Peer-to-peer lending sites: MSE guide discussion

justme111

That would have been great and I do not think anybody would mind that as it would represent only 1% drop in the income - from the headline interest of 12% it would drop to about 11%. When headline is 12% and the resultant is -10% or 2% that is when one would call it a mug's game.

Jordan_Stodart

jamesd wrote: »

The changes have removed the reason why I was considering possibly using FC, so not much prospect of me using their IFISA. The risk/return didn't appear sufficient but flipping might have been worth doing. Never really thought that was worth doing either, though.

What part of the risk/return tradeoff necessarily? The level of return v lack of security? I've been impressed with their ability to keep net returns consistently above 5% over the past few years, particularly when we've seen RateSetter and Zopa's products rise and fall. But I can imagine the FC investor base will see a sharp drop off now the changes have been made.

How are you performing due dil on the platforms you select - assuming you diversify across multiple platforms that is? (Apologies, new to the forum so not caught up on this thread if you've already covered this sort of thing!)

jamesd

I compared them with Ablrate, MoneyThing and more recently Collateral. I thought that unless flipping was used, FC wasn't worth doing compared to the potential returns from those three places. Not bad, just not as good. I expect that quite a lot of people will prefer saying invest this money for me and not being able to do any vetting of the loans they get their money put into. But that's more of a collective investment approach than real P2P. The three I mentioned are where my new P2P money is going. Zopa I've been winding down for years on return grounds. Bondora I ceased using partly on ethics grounds and have been winding down since the end of 2014.

I am using another but I don't think it's worth mentioning yet. A platform started by a loan broker and I don't yet have sufficient information to know whether they can be trusted, though it's not looking good at the moment and I'm reducing my amount invested. I was happy to take a 20% initial lending incentive, though.

Yes, I definitely do a degree of vetting of platforms I use. It's a vital issue. For example, I rejected Lendy and ceased using Bondora for new investment late in 2014. Ethical considerations that made it hard to trust the returns being offered were a key consideration in both cases. You must be able to trust that the platform you use is providing accurate and complete descriptions of loans if it's one where you're expected to select the loans to use. I look at public discussions of the platforms as well as their sites and descriptions of things.

For example, a loan broker describes their role in the new P2P platform they have started as arranging things to protect lenders, when the terms and conditions say they are a loan broker, which means they are an agent of the borrower. When acting as an introducer (meaning borrower's agent) at another platform I asked if they were really going to provide reports of a certain type as specified in the loan details, they didn't reply until after the loan was filled and the answer was no, to someone else, not me. My money isn't going there. Nor to any other loan they introduce at any other platform, because they have demonstrated that I can't trust that they are providing accurate and complete information.

justme111

There is a discussion on the topic of information on p2p forum now. There is an opinion that the concept of itself is flawed because in T&Cs every platform is described as an introducer with lenders having responsibility for due diligency, not a platform. Platform's task is to sell the loan... If you would not use the platform that shown misgivings on the information site then you would be winding down your MT investment as well. Abl been seen to make errors in loan management - was it not registering a charge against the asset or not realising fhe charge would be impossible to register due to something else having precedence;, has multiple loans to associated borrowers and introducers.

jamesd

Each loan offer is a financial promotion and per FCA rules on financial promotions has to be accurate and provide enough information to evaluate the product being offered. You have to evaluate it but it's not allowed to mislead you.

So far as I know MoneyThing themselves have never outright lied in a financial promotion but the same would not be true for those I rejected on that basis.

The Ablrate loan where a charge wasn't registered has been fully repaid, apparently by the introducer, which for that and its other loans at Ablrate provided its own corporate guarantee in addition to the protection potentially available from the security. At the moment it appears that the introducer took the loan money but it was never paid to the borrower who it was for. One director seems to have left the introducer over this matter and it also appears that MoneyThing seems to have decided to cease doing new business with the introducer as a result of the events, with the loans to them now being repaid when due instead of extended as was normal before. Ablrate seems to be awaiting the result of an outside investigation before deciding what further actions to take, though they have already said that they will no longer accept loans from them where the money is paid to the introducer for them to lend on, instead they will do them directly to the end borrower. The loans for this introducer were a little unusual compared to current practice at both platforms, because the money was lent to them for them to lend on.

