The Importance of Being Prudent

FOLK2FOLK

2019 was a year of unflattering headlines for the peer to peer (P2P) sector. Underpinning it all, are the varying approaches platforms have taken when it comes to identifying, assessing, managing and communicating risk – some have done this well, others less so.

So how about FOLK2FOLK? How does the company measure up in its approach to risk?

Well, put simply, we’re prudent. Prudent in attitude and prudent in action.

And, so far, that’s worked for us. At time of writing, our track record has been good – with no Lender losses to date. But we would be naïve if we expected that to continue in perpetuity. Instead, we take sensible steps to try to maintain low default levels and minimise Lender losses.

How we demonstrate prudence:

  • By taking a conservative approach to risk, lending up to a maximum of 60% loan to value (Open Market Value).
  • Applying common sense and taking an holistic view when assessing Borrowers.
  • Our risk management framework means we adhere to strict credit risk parameters for our Lenders, matching the interest rate reward with the risk, taking heed of and being alert to external factors and market forces that can influence levels of risk.
  • Taking additional care in early identification of late payments by defining our own definition of ‘default’. The Financial Conduct Authority (FCA) deems payments that are 180 days overdue as ‘defaults’, while we view any payments 14 days overdue as in ‘default’. We foster a culture of ‘no surprises’ by maintaining regular dialogue with Borrowers and any missed payments are flagged internally within one day.
  • The appointment of our Head of Risk & Loan Portfolio as Managing Director, purposefully setting a risk mindset at the head of our business.
  • It’s in our DNA that good folk lend to good folk and ‘good borrower behaviour’ is an intentional outcome of our local lending model. This results from Borrowers knowing who their Lenders are (and vice versa), instilling a keen awareness they’re borrowing an individual’s money and not from a faceless pool of cash.
  • All P2Ps are now required by the FCA to have a ‘stand-by service provider’ and wind down plans in place to manage the continuation of customer investments in the event they cease trading. FOLK2FOLK has always had this measure in place for its customers, but has now changed to a market-leading provider: Baker Tilley Creditor Services LLP (part of the RSM UK Group), to ensure the very best service and reassurance for our customers in the event the company has to wind-down its lending operations at any point in the future.
  • Lastly, we are prudent in the running of our business, viewing platform stability and profitability as key elements of managing risk for our customers.

As with all investments, capital is at risk. Peer-to-Peer lending is not protected under the Financial Services Compensation Scheme. Our current track record of zero Lender loses relates to our past performance and is not a reliable indicator of future trends.

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‘Are all peer to peer loan investments too high risk?’ and other myths

FOLK2FOLK

Recent news articles have focused heavily on emphasising the risks involved in investing via peer to peer lending platforms. Such stories could encourage a perception that all peer to peer loan investments are too ‘high risk’ and have you running for the hills. But if you did, you’d be missing out on an investment class that can be an asset as part of a balanced investment portfolio.

So, it’s essential to understand the realities, rather than the perceptions, of the risks involved. Not all peer to peer lending companies are the same and the risks involved vary hugely depending upon the platform, the nature of their product, their credit process and whether your investment is secured or unsecured.

The peer to peer sector is still young. It emerged as a reaction to the financial crisis and developed at speed. Some platforms have fallen by the wayside as a result of poor credit choices and processes from their early days.  Now, as warrants a developing industry, the sector is subject to increasingly rigorous regulatory attention. We welcome the FCA’s vigour in ensuring that peer to peer lending platforms operate with prudence and investors understand the risks involved before investing. Our investors are the lifeblood of our business, so our highly experienced credit team are never complacent about the quality of our loan book nor our credit assessment process.

To help separate the facts from some of the fiction, we address what we think are the three most common myths:

Myth #1 All peer to peer loan investments are ‘high risk’

While it IS true your capital is at risk when you invest in a peer to peer loan investment – and that it is higher risk than having a savings account – it is not true to say all peer to peer loan investments are ‘high risk’. Across the sector, peer to peer loan investment propositions range from unsecured high risk/high return stakes to a more conservative, and secured, end of the spectrum which is where FOLK2FOLK sits.

