Understanding investment risk

All investments carry risk — and property-backed peer-to-peer lending is no exception. While FOLK2FOLK takes steps to help protect your investment, it’s important you understand where risks lie and how they’re managed.

We want to be clear and open about the risks involved, so you can make the right decision for your financial circumstances and goals.

Before you register as an investor it is an FCA requirement that you pass our Appropriateness Test to ensure you understand the risks.

The main risks include:

1. Borrower default

There is a risk that the borrower may fail to pay interest or repay the capital. Repayments are not guaranteed, though the borrower is contractually liable.

If this happens, we explore all options and determine the best recovery strategy with our investors interests prioritised. Some strategies, such as receivership, can take time and may reduce the funds recovered. The sale of a security property may not always cover the full outstanding capital, interest, and enforcement costs.

How we help manage this risk:

Every loan is secured with a first legal charge against UK land or property.
Security enforcement provides a legal route to recovery. However, we assess each default case individually with our team considering multiple factors including property value, borrower circumstances, to determine the best recovery strategy. Enforcement may not be the most effective strategy.

See our Default Record to see how we’ve performed historically

2. No FSCS protection

The FSCS protects eligible deposits in banks, building societies, and credit unions up to £85,000 per person, per institution in the event the Institution goes out of business, but does not cover losses resulting from an investment not performing as you expect.

Peer to Peer platforms are not covered by the FSCS.

How we help manage this risk:

We maintain a regulatory capital buffer to support an orderly wind-down if required
We’ve appointed a standby service provider RSM Restructuring Advisory LLP (RSM) to continue managing loan repayments if FOLK2FOLK ceases trading
We are authorised and regulated by the Financial Conduct Authority (FCA)

Note: RSM is not an ISA manager, so IFISA status may be lost in the event of platform wind-down, meaning your IFISA funds will lose their ISA wrapper and associated tax benefits.

Read more: What happens if FOLK2FOLK goes out of business? (hyperlink to KH – What happens if Folk2Folk goes out of business) NO CONTENT TO LINK TO

3. Returns are not guaranteed and can go up as well as down

Loan interest rates are fixed at the point of investment, but actual returns may vary depending on:

Borrower late payment or default
Early redemption by the borrower

Time taken to invest in a loan. Interest is only paid once funds are invested in a live loan, not while held in our client money account or with solicitors awaiting completion of a loan.

How we help manage this risk:

Interest is owed monthly and accrues at a higher rate if unpaid.
Early redemptions trigger one month’s interest in lieu.

4. Liquidity risk

FOLK2FOLK loans are illiquid meaning your capital is tied up for the full term. In addition, there is no right to cancel an investment once committed, as it’s secured on land. While we offer a secondary market, where you can offer your investment for sale to other FOLK2FOLK investors, we cannot guarantee that someone will purchase your investment.

How we help manage this risk:

We operate a Secondary Market, where you can buy or offer loans for sale (subject to fees and eligibility).
Historically, on average resale has occurred within 0.8 days though future outcomes may vary.
Loans in default or arrears are not eligible for resale

Read more:

How to sell via the Secondary Market

5. Economic and property market risks

Broader economic conditions, such as rising interest rates, inflation, or economic downturns, may affect:

Borrowers’ ability to repay
The value of security properties (affecting recoveries)

How we help manage this risk:

We typically only lend up to 60% of market value (LTV), creating a buffer

Read more:

How we secure investments

How we value security property

6. Availability of investments

There are no guarantees regarding how long it will take before you find an opportunity you would like to invest in. There may be times when no suitable loans are available. The availability of loan investments depends on borrower demand. Funds sitting in our client money account (i.e. not deployed into a live loan) will not earn interest.

7. Timing of payments

If your Borrower is unable to meet monthly payments temporarily you will not receive your interest payments until they start paying again, therefore this investment may not be suitable if you rely upon the income or rely upon it being paid promptly. The missed interest payments will still be owing to you and will accrue at a higher interest rate but they will be delayed.

Even with successful recovery, repayments (especially of capital) may be delayed, particularly if legal processes or property sales take time.

On the converse, Borrowers may also repay early. If this happens, you will receive one month’s interest in lieu of notice and your capital will be returned. You can then choose to reinvest but there are no guarantees of investment availability.

8. Platform failure (wind-down or insolvency)

If FOLK2FOLK ceases to operate, your investments still exist. However, there is no guarantee that all funds will be recovered or that your capital will be returned in full.

How we help manage this risk:

We maintain capital reserves as required by the FCA to ensure an orderly wind down in the event FOLK2FOLK ceases trading.
We have a wind down plan and a standby service provider RSM Restructuring Advisory LLP on retainer who will work alongside FOLK2FOLK to execute an orderly wind down.

9. IFISA-specific risks

The Innovative Finance ISA is a tax-wrapper that ‘wraps’ around a Peer to Peer loan investment. It carries the same risk as other investments on our platform.

Interest earned via a FOLK2FOLK IFISA is returned to you as monthly income, it does not accrue within the wrapper and interest does not compound.
Loan availability may delay investment. If funds are not invested before the end of the tax year, they retain tax-free status but will not earn interest until invested.
We can’t guarantee how quickly your IFISA funds will be deployed into a loan. If you have not found a suitable loan by the end of the tax year, your allowance is retained but you may not have earned interest.

IMPORTANT: We don’t provide advice

FOLK2FOLK does not offer personal financial advice. Please read this page and our Terms & Conditions, consider your financial situation, and speak to a financial adviser if you’re unsure.