Any responsible lending platform should have nothing to fear from tighter regulation aimed at further protecting investors.
Having said that, a truly responsible platform will already be working to maintain standards well above those imposed by regulation.
So as the P2P industry digests the long-awaited proposals on its new marketing and disclosure rules, we thought we’d examine what differences they will make for those involved in CapitalStackers’ unique brand of loan-based crowdfunding to property developers.
Working through the five key points raised by the Financial Times it seems life won’t be too different. Let’s take the points one by one.
The FCA voiced concern that many P2P platforms tended to run overly complex business models, often choosing and managing investors’ portfolios for them in order to achieve a target return. They expressed unease about the mismatch of expectations between what the investors think they’re getting, and what they’re actually getting.
With CapitalStackers, this has not been a problem because we don’t do pooled lending. Our risk assessors examine the fine details and set a fair and transparent rate for the risk involved on each deal. Investors can see clearly what deal they are investing into, what risk they’re taking and choose the return figure to suit their own particular appetite.
The FCA has said that some platforms fail to communicate clearly to investors the true nature and risk of the investment they will be exposed to.
We’ll leave this point for one of CapitalStackers’ investors to answer directly:
“I invest from the point of view that loaning to construction always carries risk, but with CapitalStackers’ due diligence, I’m confident that everything that might possibly go wrong is covered in the information presented. They tell it as it is in the risk assessment, and the returns are outstanding.” – Brian Gough
3. RISK MANAGEMENT
In some instances, the management of risk could be improved – and it was not made clear that the interest paid by the borrower to the investor was linked to the credit risk.
With CapitalStackers, the very highest standards of risk monitoring and management are maintained throughout the deal right up to the point of repayment. As far as risk pricing is concerned, this is made crystal clear. The loan to value ratio is always shown alongside the rate of return and investors pretty much know the borrower’s inside leg measurement, so assiduous are the risk assessments.
Given that CapitalStackers almost always arranges loans in collaboration with a high street or challenger bank, investors might be forgiven for thinking that we would be satisfied by the bank’s due diligence work. In fact, the opposite is true and our risk assessment and the way we report is much more stringent given we are usually at higher loan to value ratios. Our retail investors are important to us and we strive to protect their interests.
The FCA also stipulated that P2P platforms offering a target rate of return must be able to determine with reasonable confidence that this return is achievable.
Granted, this can be pretty opaque in the context of pooled lending. However, it’s much easier to achieve on a direct lending model like CapitalStackers, where we always provide a comprehensive appraisal detailing the risk and reward specific to each and every investment.
The FCA highlighted that in general, P2P loans are unsecured and that investors’ ability to exit the agreements is not assured.
With CapitalStackers, all loans are secured on the property being built. The bank naturally holds the first charge and CapitalStackers Trustees hold the second charge on behalf of our investors. Furthermore, the developer must inject cash equity commensurate with the risk involved – usually around 10% of costs. We also insist on an appropriate cost contingency in the development appraisal. Which, when you take into account the development profit in a deal, means a lot has to go wrong – and we mean a lot – before investors’ capital is at stake.
Exiting a loan is always going to depend on other investors having the appetite to take you out and that can never be guaranteed. However, for those few investors who have sought to exit early, all have quickly sold-on their participations, recouping capital, interest and in most cases a profit.
Finally, the FCA stated that they will require investors to self-certify as Sophisticated or High Net Worth investors, or to take advice from an IFA, or to undertake not to invest more than ten per cent of their net portfolio in P2P assets the first time they invest.
Of course, we’d be the first to admit that any P2P investment should be undertaken by those who know what they’re doing. We take great pains to explain to any CapitalStackers investor what they can expect and not expect, and it seems reasonable to us that people don’t invest more than 10% until the platform has proved itself to them. However, we should point out that the likelihood of investing in P2P through an IFA is slim, since most IFAs and wealth managers choose not to advise on this nascent asset class.
So, as an investor in CapitalStackers, you might wonder what all the fuss is about. The protections and transparencies which the FCA seeks to impose have been part of investment life for you since the start.
But we’d be interested to hear your views on everything you’ve read, since the FCA is inviting responses to its proposals before the 27th October.
For instance, if you don’t qualify as High Net Worth or Sophisticated, do you agree with the proposal to initially limit what you are allowed to do in this space until you find your feet? Or do you feel that this is an inappropriate imposition and a step too far?
In terms of crowdfunding to the small building sector, this type of investment has been the salvation of many a business and led to many schemes being built out which had laid dormant since the banking crisis.
So perhaps you may feel that rather than limiting what a small lender can do, the FCA should point its big guns at those P2P platforms which fall short of what’s required and force them to raise their standards.
Now is the time to have your say. CapitalStackers is run for its investors, so if you have a view, we will certainly include it in our response.
Please do email us at: firstname.lastname@example.org. We look forward to hearing from you.