This is the introducer where I wrote that I was trying their own platform but things didn't look good: if with another P2P site they didn't do things correctly, what will happen when it's their own platform involved and no third party P2P site to act on behalf of lenders? There needs to be a really good answer about what happened or all my money is going to be withdrawn from the platform started by the introducer, it's already inherently higher risk than an independent platform.

You'll find connected borrowers at Ablrate, MoneyThing and Collateral and undoubtedly other platforms as well. It's natural that borrowers and platforms that work together are likely to continue to do so on later deals.

That leads to two issues: your exposure to the single borrower and whether a platform will default all loans at once or not, and in doing so, whether you'll get the protection of the security for your particular loan(s) or whether it will be shared among all lenders across all loans. If shared, you might find you take a loss on a loan you decided you didn't want to make and stayed out of. Your security might be used to cover a failure of security in other loans to fully cover their lending, leading it to be insufficient to cover all of the borrowing on yours.

I think the impossible to register charge was somewhere else, but that is a risk if the platform's own due diligence missed the something else, causing them to lend without charge being placeable. In general the placing of charge will come before or at the same time as the advancing of money, as normally is expected to happen with mortgage lending.

One of the platforms not named in this or my recent posts described the full value of a property as security, somehow without realising that it was half owned by the wife of the borrower and had been for over ten years. Unfortunately that incident led to substantial losses for lenders. This sort of thing is one reason why lenders will sometimes do independent checks at the Land registry and those have from time to time uncovered issues that have caused loans to be modified or withdrawn at a platform before money was advanced to the borrower. Lender due diligence isn't perfect but it's definitely improved results.

Malthusian

jamesd wrote: »

Each loan offer is a financial promotion and per FCA rules on financial promotions has to be accurate and provide enough information to evaluate the product being offered. You have to evaluate it but it's not allowed to mislead you.

Anyone familiar with the Arch Cru scandal will know that the FCA rules on financial promotions offer investors as much protection as a bulletproof string vest. For those unfamiliar, the Arch Cru funds produced grossly misleading information both on the underlying investments (which turned out to be dodgy Greek shipping and, er, property bridging loans) and on the overall risk profile of the investment. Nonetheless the people directly responsible for providing that misleading information - an obscure outfit by the name of Capita - largely escaped responsibility, and the advisers who recommended it had to pay up on the basis that it was their responsibility to dig deeper.

In the event that a loss is suffered due to a misleading "promotion" the platform will simply say 1) that it passed on information from the borrower in good faith; 2) that its T&Cs make clear that it isn't responsible for checking the information from the borrower, the lender is; 3) therefore the claim is against the borrower, and we already know the borrower doesn't have any money, because if it had it wouldn't have defaulted and you wouldn't be complaining.

Even if the FOS or the courts does decide that the platform is liable for misleading lenders, how likely is it to be able to pay claims? Lendy for example has just over £1m in net assets compared to £250m invested on the platform.

jamesd

Capita were partly responsible for providing the misleading information in the CF Arch Cru situation. They were the authorised corporate director of the funds and ultimately responsible for the prospectus, ensuring that the investments matched the objectives and assorted other things. In addition depositaries were BNY Mellon and HSBC. The three of them agreed with the FCA a £54 million payment scheme as a result of their own failings. That £54 million bill doesn't look like "largely escaped responsibility" to me.

It was Arch (the fund manager) and Cru who were largely responsible for the misleading promotion of the funds as low risk and the lack of transparency about what the funds actually invested in resulted in some changes in requirements, particularly for advisers, that require more disclosure. The story I linked to suggests that the £54 million, the estimated £60 million and amounts paid out before that would lead to investors who didn't use IFAs getting back 54% of their original investment. Those who used IFAs based on the misleading risk description would get all of their money back, via the FSCS if the adviser went bust, at an estimated cost of another £110 million. Full winding up of the fund may well take several more years, since Capita are required to try to recover as much value as possible and some of the underlying investments are long term.

Primary risk description responsibility was with Cru Investment Management, the fund marketer, and Arch FP, the fund manager, which faced legal threats over how it acted.

