bridging loans in excess of £4 million on its loan book.

0%

5%

10%

15%

20%

25%

30%

> £4m£3m -£4m

£2m -£3m

£1m -£2m

£0.5m -£1m

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Loan size (£m)

Size of loan for total residential loan book

Bridging loanbook

Buy-to-letloan book

The Platform Operator


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Lending history continued: Finally, the chart below shows the breakdown of Dragonfly’s loan book by region (focusing on the region where the property used as security is located).

As can be seen, the loan book by value is predominantly focused (77%) on London. As a percentage of the loan book by number of loans, 64% of residential property loans originated by Dragonfly are for properties located within the M25.

Ownership: Octopus Co-Lend Ltd is a 100% subsidiary of Octopus P2P Ltd, which is in turn a 100% subsidiary of Octopus Capital Ltd.

Octopus Capital is a privately held company with over 456 shareholdings per its latest annual return made up to 12 April 2016.

Staff: The Operator has 18 staff members which includes seven in the management team.

The Dragonfly team comprises a staff of 29, and 10 people work in the credit team which assesses all loans

South East 11%

South West 5%

East of England 4%

North West 1%

North East 0%

East Midlands 0%

West Midlands 1%

Yorkshire and the Humber

1%

London 77%

Structure Chart

Octopus Capital

Ltd

Octopus Group holding company

Octopus Administrative

Services Financial Ltd

The Principal Lender

Octopus P2P Ltd

Holding company

Octopus Co-Lend Ltd

The Operator and security trustee

(FCA regulated)

Octopus First Loss Ltd

Invests 5% of each loan on a first loss basis


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Position: Director

Appointment date: 03 December 2015

Description: Simon is also Chief Executive of the Octopus Group and one of its founders. He has overall responsibility for day-to-day decisions and for the strategic direction of the group.

Before founding the Octopus Group, Simon worked at Mercury Asset Management. He graduated with a first class MA in Modern Languages from St. Andrews University and is a Chartered Financial Analyst.

Previous directorships: According to Companies House records:

20 open directorships

23 closed directorships

4 retired directorships

Director 1 – Simon Rogerson

Position: Director

Appointment date: 25 September 2015

Description: Chris is also Chief Financial Officer for the Octopus Group and one of its founders, responsible for the group’s financial strategy and assessing opportunities to expand the company’s activities into new areas. Chris is also on the investment committee of several Octopus funds.

Before starting Octopus Group, Chris led one of the Global Equity sector research teams at Mercury Asset Management. Chris has a first class MA in Natural Sciences from Cambridge University and is a Chartered Financial Analyst.





Director 2 – Chris Hulatt

Management Chart for Octopus Co-Lend Ltd

Simon Rogerson

CEO – Octopus Capital

Richard Wazacz

CEO – Octopus Co-Lend

Marc Harris

Operations

Sam Handfield-

Jones

Finance

Jocelyn Tasker

Risk & Compliance

Morgan Sowden

Technology

Stuart Sheppard

Marketing

Chris Hulatt

CFO – Octopus Capital


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Position: Director


Description: Prior to joining Octopus Richard held a number of roles at Prudential, including that of Chief Operating Officer Continental Europe, a position which saw him establish Prudential’s greenfield life insurance business in Poland. He was previously Customer Services & Operations Director for all UK Private Banking and Wealth Management businesses at Lloyds Banking Group.

Richard has a first class MEng in Chemical Engineering from Cambridge University and a MBA from Columbia Business School.





Position: Director


Description: Marc was previously Chief Operating Officer of Dragonfly.

Marc joined Dragonfly from Fidelity Worldwide Investors, where he was a director. Prior to that he was Chief Operating Officer of Pyramis Global Advisors UK, Fidelity’s institutional asset management company.

Marc earned a Bachelor of Arts degree in Economics from The University of Manchester, and a MBA from Cranfield School of Management. He is also a Chartered Director.





