Before the rotten practices of FundingSecure (and prior to that, Lendy) stink out the entire P2P barrel, allow us to offer a free professional opinion: we could have told you so.
The FCA’s new, tighter regulations (https://www.thetimes.co.uk/article/peer-to-peer-lenders-given-last-warning-32tc32h2r) will certainly help clean out some of the bad crowdfund operators, but will clearly come too late for some investors.
Of course, a well-run P2P industry is a crucial cog in the post-modern economic machine. It gives good businesses access to funds that banks can no longer supply, and it gives investors access to opportunities that have erstwhile been closed to them.
Stuart Law, the Chief Executive of Assetz Capital, made this point in the Financial Times recently, welcoming the fact that “it is a fact of life now that these businesses have much tighter prudential standards and regulations to live up to.”
We agree, of course. However, when he goes on to speculate that “smaller platforms” may struggle with consolidation in the sector, we take issue with him.
“P2P lending is…now a highly regulated market”, he says, “which is good for investors with larger, well-funded platforms such as ourselves but makes things very difficult for under-resourced businesses,’ adding that “The smaller players are clearly struggling to keep up and the badly-run businesses are being scrutinised by the regulator.”
This is clearly an over-generalisation – and the uncharitable amongst us might suggest it is made with mischievous intent. The phrase equating “larger” platforms with “well-funded” ones is a non-sequitur. As is the suggestion that smaller ones are “badly-run”. Anyone who knows their investment onions will be aware that size is no guarantee of good operation, or of sufficiency of funding. In fact, a major part of FundingSecure’s problem was its appetite for growth even in areas outside its experience.
A report in The Daily Telegraph as recently as June 2019 pointed to spiralling defaults and repeated extension of loan terms. The platform, having been forced to sell a majority stake and address investors’ concerns by “reassessing” the entire loan book and promising “timely and meaningful updates” on loans, clearly saw no reason to ease off on growth and wait until its house was back in order, but issued a further 36 loans in May alone, adding £2.2 million to the mounting bonfire, and attracted 134 new investors.
These investors joined despite the fact that anyone with a couple of idle fingers could have Googled reports like that on profitwarning.co.uk back in December 2018, which flagged, among other things:
Increased defaults: Many property-facing platforms have suffered problems, particularly those whose loans rely on further development. The site seems to have shifted over the years to become more property focused, which explains this.
Poor Management: The nature of some of the defaults give rise to the doubts of the quality of monitoring given to loans by FundingSecure – perhaps they might be stretched too thinly staff-wise.
Poor Communication: There are no fixed times for updates to be given to investors. Often updates are not given at all, or when promised, missed out altogether.
Or numerous Trustpilot reviews, such as this one from May 2018:
Their recklessness with lenders’ money is criminal. Their valuations defy credulity and the resulting defaults end in catastrophic losses for investors with the company denying all responsibility for their dangerous lack of due diligence.
And this one from November 2018:
After lending now for over 9 months it is very clear that they are misleading investors…out of 40 investments that are due to be paid back with interest, 85% have not been??!! Updates are very poor and they are not making any attempts to…get back money for investors….They are taking on way too many loans and making their turn out of it to care about the lenders…avoid!
This growth-at-all-costs attitude betrays a contempt for the fundamental obligations of handling other people’s money. FundingSecure moved away from what they knew – funding not-always-secure pawnbroking loans (in one notorious case loaning money secured on valuable paintings, and not realising the paintings had been sold partway through the loan term) – to (some equally dicey) bridging loans (which we’ve discussed before, in reference to Lendy).
It’s not hard to see why it stopped giving full disclosure to its investors some time around April last year according to the investor complaints on Trustpilot.
It should be an irrefutable requirement of holding another individual’s investments that before investors part with a single penny, you:
- Rigorously scrutinise every fine detail of the deal;
- Undertake a forensic examination of the borrower’s background (which FundingSecure publicly did not);
- Take clear, detailed soundings of the wider market; and,
- You continue to do all the above regularly, thoroughly and consistently throughout the whole of the loan term.
And it is no less crucial that you give frequent, comprehensive and transparent information to the people whose money you’re holding. At CapitalStackers, these are fundamental principles – we have no interest in growth for growth’s sake.
CapitalStackers is not a big organisation. Growth, we know, will come naturally if we maintain our diligence, choose our deals wisely and safeguard the trust of our investors. This is how we came to be named “the safest 20% returns in Peer-to-Peer lending” (https://www.4thway.co.uk/candid-opinion/the-safest-20-returns-in-p2p-lending).
We’re not suggesting we’ve eliminated risk, but we do all we can to ensure that we, the platform, don’t become part of it. Of course there is risk involved in property lending – that’s what the interest calculations are based on (or should be) – but we take a huge amount of care to ensure our investors have all the information they need to clearly understand those risks and get good value for them.
We also ensure investors’ understanding is predicated on full and clear disclosure of the facts – that is, the risk is priced into every deal. Over the years, our 120+ active investors have come to trust our risk assessment, which has produced not a single loss in £55 million raised since we first opened the doors.
Now, that’s not to suggest we haven’t unearthed problems from time to time – but with our directors’ extensive banking backgrounds in specialist property lending teams, we have in place established procedures for tackling those problems promptly and efficiently, while all the time keeping our investors informed of how or whether the risk is changing. We’re experienced debt advisors – our lending skills having been fine-honed in our former lives. We know when to turn the screw, and how to help borrowers out of whatever hole they might find themselves in, and turn it into the foundations of something better.
What’s more, our investors are not cast alone on the choppy waters of risk – the unique positioning of CapitalStackers is that we work in close partnership with banks on most projects. Allowing the banks to absorb the ongoing liquidity risk and ensuring all the funding is in place to complete the project before any CapitalStackers investor parts with a penny. This means we’ll never be dependent on bringing new investors down the line (a big no-no in our book), because every project is fully-funded from the start.
Consider the alternative. If a platform takes money from investors to start (and continue to build) a project on the expectation that further funding can be attracted from new investors as it progresses, then it’s taking a huge gamble with the initial investors’ money. There’s no guarantee that new investors will be found, and there is no lender of last resort. So if something goes wrong, it will be virtually impossible to finish the build, or to sell a part-built property. And imagine how easy – irrespective of the size of the platform – it would be for investors to get spooked by some unforeseen event, throwing the entire loan book into jeopardy.
This is why we don’t take our investors into any deal unless we can see a clear, profitable exit.
Furthermore, the point about partnering with banks is a fundamental point of reassurance to our investors. Not because we rely on their due diligence. We don’t. If anything, our own due diligence is stricter, not least because our own money is often involved. But because we analyse the deal together, price the risk together, raise money together and monitor the investment together – but then we take up different investing positions, complementing each other.
And perhaps on a basic level, it’s reassuring for our investors to consider that banks only get involved in deals that they feel will return their investment.
In fact, not only are we growing a steady reputation for funding deals that the banks like the look of – some banks have even started bringing deals to us to help get them off the ground.
This sort of belt-and-braces risk management goes far beyond the proposed new regulations. But we don’t do it for compliance, we do it to protect our investors.
So we don’t fully accept Stuart Law’s assertion that P2P is “now a highly regulated market which is good for investors” – it’s not. It is getting there, but there’s still a long way to go.
However, we do believe that the more astute investors are starting to be able to tell the good nuggets from the fool’s gold.