Is it any more than a coincidence that big players are pulling out of the retail P2P market at the very moment the new, tighter FCA regulations come into force?
Both ThinCats and Landbay have publicly switched to institutional funding, citing the main reason as the dwindling cost-effectiveness of servicing individual investors. Both suggested that the retail sector was no longer “commercially viable”.
However, since others clearly continue to find it viable, the timing suggests other factors at play. The FCA’s tightening up of the rules – including appropriateness tests and investment limits imposed on Restricted investors – was intended to remove the bad actors from the industry, to clean out the stables and bring the crowdfunders into the mainstream. And of course it will do that.
However, as a couple of fairly significant babies are sluiced away with the bathwater, we’re left to wonder whether more of the good operators will be putting up the shutters and thinking it’s too much like hard work to try and boost the portfolio of Mrs Miggins.
This would be an awful shame.
At CapitalStackers, we’ve always welcomed tighter regulations. Since our own working practices have always been well above the regulatory minimum, we’re happy to have the playing field levelled to the highest degree possible.
Let’s make no mistake about it – this is a great moment in our industry’s history. A defining moment. Where common sense finally anchored the helium-filled headlines.
It’s not as if the new rules are particularly onerous. They boil down to “don’t sell things to people who don’t understand them”. Which is a pretty basic principle for organisations trusted with Mrs. Miggins’ life savings.
As a responsible platform, we don’t want to be inviting investments from people who don’t fully understand the mechanics of risk and reward. Our business model is not, and has never been, dependent on catching the unsuspecting unawares.
We actively seek people who understand that reward is an inter-related function of risk. As with the stock market, it generally follows that the higher the risk you take, the more chance there is of losing some or all of your money – but the higher the reward. However, as the fly half targets the flailing prop in midfield, sometimes a mismatch can lead to success. In some instances, a surprisingly low LTV ratio can bring a double-digit reward.
The key is information. Monitoring and reporting. The P2P “outlaws” that have gone by the wayside have largely been characterised by a lack of both. Anyone investing in a CapitalStackers scheme, on the other hand, will have access to an Aladdin’s cave of information on the deal, the developer, and all the peripheral contributing factors that explain the terms of the deal. Not just before they invest, but throughout the life of the deal.
Of course, it’s a shame that regulations had to be imposed from above to force the cowboys to stop shooting up the town. But it’s equally sad that a couple of decent operators have now felt all this is now beneath them, and that the game is not worth the candle.
Landbay cited their need to “compete” with the banks. Founder John Goodall lamented that other P2P platforms were lending at higher rates while Landbay was looking to compete with banks whose mortgage rates are lower.
“Our margins were being increasingly squeezed and we would have had to cut investor rates to compete,” he said.
This is something that has never exercised us at CapitalStackers. The market is plenty big enough for the banks and P2P platforms not to tread on each others’ toes. We happily work in close partnership with banks on the same deals, sharing information and underpinning each others’ due diligence. Operating at different levels to push the same deal over the line, and our respective rates are set accordingly.
Most deals need the banks, and they need us, too. Some banks have even started to bring deals to CapitalStackers for us to help them make it happen. They’re comfortable that tightly-run P2P is a great enabler – and the small investor derives comfort from the fact that the bank is involved, because they know bankers understand risk and reward more than most.
So it will be a great sadness if the regulations designed to remove the bad choices for investors also thinned out the good ones. There’s room for all of us, and educating our investors is not so big a burden, is it?
We sincerely hope more operators who know what they’re doing enter the market as the regulations become the norm.
But in the meantime, if any jilted investors are looking for a place to grow their stack of capital, you know where to come.