Director 4 – Marc Harris

Director 3 – Richard Wazacz

Summary:

As a subsidiary of the Octopus Group, the Operator’s board comprises directors with significant experience in managing financial services firms. This includes two founders of Octopus Capital Ltd, Simon Rogerson and Chris Hulatt

A director of the Operator was previously the Chief Operating Officer of Dragonfly, the Platform’s source of deal flow

Dragonfly has been operating in credit finance since 2009 and has lent in excess of £1.9 billion with £610 million in active loans at the end of 2015

The Operator expects to receive full authorisation from the FCA in Q3 2016, at which point it will seek approval as an ISA Manager

The Platform Operator Summary


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Financials & Business Continuity Planning

Summary: Although the Operator and its parent are new companies, the ultimate holding company (Octopus Capital Ltd) shows very strong profits per its 2015 accounts and has net assets of £80 million

Octopus far exceeds its capital adequacy requirements

There is a comprehensive business continuity plan and sufficient key staff to mitigate any key person risk

Financials & Business Continuity Planning Summary

Introduction: This section identifies the financial health of the Operator and any plans it has in place to protect investors should it default. Without adequate provisions in place investors could be left to pursue loan repayments personally through the courts.

Capital adequacy: Octopus has advised that its current financial resources (as defined in IPRU(INV) 12.3.2R) are in excess of the regulatory requirements.

Accounts: As the Platform is a new launch the Operator has only filed dormant accounts (as of 28 February 2015) and its parent Octopus P2P Ltd’s first accounts are not yet due.

Octopus Capital Ltd filed group accounts for the year ended 30 April 2015 on 04 February 2016. In its 2015 financial year Octopus had a turnover of £119 million, and a net profit of £36 million. This was up from 2014 when Octopus had a turnover of £76 million and a net profit of £27 million.

At 30 April 2015 Octopus had net assets of £80 million, which included £5 million of fixed assets, £44 million of cash and £32 million of goodwill.

On default: If the Platform were to fail, and on the basis that there are at least £6 million of loans on the Platform, the Operator advises that it believes the fees paid by borrowers will be sufficient to meet the wind down costs. These fees are anticipated to be in the region of £200,000 per year.

Additionally Octopus’ first-loss position on each loan will be run down, and we are advised that the Octopus Group has invested £2 million equity into the Operator which would also provide a reserve in a wind down scenario.

If the Operator were to default, the Octopus Group will appoint two members of its staff to ensure the existing loan book is serviced until maturity, and all monies receivable repaid to investors.

Business continuity plan: Octopus’ Crisis Management Action Plan was provided. This is a comprehensive 30 page document which sets out the members responsible for ensuring the group’s continuation.

Key person: Octopus does not have key person insurance in place but it advises that it has a three month notice period for its staff, and that it is confident that key person risk can be actively mitigated.

£ M £50 M £100 M £150 M

Turnover

Net profit after tax

Net assets

Cash balance

2015

2014

2013


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Liquidity

Introduction: This section looks at how easily investors can liquidate their loan parts before any final capital repayment date. Liquidity is important as investors’ circumstances may change and they may wish to access some or all of their investment sooner than originally anticipated.

Withdrawal of funds: Investments via the Platform are open-ended. An investor will be invested into up to 40 loan parts at any time and as these are repaid by borrowers the capital proceeds will be reinvested as soon as is practicable into further loan parts.

An investor can request a withdrawal of some or all of their funds at any time. On receipt of a withdrawal request:

1. a corresponding amount of the investor’s loan parts will be earmarked for a withdrawal and not reinvested into further loan parts once repaid.

2. the Operator will endeavour to sell the investor’s loan parts to incoming investors.

Loan parts will range between one month and 60 months, so investors seeking a full withdrawal of funds may have to wait up to 60 months, unless Octopus can sell the loan parts to incoming investors. If investors’ loan parts cannot be sold, they should expect to receive withdrawal proceeds in stages as and when individual loan parts are repaid.

Withdrawal requests will be processed in the order they are received and can be for a proportion or the entire portfolio only – requests for sales of individual loan parts will not be accepted. Non-performing loans cannot be sold. Investors in non-performing loans will be required to wait until the loan is repaid, which may take longer than the remaining term on the loan to occur.

Octopus advises that where there are insufficient incoming investors, it may use its own balance sheet to buy the loan parts of investors looking to exit. However, this is not guaranteed.

Transfer: Investors cannot sell their loan parts themselves.

Secondary market: There is no secondary market where investors can opt to sell specific loan parts, although as outlined above investors can requests a withdrawal and the Operator will endeavour to sell all or a proportion of investors’ loan parts to incoming investors.

As of May 2016, 11 investors have requested withdrawals totalling £56,250. In each of these instances Octopus purchased the investor’s loan parts to facilitate a timely exit, and subsequent inflows on to the Platform from new investors have continued to exceed withdrawals.