Among other cases and decisions, this one reviewed by the High Court in case reference FS/2012/20 , the FSA had:
a. banned an individual, Farrell, at Arch from carrying on regulated activities and imposed a penalty on him of £650,000,
b. banned an individual, Addison, at Arch from carrying on regulated activities and imposed a penalty on him of £200,000
The High Court "found serious failings to act with integrity" on the part of the individuals, essentially upheld the FSA decisions and ordered the FSA to publish a notice saying that "but for its financial position a financial penalty of £9 million would have been imposed" on Arch FP. The decision describes some of the troubling transactions in its appendixes.

In the CF Arch Cru situation it seems that every company involved failed in their responsibilities to investors in some substantial way and a significant number and amount of penalties and other financial costs have been imposed on firms and individuals bearing responsibility.

It's the P2P platform making the promotion and responsible for its content, not the borrower. A platform may well try the claims you suggested but they are responsible for the content.

I agree with your apparent view that the financial resources of platforms are a factor in decisions about which platforms to use. However, accurate loan descriptions that prevent the platform's resources from being put at risk are a better protection for both lenders and the platform.

You picked a particularly bad example with Lendy, a platform I declined to use and recommend against because of issues including the quality of their loan descriptions. Among other things they didn't tell lenders that a loan was to go to a convicted criminal who was due to be sentenced a few days after the loan was completed. I assume they knew because it wasn't that hard to discover, but that's only an assumption. That loan had a valuation on residential property basis when the planning was non-residential and the owner had gone all the way to the High Court to get it changed, and failed, with the Planning Inspector having earlier said that use must not be allowed to lapse into residential.

Jordan_Stodart

I think what is clear is that the messaging used by platforms needs to be water tight when dealing with loans where the investor is directly (bar provision funds which are a portion of the spread) on the hook for losses. A Lendy (once Saving Stream) loan to a garden centre - loan PBL020 - springs to mind. Changes to platform's Ts&Cs nine months into the loan confused investors as to whether the platform was to repay debt or the borrower - subsequently, it was clear it was the borrower. This was before the loan went into default, administrators stepped in and the value of the underlying asset was significantly less than recorded (below the LTV rate). They did, finally, recover all capital and some interest. If communication/risk warnings were better, I think concerns would be more readily alleviated but this may come with the fact the asset class is still quite nascent and platforms haven't been exposed due to P2P performing well in recent years. Defaults are a given, but the way they are dealt with will stick in investors mind.

Do we need an economic downturn to shake up P2P is a question I ask myself - thoughts??

jamesd

Lendy didn't actually recover all capital and interest, they failed to do that - the Garden Centre sold for below the (undisclosed) original purchase price and Lendy used their protection fund to pay the balance. Lenders doing due diligence could find the purchase price. Lendy didn't disclose that it was a loan to a company they held a ten percent ownership interest in, describing it as a loan to an individual who was an experienced developer; their part ownership only showed up a year or so later once Companies house records were updated.

I was lending via Zopa in 2008, the default rate broadly doubled but some classes of loan were more like three or four times. Back then they were wrongly telling lenders that they could deduct bad debt from interest, so lenders also took a larger loss than anticipated for that reason. Even so, a fair mixture of loans produced quite positive results.

Jordan_Stodart

That's true, they did utilise their provision fund to repay investors including interest to the tune of c£150k. I think it's a compelling example of the level of due diligence an investor would have had to go to in order to seek the truth - which they shouldn't be obliged to do in this instance. What worried me more was the fact that the loan was still being funded despite being in default - secondary market loan purchases - and if I remember correctly it was to do with the 'Loan in default' message not being visible enough!

That's right, the default increased to over 5% from 2.74% in '07 and the platform still returned near 10% net returns. I actually have a useful article on the topic: 'Zopa Review' by Orca Money but I can't post the URL due to being a new user...shame! Full disclosure, I do work for the company that produced it and I'm very much aware of the forum rules re promotion etc, but because I think it'd be of interest, and the service is free to use, I hope it's alright to post this sort of thing...(I'll await the handcuffs if not!).