Peer to Peer Lending

There may be trouble ahead. I take a keen interest in the P2P sector having worked closely with two of the platforms.

I use assorted research tools including those that enable me to search businesses by secured lender. The results from a few P2P platforms are troubling given the apparent deterioration of their books with some of their borrowers looking to be in deep financial trouble.

Almost by definition those businesses that borrow over P2P platforms will not be the strongest financially. They will be paying higher rates than available via conventional sources, not only to give those that are lending a good return but also to feed the platform itself, and their costs are not insignificant.

If borrowers, in numbers, start to fall into some kind of insolvency process or disappear completely then the sector will struggle to survive and a lot of investors will lose capital.

As a broker, talking to businesses looking to borrow, P2P borrowing would be a long way down the recommendation list. Were anyone to ask about the merits of lending across a platform, then extreme caution needs to be exercised. Funds are not covered by the Financial Services Compensation Scheme so never has the phrase ‘Capital at Risk’ been more appropriate.

Peer to Peer Lending – Growth Street

More news (July 2020) from the P2P lending sector as Growth Street, a facilitator of loans up to £1m to UK SME’s describe themselves as being in a ‘Resolution Event’ at the conclusion of which it will ‘aim to cease business activities and wind down its operations’

I guess the statement is open to interpretation, and those SME’s currently borrowing from Growth Street (their statistics page suggests 86 current borrowers with an average funds in use just under £150k, suggesting an overall book size of just under £13m) will need to seek funds elsewhere. Of course right now that will present some borrowers a real headache.

The statistics page indicates an expected default rate of 5.04%, so those investors who lent funds across the platform may anticipate some erosion of their capital.

It really reiterates what has been said before, both here and elsewhere, and I suspect will be said again. Peer to Peer business lending is a high risk strategy, be careful.

Peer to Peer – Lendy

Just over a year ago, in May 2019, P2P facilitator, Lendy, went into administration. It’s being reported today, across various media outlets, that the founders have had their assets frozen given allegations of misappropriation of funds.

At the time of the administration order there were loans outstanding in the region of £150m, with funding coming from around 9000 retail investors.

Looking at some of the loans facilitated by Lendy to business borrowers (by doing a search on companies where Lendy was security holder) it’s fair to say the book is and will be seriously eroded. I suspect those retail investors who lent their money across the Lendy platform will see minimal (if any) returns on their money.

The point being made, not withstanding any wrongdoing, is that lending across P2P platforms is extraordinarily risky. Platforms will entice retail investors with high to very high (certainly disproportionate) returns and then attempt to offset any concerns by quoting their rigorous credit policy and historic default rates.

Some of the credit decisions made are poor, with businesses in some cases, barely, or poorly, scrutinised prior to approval. I have also seen and heard of instances where historic default rates are manipulated, usually by ambiguous definitions of what is classified as default.

There also seems little comfort from the phrase ‘FCA Authorised & Regulated’. Lendy had all sorts of FCA granted permissions (as did others).

Before ‘investing’ across a P2P platform anyone should ask themselves whether they are prepared to lose not just a proportion of their money but their entire investment.

Peer to Peer Lending

Sky news are reporting that Metro Bank is in talks to buy the Peer to Peer Lender, Ratesetter.

Its not April 1st so there must be a degree of credibility to the story, but a Bank, ‘beset by problems during a troubled 12 month period’ contemplating buying a P2P lender would be a very courageous move.

During the Covid-19 driven crisis, lenders (investors), across the Ratesetter platform are only receiving 50% of their interest, the balance going into the provision fund, for the benefit of all investors.

Their borrower portfolio, much of which will be fixed rate, will be subject to considerable erosion as a consequence of the pandemic.

It will be interesting to see how this unfolds and I suspect other P2P platforms will be watching closely.