Death of investor: On death of the investor the Operator will await grant of probate and instructions from the administrators of the estate. The account will remain open and funds will continue to be reinvested until a withdrawal request is received.

Summary: Investors can make a withdrawal request for some or all of their funds at any time, and on receipt of such a request that amount will be repaid in stages as and when loan parts are repaid by borrowers or sold by Octopus to incoming investors. It could potentially take up to 60 months for a full withdrawal.

The speed at which loan parts can be sold by Octopus will depend on the Platform’s popularity with investors i.e. the amount of incoming investors to whom the Operator can sell the loan parts. Octopus hopes that this process will ultimately be same day.

Investors cannot request that individual loan parts are sold, only a proportion (or all) of their portfolio.

Octopus may use its own balance sheet to buy loan parts from investors looking to exit, but this is not guaranteed.

Liquidity Summary


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Security, Borrower Assesment & Borrower Default

Introduction: This section looks at how the Platform selects borrowers and how the Operator acts to ensure investors’ funds are protected. This includes any due diligence conducted and the types of security offered. The level of pre-screening carried out will likely affect the number of defaults, and the level of asset backing will likely affect how much investors can hope to receive in a default scenario.

Jurisdiction: England & Wales

Types of loans: Currently the only loans that Octopus will consider for the Platform are residential property loans, specifically buy-to-let and bridging loans.

Octopus advises that it may eventually lend to a wider borrower profile, to include commercial property purchases and development finance. This would dovetail the Platform with Dragonfly’s lending activities - although it is not expected to happen soon, if at all.

Loan security: All loans will be secured by first charges against residential property located in the United Kingdom.

The maximum loan to value ratio will be 70% - and Octopus will in all instances co-lend 5% of the total loan with investors and will sit in a first-loss position. As Octopus sits in a first-loss position it effectively has an inferior charge over the property than investors do, and so for illustrative purposes Octopus’ loan can be discounted from the loan to value ratio i.e. a particular loan with a loan to value ratio of 70% will have an effective loan to value ratio of 66.5% for investors.

Below we consider the loan to value ratio of Dragonfly’s current residential loan book:

The majority of residential property loans originated through Dragonfly have a loan to value ratio of between 50% and 70%. Loan to value ratios in excess of 70% are uncommon although Octopus has confirmed that these loans will not be considered for investment by the Platform.

Similarly just over 10% of Dragonfly’s residential property loans are secured by a second charge over the property, but these types of loans will not be considered for the Platform (first ranking charges only).

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30%

35%

0-39% 40 - 50% 51 - 60% 61 - 65% 66 - 70% >70%

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Loan to value range

Loan to value distribution for total residential loan book

Bridging loanbook

Buy-to-letloan book


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Structure of the investment: Octopus Administrative Services Financial Ltd (the “Principal Lender”) will finance loans to numerous borrowers sourced through Dragonfly. The Principal Lender will divide the loans into loan parts and assign the loan parts to individual investors.

Assignment is via a Contract of Assignment between the investor and the Principal Lender, both acting through the Operator.

This approach has been adopted to ensure that investors’ funds can be deployed into multiple loans immediately, rather than waiting for sufficient investor subscriptions to cover an individual loan before deploying funds.

Although this approach is obviously more capital intensive (as the Principal Lender must have the resources to lend the funds before sufficient investors have subscribed) the scale of Octopus and its resources once again benefits the Platform and should ensure that it can deploy all investors’ funds regardless of how much or little is invested.

Borrower assessment: Borrower assessment will be undertaken by Dragonfly. Octopus advises that Dragonfly considers three aspects for every deal: the borrower, the asset and the route to exit.

Checks undertaken include ID verification, online screening, face to face identification via solicitors, credit checks through Callcredit and valuations of the asset by one of Dragonfly’s valuation panel.

Late payments:

The Platform has no track record for late payments; however Octopus’ procedure leverages learning from Dragonfly's late payments experience, and is set out below:

Octopus will contact the borrower to inform it that it is in arrears, and will reattempt to collect the outstanding payment in respect of that loan.

If no reply is received a second contact will be attempted, and if there has still been no explanation within 7 working days of the payment date, the borrower's account will be treated as being overdue, although Octopus will continue to attempt to collect the funds.

After 14 days, if the outstanding amounts have still not been repaid, then a second notice of account in arrears will be sent to the borrower.

