Peer-to-peer lending sites: MSE guide discussion

cfw1994

masonic wrote: »

I wrote:
"Skin in the game ranked behind investors claims"

The link you posted states:
"Kuflink co-invests 5% in all Select-Invest loans. This means that in the unlikely event that a loss was to occur Kuflink would cover the first 5% of any loss."

So I'm sure what I wrote is correct. Kuflink's skin in the game is ranked behind investor claims. In the event of a default, investor claims would be paid ahead of Kuflink's skin in the game. This creates a risk to Kuflink's financial stability when the defaults start rolling in (and they surely will). The FCA frowns on platforms doing as Kuflink has done, because it threatens their stability.

I didn't have any of those concerns a couple of years ago. Having been caught up in 3 platform collapses, and narrowly escaping a fourth, I now appreciate the risks a little better.

Apologies, I mis-read your wording - you were agreeing that they effectively take the first hit on any defaulting loans.

When I login, I currently see
Total amount invested £69,332,806.24
Total number of investments 195,609

Clearly no P2P is a'safe' place, & I only have a couple of thousand in there, but it still feels about as solid as you can get for a 'not-guaranteed but hopefully good chance of getting over 6%" these days. I would consider adding a little more into it.

masonic

AdrianC wrote: »

I fully understood the situation. I just wasn't expecting the UK's current, sustained, and determined attempt at economic hari-kiri.

Combined with an inrush of naive money that didn't really understand the risks, and the platforms ignoring borrower standards in a rush to try to meet the demand, and it's all been a bit of a perfect storm.

The concept was, and still is, sound.
The execution - like so many things - has been lacking, and that lack has been exacerbated by external factors.

The parts I didn't understand are the following, some of which were my fault as I could have researched them a little better, but most, I believe, could only have been learned through experience:

• The lack of qualifications and experience of those running P2P platforms
• The ability of recalcitrant borrowers to run rings around said unqualified and inexperienced individuals, even to the point of committing crimes, with apparent impunity
• The administrative and financial burden of managing a long tail of defaults after the early years
• The rate at which Administrators rack up expenses if a platform should go into Administration, which of course is paid for from client assets
• The fact that the so called "living will" plans for a platform's failure is pretty much ignored at the point a platform becomes insolvent as the Insolvency Act takes over.

masonic

cfw1994 wrote: »

Clearly no P2P is a'safe' place, & I only have a couple of thousand in there, but it still feels about as solid as you can get for a 'not-guaranteed but hopefully good chance of getting over 6%" these days. I would consider adding a little more into it.

Well I certainly agree it is not safe, but while a couple of years ago I'd have said it is more attractive than buying high yield corporate bonds and lower risk than investing in equities, I don't believe either of those statements to be true now and for me the returns on offer today simply do not justify the risks.

AdrianC

masonic wrote: »

The parts I didn't understand are the following, some of which were my fault as I could have researched them a little better:

* The lack of qualifications and experience of those running P2P platforms

It's not medicine. There's no legal requirements for qualifications and experience for anybody in the financial sector.

* The ability of recalcitrant borrowers to run rings around said unqualified and inexperienced individuals, even to the point of committing crimes, with apparent impunity

Nothing specific to P2P. All enforcement of any contractual obligations is only happening as far as the creditor is willing to pay for it.

* The administrative and financial burden of managing a long tail of defaults after the early years

It's always going to be a game of diminishing returns. More expense to go after a smaller return.

* The rate at which Administrators rack up expenses if a platform should go into Administration, which of course is paid for from client assets

Again, nothing P2P specific there, either.

* The fact that the so called "living will" plans for a platform's failure is pretty much ignored at the point a platform becomes insolvent as the Insolvency Act takes over.

AIUI, the pre-plans were over the management of the ongoing loan book.

Lendy's the only platform that's even had any time since administration, and was within the pre-planned run-off jurisdiction. Most of the problem was that they simply had virtually no ongoing loans - because they hadn't written any new loans for ages, so all that was left was the perennial non-payers. All the good stuff had already repaid. The live loans are proceeding happily.

But I was thinking more of the "Oooh, but I didn't realise risk/non-FSCS" investors (and that's a word I use in the loosest sense)...

cfw1994

masonic wrote: »

Well I certainly agree it is not safe, but while a couple of years ago I'd have said it is more attractive than buying high yield corporate bonds and lower risk than investing in equities, I don't believe either of those statements to be true now and for me the returns on offer today simply do not justify the risks.

That's fair enough: everyone makes decisions based on their own beliefs!

I do agree with AdrianC when he says "The concept was, and still is, sound.
The execution - like so many things - has been lacking, and that lack has been exacerbated by external factors."

I am sure we will see more such schemes go to the wall....but I firmly believe there will be others, perhaps more solid companies, who survive & thrive.

masonic

AdrianC wrote: »

It's not medicine. There's no legal requirements for qualifications and experience for anybody in the financial sector.

The problems arise when the people running these businesses, though lack of experience, are incapable of providing the services they claim to be providing, such as a certain amount of DD at loan origination (which cannot be done by would-be lenders as would-be lenders do not have access to all of the information known to the platform), proper management of loans during their lifetime, and proper management of non-performing loans. They are compounded when the businesses themselves, through lack of capitalisation, cannot afford to carry out those tasks without exponential growth in loan origination, which itself leads to poisoning of the loan book with bad debt. In some cases, all that would have been needed was some basic common sense (i.e. make sure assets are owned by the borrower, make sure assets are actually secured, make sure borrower doesn't have a history of not paying their debts).

