A little over a month ago, Loanpad HQ discussed a range of topics for upcoming blog posts including the upcoming IFISA season, importance of cybersecurity and loan due diligence. Fast-forward to today and our team are primarily working from home, stock markets have suffered losses unseen in decades and the world has united in its efforts to battle and defeat Covid-19.
Like many other businesses, we will do whatever we can to support the country so that we can all get through this together.
First and foremost, we join everyone in hoping that the best experts in the world manage to contain the fallout as best possible, slow the spread and ensure the availability of medical treatment for everyone. Our business has a strong ethical stance and we hope that at times like this we will see the very best traits of humanity come to the fore where we strive to help and care for all those around us who may need our help in many different ways.
The P2P market is by no means immune to the impact of Covid-19. Like other asset classes, the sector has seen an increase in withdrawals with many platforms effectively banning the ability of investors to access their money.
In these times, investors should realise that P2P firms vary significantly in risk appetite, structure and makeup of loanbook. Investors should do their homework on the various platforms and see what is on offer. Some of the questions you should consider include:
- What security is there? P2P platforms either make unsecured loans to businesses and individuals or loans secured against some form of tangible asset, like property. Unsecured loans by their very nature are higher risk as investors have no recourse if a loan goes into default. Loanpad only makes secured loans against property to ensure the property can be sold if necessary to recover your money.
- If security is taken, what are the loans to value? Even when security is taken, P2P platforms can decide how much to lend as a percentage of the security value. The higher the loan-to-value (LTV), the higher the risk as there is less of a cushion if valuations fall. Loanpad’s risk-averse business model only lends up to a maximum of 50% LTV with a current aggregate LTV of 28%.
- Are commitments made to future loans? P2P platforms often ‘commit’ to property development loans where the funds are only released during the course of the loan. Without having set aside these funds at the outset, they will often have to rely upon either continual repayments from other loans or more deposits. Given the structure of lending partners, Loanpad does not commit to lending any future money.
- What interest rates are offered? P2P platforms offer a wide range of interest rates linked to different account types and access times. The general rule of thumb is that the investors take on higher risk for higher return. Loanpad prides itself on lower-risk loans while still offering competitive rates.
We continue to believe that P2P has a firm place in investors’ portfolios. In recent days, the level of withdrawals at Loanpad has decreased to a trickle and we are seeing an upturn in deposits from both new and existing investors.
We do not see a material increase in risk of capital loss on any loans. Our loan structure is designed to outperform in tough market conditions. This is because our conservative appetite for risk (very low LTV property lending only) serves to shield our investors from falls in the property market which ‘may’ result from significant drops in the financial markets (as we are currently witnessing).
It is important to remember that the performance of loans on our platform is not directly correlated to the stock market and is in fact one of the advantages of using Loanpad.
We have always believed that most retail investors simply want to earn a fair return on their money that comfortably beats inflation in any foreseeable market conditions. That is what Loanpad aims to do and we fully expect to be able to do so even in these volatile times.
Written by the Loanpad team
Since early December 2019, anyone who has tried to invest on a peer-to-peer platform has noticed a string of changes, most notably the introduction of investor categorisation and the requirement to take (and pass) an appropriateness test.
This is due to new regulations from the Financial Conduct Authority (FCA) who are seeking to improve the internal governance and systems of peer-to-peer platforms whilst ensuring that only those investors who understand the features and risks can invest.
However, why have these new regulations been put in place and can they really help put trust back into a sector that has seen its fair share of bad press and insolvencies?
Contrary to popular belief, recent insolvencies within the sector have not caused a knee-jerk reaction at the regulator. These changes have been on the cards for years. If we cast our minds back to the beginning of 2014, we had the UK peer-to-peer market running towards the £1 billion. Peer-to-peer was quickly becoming a household name and there was a lack of consistency in marketing, disclosure and corporate governance.
At that time, the sector was regulated by the Office of Fair Trading and, in mid-2014, the regulatory torch was passed over to the Financial Conduct Authority (FCA). Initially, existing companies received provisional authorisation whilst new entrants had to go through a full FCA authorisation process.
