The peer-to-peer (P2P) lending sector has grown exponentially in the 15 or so years it’s been active, and many investors have enjoyed strong returns during a time of low interest rates and stock market volatility. It’s a shame then, that alternative debt-based investments, such as P2P and Marketplace* lending, remain firmly at the bottom of the list for many IFAs, wealth managers and other financial advisors when making investment recommendations to their clients.
Beyond simply not liking P2P, there are several reasons usually given for their reticence, including: high-profile platform collapses (i.e. Lendy); a general lack of understanding of the sector, its products and associated risks; the oft-made mistake of lumping all platforms together with no understanding of who the good eggs are; the fact P2P is not covered by the FSCS (more on that hot topic below); and importantly, the fact their professional indemnity insurance costs act as a deterrent because insurers are cautious of any alternative type of investment. All in all, we understand their reluctance, but that doesn’t necessarily mean they are right to advise investors away from this asset class.
We know we’re unlikely to convince those IFAs to change their mind, but we do want to dispel some of the misinformation that is out there – some of which we’ve heard directly from IFAs ourselves. We think the benefit of fixed-return investments with underlying security is worth looking at as part of a diverse, balanced investment portfolio, and that savvy investors should be empowered and have the right knowledge to make up their own minds.
So, in an effort to ensure transparency, here are nine snippets of misinformation we’d like to counter and set you straight on. From then on, it’s up to you to decide!
P2P is not properly regulated.
When the FCA first set its rules for P2P, it committed to keep these rules under review as the sector evolved and subsequently introduced tighter regulatory measures in 2019. These new rules were designed to protect investors while allowing firms to operate in a sustainable manner, including for example, a ruling that all new first-time or inexperienced investors are not allowed to put more than 10% of their investable wealth into P2P. An evaluation and revised supervision strategy is expected from the FCA in February this year.
FOLK2FOLK become regulated and fully authorised by the FCA for the financial services it provides, in December 2016 ahead of many of the UK’s larger P2P platforms at the time; failing to comply with our regulatory obligations is not an option.
Your money is at extra risk because P2P is not covered by the FSCS.
The FCA determined that P2P lending would not be covered by the FSCS, and this is often cited by IFAs as a reason not to invest, but what it means to be covered is so frequently misunderstood.
The fact is, the FSCS does not provide compensation in relation to loss caused by bad investment performance. It may only be claimed when a financial services product provider goes bust, or if there is a loss arising from bad investment advice from an authorised third-party such as an IFA or Wealth Manager and that advice is shown to have been unsuitable and the adviser has failed in the meantime.
In fact, because P2P lending is not covered by the FSCS, the FCA put in place other protective measures which it described as providing “adequate protection at this time” and subsequently introduced further regulation in December 2019 which included:
- Strengthening rules on plans for the wind-down of platforms should they fail.
- More explicit requirements regarding the governance arrangements, systems and controls platforms need to have in place, with a particular focus on credit risk assessment, risk management and fair valuation practices.
- A new requirement that platforms must assess investors’ knowledge and experience of P2P investments via ‘Appropriateness Testing’.
- Appropriate risk warning and statements in all financial promotions.
- Setting out the minimum information that platforms need to provide to investors. Including publishing an annual outcomes statement – you can view ours here.
Your money is not protected.
P2P and Marketplace lenders are not the same as traditional banks, but it’s not true to say that means your money is not protected. At FOLK2FOLK we don’t hold deposits, only accepting funds once you’ve committed to an investment. So, in terms of your FOLK2FOLK investments, your money is either:
- Invested in a loan – in which case it is secured with a first charge against land/property with a max loan to value (LTV) of 60%. Our wind-down plan means that in principle, your invested funds should be “safe” even if FOLK2FOLK were to fail, with the loan interest payments continuing to come to you and the return of your capital when the loan redeems.
- In between investments – in which case you will have chosen to have your funds back or agreed for the uninvested cash to temporarily sit in our ringfenced client money account until you are ready to invest in another loan. While your money is in our client money account it is segregated and safeguarded by the bank so should the bank holding the client money fail, your money will be returned to you.
P2P investments are riskier than other types of investments.
A tricky one to address because across the spectrum, P2P platforms vary so greatly in how they are run. But it’s fair to say, there’s no certainty of outcome with many investment types. For those which offer higher returns, there are usually higher risks and the share market is an example of this.