If the borrower is more than 21 days in arrears, then the loan may be placed into default and passed to the security trustee to deal with in accordance with clause 14(d) of the lender T&Cs.

Borrower default: Similarly the Platform has no track record for borrower defaults, although we are advised that Dragonfly has over £1.27 billion in redeemed loans since its launch in 2009, and has only had seven defaults. Of these seven defaults only £6,000 of capital has been written off (although £1.1 million in fees and retained interest has also been written off).

The Operator’s default procedure is set out below:

Once a default has been identified (an arrears of 61 days over term or general breach of lending and mortgage conditions), a letter will be sent warning of potential action in 7 days if an acceptable resolution has not been mutually agreed.

The account will be reviewed and if no contact or proposal is received Octopus will instruct an asset manager to provide an assessment of property and upon recommendation will look to instruct solicitors to start possession proceedings and if needed LPA receivers to manage the property until property sold.

Solicitors once instructed will send a formal demand for the loan balance to be paid before appointing receivers or applying to the courts for a possession hearing.

As soon as the Operator (acting as security trustee) has taken possession of a property, either via a court order or receivers taking vacant possession, it is sold and lenders repaid in accordance with the lender terms and conditions

Octopus advises that a borrower default ultimately resulting in an enforcement of the security and selling of the property typically takes between 2 and 12 months to complete, and potentially longer if litigation is required.


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Summary: Investors will enjoy a first ranking charge over UK residential property with a maximum loan to value ratio of 70%, and typically in the range of 50% to 70%

Dragonfly has a credible history in originating loans and its current default rate (standing at 0.3% over 2,228 redeemed loans) is very good.

As an established short to medium term lender, Dragonfly has a track record in managing late payments and defaults, and Octopus’ procedures appear sound.

The role of security trustee is not filled by a third party but by the Operator

Security, Borrower Assessment & Borrower Default Summary


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Regulatory Compliance & Internal Controls

Introduction: As the role of Operator involves performing a number of regulated activities, the Operator is within the FCA’s perimeter and is required to be authorised and regulated with the relevant permissions. This involves the Manager adhering to the FCA guidelines on its internal processes to ensure that they are robust and that at all times consumers are protected. Here we consider which individuals are responsible for ensuring that these processes are adhered to and any other pertinent internal controls that should be in place.

Board Meetings: Board meetings are held quarterly and the agenda is as follows:

1. Minutes for approval 2. Minutes for noting 3. Proposition 4. Lending update

a. Performance and loans data (including redemptions, outstanding, extended and bad and doubtful)

5. Strategic planning a. Headcount

6. Management accounts a. Platform b. OC capital c. Liquidity partner

7. Treating Customers Fairly (“TCF”) 8. External regulatory update

a. FCA b. HMT

9. Risk and compliance a. Risk Register b. Compliance Report c. Anti-money laundering d. Client money and assets e. Regulatory approval

10. Governance a. Directors’ Conflicts and Interests

11. Any other business

Internal audit committee The Operator has an Audit, Risk and Compliance committee that meets quarterly. The committee shall comprise at least three members appointed by the board and initially will be chaired by the Octopus Group CF10, Jocelyn Tasker.

Approved persons: The Operator is not yet full authorised by the FCA, but it advises that its controlled functions will be performed as follows:

Simon Rogerson CF1

Christopher Hulatt CF1

Richard Wazacz CF1/CF3

Marc Harris CF1

Jocelyn Tasker CF10/11

Jocelyn Tasker, who will be the Operator’s CF10, holds a first class under graduate degree and two subsequent degrees in law. Before joining Octopus Group three and a half years ago she worked at Cheviot Asset Management Ltd and BlackRock Asset Management Ltd. She has previously been CF11 for three regulated entities in the Octopus Group.

Compliance procedures: The CF10/11 reports directly to Richard Wazacz, a director of the Operator. The CF10/11 also has at its disposal the support of Octopus Group’s Risk and Compliance Department (an independent team of 11), as well as Ernst & Young, Octopus’ internal auditors.

Promotion: Octopus is promoting the Platform to retail investors, although it recommends that investors seek independent investment and tax advice prior to investment.


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Holding client funds: Investors transfer funds directly to the Operator. Octopus Co-Lend Ltd applied for full FCA authorisation in October 2015 and advises that it hopes to receive full authorisation shortly. Once fully authorised the Platform will be required to comply with the FCA’s CASS rules.

