Peer-to-peer lending sites: MSE guide discussion

jamesd

geoff_s---r wrote: »

I asked above if research could be done (or has been done?) on p2p trusts, as I'd consider moving too if I could identify a p2p company that uses an independent reserve trust, rather than just a pretend trust. I couldn't easily identify one.

A healthy P2P company should be the just the platform that arranges loans & shouldn't be actively controlling lenders cash that is held in reserve.

The FCA has done some research on this and is considering it in its possible rule making on potential and actual conflicts of interest within P2P. Page 18 of Interim feedback to the call for input to the post-implementation review of the FCA's crowdfunding rules: "Thirteen respondents made comments ... or requiring third parties to administer provision funds to avoid conflicts of interest" and "We continue to conduct research and analysis into the market to inform our thinking on the extent market development gives rise to potential consumer detriment" but managing conflicts of interest is scattered throughout the document. In the few places with protection funds it's commonplace for senior managers at the P2P platform to also be managing its protection fund, RateSetter (the one that probably concerns you most) and Zopa being the two most prominent of those.

fairleads wrote: »

i repeat, why bother even considering putting money into these schemes. Just because an individual says that p2p is less risky than BTL, or another individual says they have 100k on loan to p2p, is not a good enough reason (justification) to place money at risk in a scheme where you could loose all.

A person like me with that much in and who's been using P2P since 2008 is likely to have a better idea of the actual risks, which don't include losing all of the money unless you do really silly things like ignoring all the guidance to diversify across platforms and loans. Something you can do more easily by putting all of the money in a single shareholding or bond instead if you want to be foolish. As the MSE guide this discussion is linked to says: "All the risks involved in peer-to-peer lending mean it's sensible to spread your money around different savings and providers, so you're less exposed to any unpredictable shocks", though its assertion that the three places it mentions give the best returns is now ludicrous and it's thoroughly outdated in that area.

I'm using P2P to reduce my risks compared to say share and bond funds, because it does that.

Thrugelmir

jamesd wrote: »

A person like me with that much in and who's been using P2P since 2008 is likely to have a better idea of the actual risks,

As an outsider investor you actually know very little. Having been on the inside of Company finances over many years. Certainly not a place for the fainthearted. A business can change very rapidly from being highly successful to being in deep financial trouble. Risk comes in many facets.

jamesd

Thrugelmir wrote: »

As an outsider investor you actually know very little. Having been on the inside of Company finances over many years. Certainly not a place for the fainthearted. A business can change very rapidly from being highly successful to being in deep financial trouble. Risk comes in many facets.

For all of the perhaps thousand or so businesses I've invested in via P2P over the years?

Yes, company finances can change rapidly but part of sensible P2P investing is not to have an excessive concentration in any particular risk/company. On both the individual borrowers and platforms I monitor this and change what I do as seems necessary as a result so I don't get excessively concentrated, however good a deal might look. So is forming some sort of view about such prospects when evaluating individual loans on the platforms where that is done directly by lenders.

I agree that investing isn't a place for the fainthearted - at least for the more extreme end of fainthearted - and for all investing there are very widely disseminated guidelines on things like diversification and considering what you do and don't know to help do it sensibly. The MSE guide is one of the huge number of guides and posts that gives sensible advice about getting started gradually and diversifying.

Our pensions is where a quite high proportion of the population is likely to be doing risk-based investing, even if they don't realise it.

bigadaj

It's an interesting debate to determine where p2p fits on the risk scale, and that is largely determined by the specific p2p model.

The older platforms like Zopa and Ratesetter can manage bad debts by paying from their healthy margins presumably, so paying an investor 3-4% when their returns are multiples of this is possible even with defaults.

The business focused platforms that you and I use, though you have been doing this for longer with larger sums involved, generally have security. Returns are higher, defaults have occurred though I've not suffered one as yet, and risk to capital is primarily due to lack of access whilst assets are sold and a haircut being applied due to the sale of assets rapidly and things like over valuation of these assets.

So for the latter platforms p2p loans would seem to me to fit in the middle of equity type risk, these are small companies or individuals so not exactly HSBC, shell etc, but this is a secured loan so as a creditor you would sit well ahead in any queue of any equity holder.

Diversification is key and I've been fairly conservative, I'll generally put 3 figures into individual loans and have approaching five figures on primarily three platforms currently, it's not going to make me rich quick but does mean the effect of any default will be minor. Individual five figure investments would be a headache for me and I'm sure many others were they to default.

It's an interesting area, particularly with returns on cash so low, apart from small sums, bonds looking unattractive, property and infrastructure valuations looking stretched and equities expensive though I'm still putting money into the latter through pension and unwrapped.

I'll maybe have to look further into the secondary markets as well, I still use Savingstream though not as much as the two other platforms, and their secondary market seems to be a dumping ground for end of life loans that investors feel might not ready at all, in full, on time or a combination of these.

TheFaithfulServant

Hi just wanted to know if anyone has had any experience with abundance ethical peer to peer funding thanks

fairleads

I would say that diversifying your cash over a multiple of p2p platforms and loans is to increase the risk of a loss, not minimise it.
You see, p2p is loaning money for interest only. If one borrower in your p2p portfolio defaults you lose both capital and interest which is not compensated by an increase in the capital value of the rest of your portfolio.

Further, you cannot compare investing in equities to loaning money via a p2p platform to an almost Anonymous third party. I use the A word in the context that in most cases you, the lender, will not have access to the balance sheet of the borrower. Thus you cannot evaluate the financial standing of the borrower.
And neither is there a direct connection (ownership) between you and the borrower as there can be in the case of your investment into an invest able asset – BTL and equity - for example. So as you cannot evaluate the financial standing of the borrower, you have no idea of the risk involved.
And because you have no ownership of a p2p loan you have no chance of minimising a loss as one can with an equity investment.

jamesd

fairleads wrote: »

I would say that diversifying your cash over a multiple of p2p platforms and loans is to increase the risk of a loss, not minimise it.