With a FOLK2FOLK secured investment however, it’s a very unlikely situation where you would end up with nothing. In the event a borrower defaults on their loan, we have recourse to get the capital and investment back through the sale of the security property. Our maximum 60% LTV leaves a buffer in the event of a market drop. We have a stringent credit process to assess each loan prior to approval after which our portfolio team regularly monitor and manage the health of each loan so we have very early indicators if a borrower is beginning to look like they’re struggling. Finally, in the event something happens to our business and we have to close, our wind-down plan kicks in to manage our loan book.
To date, this approach has ensured that in our eight years of trading, and with a cumulative total of nearly £400m invested via us, none of our investors have lost any capital.
Platforms sell you a rosy picture of returns but don’t tell you what can go wrong.
All P2Ps are required by the FCA to be proactive and transparent in their communication of the risks involved. At FOLK2FOLK, we plan to be here for the long haul and our best interests are aligned with the best interests of our investors; it’s to no one’s benefit to hide any of the facts regarding risk.
At every stage of the investor customer journey, we are clear and upfront about the risks involved in investing via P2P platforms into P2P loans. From the moment a potential investor contacts us via our website and in our Investor Guide, and before we allow anyone to register as an investor they must pass our Appropriateness Test which assesses their understanding of the risks involved. At the point investors choose a loan to invest in, we provide them with our due diligence and details of the security property for them to make their own decision or conduct their own further due diligence. We also explain to customers what would happen in the unfortunate, and we hope unlikely, event FOLK2FOLK failed to enable their investments to continue regardless.
P2P and Marketplace platforms could apply for full regulation to protect their investors, but just don’t.
This is a particularly concerning bit of misinformation that recently came to our attention. We can only speak on behalf of FOLK2FOLK which is regulated and fully authorised by the Financial Conduct Authority for the financial service it provides – there is no higher level of regulation. FOLK2FOLK is not a bank and we have no current or future plans to apply for regulatory permission in this regard.
We exist to be an alternative to the banks. Here to help businesses access finance when banks can’t – not because we lower our credit standards, but because we’re able to take a more holistic view of the borrowing business, the sector, the people involved and the situation, to feed into our risk assessment – and we offer investors an inflation beating and fixed return of typically 6.5% p.a. from a property-backed investment.
The poor performance of a few platforms is a reflection on them all.
Blatantly untrue. The P2P sector is very broad, spanning a huge range of platforms each with their own model and own approach to identifying, managing, and handling risk. All industries have their good, their bad and their ugly players and it’s frustrating for good lenders that the high-profile collapse of other platforms over the years casts a shadow on public perception of the sector as a whole. But, P2P is not the only investment class with high-profile disasters…we’ll just say ‘Woodford’ and leave it there.
If the P2P fails, you’ll never see your money again.
It is a regulatory requirement that all platforms have a detailed wind-down plan in the event the platform fails or decides to close. This is to ensure an orderly run off of their loan book, and the continuation of administration of existing loans until maturity or until the Borrowers repay. FOLK2FOLK pays an annual fee to retain the services of a market leading Standby Service provider, RSM Restructuring Advisory LLP (part of the RSM UK Group), to ensure they are ready to act in the event they are required.
Once you’ve invested via a P2P you cannot get your money out.
Ideally, when an investor invests via a platform it is for the duration of the loan they have invested in. However, most platforms have secondary markets on which investors can list their investments for sale to other investors (though some platforms ‘paused’ their secondary markets during the pandemic). FOLK2FOLK’s secondary market has experienced very high levels of liquidity, particularly within the last 12 months with FOLK2FOLK investors snapping up investments listed for sale sometimes within hours. At time of writing we have no loans for sale via our secondary market.
In summary, at FOLK2FOLK we run a profitable, successful business with a robust cash position. Our investors undergo the appropriate testing to ensure they understand the risks before we allow them to register on our platform. We would urge anyone considering investing via the sector to gain an understanding not just of the product risks, but also of who are the responsible platforms. Have a read of our tips of what to consider before investing via a platform and if you’d like to know more about Marketplace lending and investing via FOLK2FOLK please don’t hesitate to contact us.
* For the purposes of this blog, ‘P2P’ is used to refer to both peer to peer (P2P) and Marketplace (MPL) lending, however there is a difference between P2P and Marketplace lenders. P2P platforms enable individuals to lend to borrowers. Marketplace lending platforms allow institutions to lend money via their platform as well as individuals. FOLK2FOLK started as a P2P but is now a Marketplace lending platform, offering investment opportunities for both individuals and Institutions.
When investing via our platform your capital is at risk and is not protected under the Financial Services Compensation Scheme (FSCS). You can read more detail about the risks involved in investing via our platform here or contact us to talk about this further.
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