The FCA used this time wisely to understand the peer-to-peer platforms, the investor base and develop a view on whether additional and / or more specific rules would be required. However, as we know over the last 18 months, whilst this was happening, cracks began to form, and this resulted in the failure of a few platforms.
After rounds of consultations, the FCA implemented its new rules for the peer-to-peer sector on 9 December 2019. One of the most visible changes to investors is the need to undertake an appropriateness test. This has been implemented by the FCA so that only investors who adequately understand the features and risks of each platform and peer-to-peer in general are able to invest.
Looking around the sector, we see some variances in the way that each platform has interpreted and thus implemented the new rules. It will inevitably take some time for conformity to occur across the various platforms. In addition, we see the FCA seeking to clarify and enhance the new rules following a period of review and embedding during 2020.
Ultimately, peer-to-peer lending remains a bigger household name than it was five years ago. The introduction of new rules seeks to ensure it sits alongside historical more traditional investment classes and the key is for investors to assess each platform on its own merits, risk levels and usability.
We see 9 December 2019 as a turning point for a new, more professional, era for peer-to-peer lending with platforms demonstrating increased transparency, additional safeguards to mitigate platform risk and more accountability on the part of the individuals running p2p platforms.
The future looks very green indeed.
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Loanpad’s Chief Executive Officer, Louis Schwartz, and Chief Operating Officer, Neil Maurice, give their views on recent events in the Peer-to-Peer industry and what it means for the future.
The P2P industry, like many others, has been hit by a number of corporate failures in recent times.
As an industry, our concern must be with investors who not only have their assets frozen but also may suffer losses on their investments through a combination of both loan impairments and professional fees. This is extremely unfortunate and, whilst all investors take risks, it raises many questions on operational controls, lending processes, due diligence and investor information disclosure.
Whilst a relative newcomer, we firmly believe that these corporate failures should not reflect on the wider industry. Loanpad, alongside our competitors, should focus on running our businesses in a stable manner, complying with all relevant regulation and guidance and putting the investor at the forefront and centre of any decision being taken.
We set out below a few of our thoughts on sustainability and navigating the P2P course.
One of the biggest areas of risk that has come into very sharp focus in recent months is platform risk.
A fundamental principle of P2P lending is that investors should be exposed to borrowers’ credit risk (the risk of loans defaulting) but not materially to the credit risk of the platform. This is one of the things that differentiates P2P lending, where platforms simply act as an intermediary on behalf of the borrower and lender. Whilst at face value this is of course true, the recent administrations have quite clearly demonstrated that investors have been exposed to the good standing of the platform in ways other than borrowers’ credit risk.
So how are investors expected to be able to determine the level of platform risk when evaluating any platform?
The first thing many investors will look to is the size of the platform, with the supposition that bigger is safer. Whilst in many cases this would seem logical, in the world of P2P we remain unconvinced by this argument. This is primarily because no P2P platforms would appear to have reached profitability on a consistent basis and some are still showing significant ongoing losses.
With the FCAs minimum regulatory capital requirements in place, losses can only be sustained via new equity being raised. However, the “golden years” of ever-increasing equity injections appear to be dwindling. Quite simply, platforms must now become self-sustainable to survive over the coming years and we envisage large-ranging changes to platforms’ business models.
So back to the question – how can investors reasonably evaluate “platform risk”? Sadly, with much difficulty and imprecision as most available information is historic.
However, the introduction of the new FCA rules in December 2019 will go some way to helping investors evaluate platform risk through clear disclosure on loans under management, fees and the rate of interest charged to borrowers. In addition, all platforms will need to adequately disclose their wind-down plans so investors can compare and contrast the approach platforms are taking to wind-down.
At Loanpad, despite being just 9 months post-launch, we anticipate reaching profitability and self-sustainability by 2020. This is as a result of our unmovable focus on sustainability ahead of exponential early growth.
Our focus is to steer the business to profitability whilst continuing to provide investors with (what we believe to be) the market-leading P2P product.
One of the issues identified through the corporate failures to date is that many platforms generate a significant proportion of their income at the time of loan origination. Whilst perfectly acceptable to charge fees, this creates an inherent need to originate new loans to fund operating expenses which in turn relies on regular loan repayments and / or new investment.