Nothing specific to P2P. All enforcement of any contractual obligations is only happening as far as the creditor is willing to pay for it.

It's always going to be a game of diminishing returns. More expense to go after a smaller return.

Again, nothing P2P specific there, either.

No, none of this is specific to P2P, but I, as a consumer with no industry-relevant experience, did not adequately understand the extent to which borrowers could frustrate the process, or the impact this could have on the viability of the platform itself. I don't consider that to be a failing on my part, as I don't think I could have known this in advance.

AIUI, the pre-plans were over the management of the ongoing loan book.

Lendy's the only platform that's even had any time since administration, and was within the pre-planned run-off jurisdiction. Most of the problem was that they simply had virtually no ongoing loans - because they hadn't written any new loans for ages, so all that was left was the perennial non-payers. All the good stuff had already repaid. The live loans are proceeding happily.

The problem here is that the FCA mandated that platforms create such a plan and ensure it is funded, but this will only be executed if a platform fails but is not insolvent (as in the case of MT). If a platform fails and is insolvent, then my understanding is that the living will need not be followed, so any provisions therein would not apply to an insolvency.

But I was thinking more of the "Oooh, but I didn't realise risk/non-FSCS" investors (and that's a word I use in the loosest sense)...

Yes, well it seems there was plenty of that, but to some extent that helped some of these platforms carry on trading by allowing them to write new loans indiscriminately.

AdrianC

masonic wrote: »

The problems arise when the people running these businesses, though lack of experience, are incapable of providing the services they claim to be providing

Which is precisely what FCA authorisation should prevent.

And let's not forget that what closed COL down was their attempts to circumvent FCA authorisation. And what caused all the admin shenanigans with COL was their attempts to keep the administration process out of FCA purview - including "losing" the loan book...

such as a certain amount of DD at loan origination (which cannot be done by would-be lenders as would-be lenders do not have access to all of the information known to the platform)

There always has to be a certain amount of trust in the platform. With black-box platforms, that has to be absolute. With platforms who provide borrower information, there's a lot of self-DD possible, and crowd-DD can be powerful.

Yes, well it seems there was plenty of that, but to some extent that helped some of these platforms carry on trading by allowing them to write new loans indiscriminately.

My view is the opposite - the inrush of money had to be met by an inrush of supply, which led to a slackening of quality. It was very visible on FC - to the point that they went black box to try to feed the dross through. Ly realised they were going that way, so stopped writing new loans because they couldn't get sufficient quality to meet demand.

masonic

cfw1994 wrote: »

That's fair enough: everyone makes decisions based on their own beliefs!

I do agree with AdrianC when he says "The concept was, and still is, sound.
The execution - like so many things - has been lacking, and that lack has been exacerbated by external factors."

I am sure we will see more such schemes go to the wall....but I firmly believe there will be others, perhaps more solid companies, who survive & thrive.

I also agree the concept is sound, but my concerns remain about the execution and don't have much faith that the current crop of survivors have measures in place that would prevent them from being future casualties as a result of the same failings. That said there are one or two platforms I don't intend to exit.

masonic

AdrianC wrote: »

Which is precisely what FCA authorisation should prevent.

And let's not forget that what closed COL down was their attempts to circumvent FCA authorisation. And what caused all the admin shenanigans with COL was their attempts to keep the administration process out of FCA purview - including "losing" the loan book...

FCA authorisation is clearly worth nothing and doesn't appear to have done anything to prevent these issues. I'll enter your own analysis of numerous FS loans and actions/inactions as Exhibit A.

There always has to be a certain amount of trust in the platform. With black-box platforms, that has to be absolute. With platforms who provide borrower information, there's a lot of self-DD possible, and crowd-DD can be powerful.

Agreed, and I've benefited greatly from such insights and whipped out my personal bargepole on numerous occasions. What is unthinkable in a number of cases is that certain platforms have been in possession of the same information and let a loan proceed.

My view is the opposite - the inrush of money had to be met by an inrush of supply, which led to a slackening of quality. It was very visible on FC - to the point that they went black box to try to feed the dross through. Ly realised they were going that way, so stopped writing new loans because they couldn't get sufficient quality to meet demand.

There's an element of both, FS and MT, for example, appear to have really struggled as a result of investor sentiment turning, forcing them into a period of consolidation and drying up what had been up to that point an ever-growing stream of income. Had either platform been able to suck in more money and continue to lend it out, they would probably be trading today. Therein lies the moral hazard.

AdrianC

masonic wrote: »

FCA authorisation is clearly worth nothing and doesn't appear to have done anything to prevent these issues.

Again, hardly a unique opinion outside the world of P2P. But they're the best we have.

I'll enter your own analysis of numerous FS loans and actions/inactions as Exhibit A.

I don't believe I've ever expressed an opinion on FS. I don't hold one.

Are you meaning FC? It's 2.5yrs since I had anything bar defaults and recoveries on there, and I will admit that they're doing a sterling job on recovering the majority of those defaults. With the exception of one loan, I'm nearly 2/3 recovered, and still counting.