Complaints procedures: As the Operator has yet to begin trading it has no complaints register, but it has forwarded its policy.

Complaints can be made by email, phone or post. The Operator undertakes to resolve the matter in one business day or to send a written confirmation of the complaint in two business days with a printed copy of the complaints procedure and the name of the person dealing with the complaint. Within eight weeks a final response will be issued setting out the decision and any compensation.

Octopus Capital Ltd’s complaints register for 2015 is included below:

Status No. of complaints

Upheld 12

Not upheld 21

Ongoing 1

Total 34

Octopus advises that no complaints against the Octopus Group escalated to the Financial Ombudsman Service have been upheld.

Web security: The website application security has not been audited by an ISO 27001 certified (or similar) independent body. The CTO for Octopus, Morgan Sowden, is responsible for its development and maintenance. We are advised that Morgan has twenty years’ experience as a software engineer, in roles of increasing responsibility, with the past ten years as lead-engineer or CTO.

The Operator advises that the Platform has the following security measures in place:

All traffic to the site is over SSL and all login details are one-way hashed using SHA512

Databases are segregated to limit data loss if one is compromised.

Implementing two-way encryption of most data, to render it unreadable without private key

Full auditing of all actions on a separate database to log and track all usage

Direct access to production data by developers is carefully managed and monitored, and only provided on an as-needed, basis

Online admin tools only exposes data required by customer service to perform support functionality

Octopus conducts third party penetrating testing to assess the robustness and security of the Platform

Octopus Group has an internal division (Octopus Group Risk) which will assess all aspects of the operating environment.

Nevertheless, an independent audit would be preferable.

Summary: As part of the larger Octopus Group, the Operator benefits from a large and robust regulatory framework

Octopus Capital Ltd’s complaints register and procedures evidence a timely conclusion and Octopus advises that no complaints against the Octopus group escalated to the Financial Ombudsman Service have been upheld

The Platform has not been externally audited by an ISO 27001 certified (or similar) independent body, although Octopus advises that its CTO has sufficient experience in this area.

Regulatory Compliance & Internal Controls Summary


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Company name: Octopus Co-Lend Ltd


Incorporation Date 26 February 2014

Address: 33 Holborn, London EC1N 2HT

Telephone: 0800 294 6848

Experian credit risk band:

n/a – dormant accounts

Part of the Octopus group – Octopus Capital Ltd has an Experian credit assessment of Very Low Risk (100)

Security Trustee

Company name: Octopus Administrative Services Financial Ltd


Incorporation Date 02 July 2015


Telephone: n/a

Experian credit risk band: High risk (17)

Part of the Octopus group – Octopus Capital Ltd has an Experian credit assessment of Very Low Risk (100)

Principal Lender

Parties Involved

Company name: Dragonfly Property Finance (a trading style of Bridgeco Ltd, Fern Trading Ltd, Nino Ltd, Rednel Ltd and Octopus Co-Lend Ltd)

Company number: Bridgeco Ltd (no. 6629989), Fern Trading Ltd (no. 6447318), Nino Ltd (no. 9015082), Rednel Ltd (no. 7531926) and Octopus Co-Lend Ltd (no. 8913299)

Incorporation Date -


Telephone: 0800 294 6850

Experian credit risk band: Part of the Octopus group – Octopus Capital Ltd has an Experian credit assessment of Very Low Risk (100)

Source of Deal Flow


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Company name: Brecher LLP

Registration number: OC372975

Incorporation Date: 01 March 2012

SRA status: Regulated by the SRA with ID 627789

Address 4th Floor, 64 North Row, London W1K 7DA

Telephone 020 7563 1000

Website: www.brecher.co.uk

Experian credit risk band: Below average risk (80)

Real Estate Solicitors

Company name: Osbourne Clark LLP

Company number: OC397443

Incorporation date: 12 January 2015

SRA status: Regulated by the SRA with ID 619990

Address 1 London Wall, London, London, EC2Y 5EB

Telephone 0117 917 3000

Website: www.osborneclarke.com

Experian credit risk band: Below average risk (60)

Legal Adviser

Summary:

Made possible in part by its scale, Octopus predominantly insources the ancillary roles involved in operating a peer-to-peer platform, such as depositary agent, administration and security trustee. This should reduce the associated costs of running the Platform

Where external third parties have been utilised, they appear suitably qualified and in good standing

Summary


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Documents

Octopus Choice Final - storage.googleapis.com