Myth #2 You’ll lose all your money if you invest via peer to peer platforms

You ARE at risk of losing money when you invest via peer to peer lending platforms, because all investments carry degrees of risk.  All investors have a different risk tolerance and return appetite which is why peer to peer lending, with its broad array of lenders, levels of return and approaches to risk, has grown as an alternative investment option.

Approaches to reduce risk vary from platform to platform. At FOLK2FOLK, we only offer loan investments that are secured against UK based land or property.  We don’t offer unsecured lending which we consider to be riskier.  We only lend up to 60% of the open market value of the security property and a charge is held over the property.  At time of writing, none of our investors have actually lost money in our six years of business, but past performance is not a reliable indicator of future trend.

Myth #3 There’s not much difference between the peer to peer platforms

Peer to peer lending is a hugely varied industry with multiple platforms operating vastly different models, pricing structures, credit processes and approaches to risk. Comparison is far from straightforward – it’s certainly not comparing ‘apples with apples’ – and the behaviour of the few is not a reflection of the practices of others.

 

We advocate the importance of always understanding the risks, as well as the rewards, of investing in peer to peer loans.  We highlight the risks in our Lender & ISA Guide and illustrate the relative risk and reward of FOLK2FOLK loan investments when compared to each other in our handy infographic.

THE P2P SECRET BEHIND LENDING £260m WITH NO LENDER LOSSES

FOLK2FOLK

Not all Peer-to-Peer (P2P) lenders are the same when it comes to risk and reward explains Roy Warren Head of Loan Portfolio & Risk.

After nearly six years of business, FOLK2FOLK still proudly reports that none of its Lenders have lost any money via the platform.  This may be an unusual record for a Peer-to-Peer lender and one we’re determined to preserve. So, what’s our secret?

I’d love to tell you something clever; that our secret is an amazing algorithm, a marvellous mathematical equation, a fantastic financial formula but instead, the secret to our sound track record when it comes to our Lenders’ money is something very plain and simple. It is prudence.

Prudence is paramount.

All investments carry a degree of risk and all investors have a different risk tolerance and return appetite which is why Peer-to-Peer lending, with its broad array of lenders and vastly different models and approaches to risk, has grown to become a popular investment option for many.

However, comparison is not straightforward and propositions range from high risk/high return stakes to a more conservative end of the spectrum which is where FOLK2FOLK sits with our 6.5% p.a. interest rate and maximum 60% (LTV) loan to value ratio of forced sale value (this means how much could be obtained if the land/property asset was sold within 60 days and usually equates to c. 45% (OMV) open market valuation).

This is where prudence comes in. For us, prudence is about respecting our Lenders’ hard-earned money and ultimately leaving their investment decisions totally in their hands.  We build strong relationships with our Borrowers and Lenders; understanding their requirements and preferences and take a common-sense approach to all things.

Lenders are the lifeblood of our business and we do all we can to protect their interests.  This means we are not complacent about our assessment process and the quality of our loan book: we continually strive to improve our processes; stay ‘ahead of the wave’ by keeping abreast of sector issues, property values and the wider performance of the economy; and foster a risk culture of ‘no surprises’ by maintaining regular dialogue with Borrowers

Our conservative approach to LTV (Loan to Value) has contributed to keeping our portfolio clear of Lender losses to date.  However, LTV cannot be viewed in isolation, it’s also about serviceability and a sound exit plan for the loan. It is within our DNA that ‘good folk lend to good folk’ and the character and track record of our Borrowers is also important in our loan assessment.

We continue to improve the ways in which we monitor and control our portfolio.  Our promise to our Lenders is that we’ll be open, transparent and not take our current track record of zero Lender losses for granted; prudence will remain paramount.

Find out more about Lending via FOLK2FOLK or enquire here for more information or to speak to us.

As with all investments, capital is at risk. Peer-to-Peer lending is not protected under the Financial Services Compensation Scheme. Our current track record of zero Lender loses relates to our past performance and is not a reliable indicator of future trends.

 

THE P2P SECRET BEHIND LENDING £260m WITH NO LENDER LOSSES | FOLK2FOLK  Roy Warren, Head of Loan Portfolio & Risk