Navigating the P2P Course
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.