Our Position on the Current P2P Marketplace 25/06/2019
The latest news on the demise of Lendy and London Capital & Finance has prompted me to write this blog post to put forward our position on the current peer to peer lending marketplace.
Firstly there is an ongoing investigation into both companies so we won’t know exactly what happened until all those investigations are done.
If there can be anything good to come out of these failures it is that the regulators are beefing up regulations across the P2P lending sector and it also appears from empirical evidence that mini-bond promoters are being squeezed.
The FCA says “There is no legal definition of a ‘mini-bond’, but the term usually refers to illiquid debt securities marketed to retail investors.
A mini-bond is essentially an IOU issued by a company (the issuer) to an investor, in exchange for a fixed rate of interest over a set investment term. At the end of the term, the investors’ capital is due to be repaid.
The return on investors’ money entirely depends on the success and proper running of the issuer’s business. If the business fails, investors may get nothing back”.
The problem in the marketplace is that most of the mini-bonds I have seen don’t really have a return that relates to the risk and the marketing of those bonds are confusing. Take the LC&F bonds, they prominently displayed the FCA badge which would lead a potential investor to believe that the bonds were regulated, it also appeared that the invested money was invested in small companies and was paying 8%.
The new rules coming for P2P cover a multitude of things. The one that has the most press is marketing restrictions and appropriateness test. These, we believe are not barriers and add further protection. We have always had risk warning boxes to tick before making a bid, or buying loans, so this will be just part of our processes to onboard customers.
The interesting thing for us is the rules not getting as much press. The FCA has these goals by changing the rules, alongside appropriateness, marketing restrictions and wind down procedures etc:
– Clear and more meaningful data for investors on the range and performance of investments offered.
– Platforms to demonstrate that they are pricing peer to peer loans fairly
– Consumers receiving a fairer risk/reward trade-off
Clear and more meaningful data – we introduced to our Borrowing Proposals a number of years ago because we saw this coming. We have the details of the loan in detail but also general risks and risks that are specific to the loan and the mitigants. We publish credit reports, valuations etc. This should be a minimum standard and we applaud this new regulation.
Platforms to demonstrate that they are pricing and consumers receiving a fairer risk reward. This is a good one for us because it should give consumers a better ability to compare platforms. I say this because at the moment we feel that because of different business models and different goals of platforms the pricing of some loans are not a fair representation of the risks involved.
There is an old saying ‘Turnover for show, profit for a pro’. In this context, we mean that some platforms are seeking volume of loans as a means of value (i.e increased valuation or increased perceived value). So if you need volume, you need to be able to compete with other volume-based models. This means low rates and thin spreads (fees).
Consumers, therefore, have looked at platforms like Ablrate as ‘high risk’ because we charge higher rates and give higher returns. As a practical example. We did a loan for a certain company where the rate to the borrower was 16%, the rate to our lenders was 12% meaning we made 4%, which is a typical loan. We raised £300,000. Another lender did multiple millions at a borrower rate of (we understand) 9% and a lender rate at 7.5% (published) on supposedly the similar security. Who priced the deal correctly?
That loan defaulted, our lenders received 100% interest and capital, the other lender looks like it will lose the majority of loaned funds as the security was not in place correctly. This new regulation, therefore, should even the playing field. However, we doubt it will, because until the pricing of loans is prescriptive it will remain subjective. Think of the business models that would be affected if suddenly they have to price their loans at a higher rate?
As a lender, you should not look at price as a silver bullet for due diligence. We hear ‘why would a business pay X when they could get the money cheaper, what’s wrong with the deal”. The answer generally is that the money is not available cheaper. Not because the deal is bad, but because it doesn’t fit certain criteria laid down by the banks and even if it does it can take months to organise and often deals are time sensitive, so those time frames don’t fit.
The new rules, we believe, are OK and if standards increase, lenders get more money for the risks they take and it allows more comparisons of loans between platforms, then we are all for it.