At Loanpad, our income is generated from a Loans Under Management margin such that we earn income on a daily basis in the same way as when our investors do. This ensures that our income is stable irrespective of the level of new loans originated in any given period.
In the coming month and years, we envisage greater scrutiny on how platforms earn their revenues and the sustainability of the underlying business models.
Governance & Wind-Down Plans
Perhaps the most intriguing factor of these corporate failures is the role of governance and wind-down plans.
The overarching aim of a wind-down plan is such that the Board tracks and identifies when a wind-down should be triggered and then initiates the wind-down of the loanbook in an orderly fashion. Importantly, this must in good time before a business runs out of cash to operate.
Whilst each circumstance is different, we believe that strong corporate governance, a tight control on costs, clear and measurable indicators of the need to initiate a wind-down and full financial planning for the wind-down period are essential in any P2P platform.
In our opinion, the alternative to an orderly wind-down is falling into insolvency by way of administration or liquidation. This is the scenario that should be safeguarded against as otherwise the risk to overall recoveries and fees undoubtedly increase. Whilst wind-down plans must consider their interaction with general and insolvency law, we believe that the initiation and completion of a successful wind-down plan should occur before any insolvency process is required.
Neil Maurice, Chief Operating Officer of Loanpad gives an overview of wind-down plans and shares some views on Loanpad’s wind-down approach.
What’s central to any business?
As with any business, there is no guarantee that Loanpad or any peer-to-peer lender can or will choose to operate forever.
Since the financial crisis in 2008, we have seen a raft of corporate failures both within financial services and in other sectors. Whether it’s lenders in peer-to-peer platforms, counterparties in investment banks or holidaymakers in tour operators, all failures have one thing in common – customers.
Customers, or within peer-to-peer lending – investors, are and should always be the centre of any business throughout its lifecycle. Unfortunately, history has taught us that corporate failure has often caught firms unaware and customers or investors have been left with uncertainty over both whether and when they will get their money back.
What are wind-down plans?
At Loanpad, we see it as critical to have plans in place to both identify when our business is no longer viable and to implement plans to wind-down any outstanding investments or loanbook before an insolvency process is required.
The FCA has put increasing emphasis on the need for peer-to-peer lenders to have adequate and proportionate wind-down plans in place to avoid what it deems as “disorderly failure”. Within peer-to-peer lenders, one of the FCA’s concerns is that loans continue to be administered if the platform ceases to operate for any reason.
The overarching aim of a wind-down plan is to help ensure that existing loans continue to be managed, monies recovered from borrowers in a timely and efficient manner and then ultimately repaid to investors without the need or even consideration to enter any form of insolvency.
What are Loanpad’s wind-down plans?
We built our wind-down plan taking into account our business model and web-based platform and considered the best interest of investors in respects of efficiency and costs.
Our wind-down arrangements consist of a plan to manage the wind-down of the loanbook internally (alongside our lending partners). Staffing requirements and operating costs have been assessed and we have capital set aside (which will be increased proportionately with the size of the loanbook) to keep things running smoothly.
In addition, our lending partners take on contractual obligations to investors / Loanpad insofar as management and reporting are concerned and, combined with their “first loss / skin in the game”, this is unlikely to be treated lightly even in a wind-down scenario.
Loanpad believes its business model provides for an orderly and less resource-intensive wind-down due to the following factors:
- Loanpad earns money on a daily basis based via an “assets under management” margin, therefore Loanpad is not dependent on new business for its revenue;
- The lending partner approach means that the day-to-day management of the loans is undertaken by established and experienced lenders with our supervision and monitoring; and
- All investors are in the same pool of loans so there are no difficult or time-consuming allocations to be administered on a loan-by-loan basis.
What will the future hold?
As the industry works through a number of peer-to-peer platform failures, lessons continue to emerge to assist us and the rest of our sector in improving our wind-down plans.
We hope that new regulations coming into force will ensure that all peer-to-peer lending platforms have wind-down plans to cater for all reasonable eventualities. Whilst all platforms are competitors in one sense, we are first and foremost partners in the common aim of securing the continued growth and sustainability of the sector and ensuring good practice throughout.
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