One of the biggest risks of P2P is fraud at a platform, say by employees, or major platform failure. It's essential to diversify across platforms to reduce the loss exposure if that happens. While the FCA requires certain protections, it'll be worrying even if those work as they are supposed to. As the FCA observed in its Interim feedback to the call for input to the post-implementation review of the FCA's crowdfunding rules: "2.8 The possibility of a high-profile platform failure is seen by firms as the biggest risk to the ongoing viability of the sector. ... 57% of firms said that collapse of one or more of the well-known platforms due to malpractice carries a high risk to growth in a survey cited in Nesta and University of Cambridge, Pushing Boundaries, the 2015 UK alternative finance industry report, February 2016" So while you're right that more platforms means more chance of being in one that fails, it's essential to reduce the potential losses if you are.

fairleads wrote: »

You see, p2p is loaning money for interest only. If one borrower in your p2p portfolio defaults you lose both capital and interest which is not compensated by an increase in the capital value of the rest of your portfolio.

Really? So Zopa, Bondora and Ablrate have been lying to me about all of the capital payments that borrowers on their amortising loans have been making? Nope. Amortising loans exist in the P2P area and there are places like Ablrate that do a mixture. In fact I invested a bit in an amortising loan at Ablrate that the borrower accepted yesterday, loan 1000056 the lease receivables one. It's not the increase in capital vale of other loans that is supposed to cover losses to defaults, it's the interest (except in the loans where someone is swapping out defaulted portions of a loan, quite a lot of which I have). And some platforms like Zopa, RateSetter and Bondora are explicit in how they add more to the interest rate and/or fees paid by borrowers to do this, either via protection funds or to provide that interest rate margin on top of the projected investment return.

Of course this doesn't mean that you can't make capital gains at platforms. I have on all three of the platforms that either allow trading at premiums (Ablrate, Bondora) or buying at discounts due to incentives.

fairleads wrote: »

Further, you cannot compare investing in equities to loaning money via a p2p platform to an almost Anonymous third party. I use the A word in the context that in most cases you, the lender, will not have access to the balance sheet of the borrower. Thus you cannot evaluate the financial standing of the borrower.

So the fact that I can look up the home address of a borrowing firm's directors and see that they have sole ownership of a flat in London that can be sold to repay their loan means they are anonymous? I don't think so. It's normally possible to check the accounts of borrowing businesses filed at Companies House on many of the platforms that do lending to businesses and you can also do things like look at the charges and any court judgements. There's a lot I don't know but I typically do know the names and can do things like checking public records and news stories when it's business lending on many platforms, though not all.

At present I am doing no lending at all to businesses where I don't know the name of the borrowing firm and have the ability to look up the details. The past such lending was via Zopa and Bondora where they were to sole traders or to individuals for their small business use and in that case the data protection rules normally prohibit naming of the borrower, though public records do sometimes reveal details, or even press reports sometimes, typically after default and in bankruptcy or court cases for debt collection or identity fraud.

fairleads wrote: »

And because you have no ownership of a p2p loan you have no chance of minimising a loss as one can with an equity investment.

You may have missed what P2P means: peer to peer. The legal requirement for all section 36H regulated P2P is that there is a direct contract made between lender and borrower. Every P2P platform I use lets me sell loans and on one I've done a fair bit of selling of impaired - defaulted or even bankrupt borrower - loans to manage potential losses. And of course in UK and some non-UK P2P the capital losses in defaults can be deducted from the interest earned for income tax purposes, with any subsequent capital recovery treated as taxable interest.

There's a lot of criticism of P2P from people who don't know much about it. And usually a lot of enthusiasm from people who have tried it and learned more about how it really does work. You're doing a great job of illustrating some of the former and giving me a nice chance to explain that may help to educate others. Thanks!

fairleads

jamesd wrote: »

There's a lot of criticism of P2P from people who don't know much about it. And usually a lot of enthusiasm from people who have tried it and learned more about how it really does work.

Yes James, and thousands of people have lost money thro' platform collapses on p2p in other countries.
Further, knowing a director's address does not guarantee anything.

jamesd

fairleads wrote: »

Yes James, and thousands of people have lost money thro' platform collapses on p2p in other countries.

More than a billion people have done so, in a number of large failures in China, some of which were believed to be outright fraud that did no investing at all, like this one with 900,000 "investors" who collectively put in $7.6 billion. The FCA has its uses.

fairleads wrote: »

Further, knowing a director's address does not guarantee anything.

In the one I was thinking of it tells me that a director is going to lose their home if they don't pay up. The firm that did the borrowing is subject to a winding up petition following court judgement against it and normal practice given what happened is that directors are made personally liable. Already been required to disclose assets worth more than a certain amount, been subject to an ongoing emergency freezing order and had their personal bank account frozen by order of a court except for living expenses. I don't really think that those things are nothing. I rather like to know that the individual has assets and being able to see what's happening in public records in addition to what the platform tells me.

jamesd

bigadaj wrote: »

I still use Savingstream though not as much as the two other platforms, and their secondary market seems to be a dumping ground for end of life loans that investors feel might not ready at all, in full, on time or a combination of these.

Some lenders do it systematically in the belief that it removes much of the risk of default. That's driven in part by Saving Stream's practice of taking all of the interest payment money from the borrower up front, so you never get to see things like delays until the end of the loan. Unless the borrower gets into really serious trouble before then, which does happen at times.