Peer-to-peer – a disaster waiting to happen?

Jonathan Sealey

June 8, 2016

gambling roulette wheel

Jonathan Sealey is chief executive of Hope Capital

Peer-to-peer is the buzz phrase of the industry at the moment.  Companies are piling into the industry tempted by the low cost of funds and high returns.

But peer-to-peer could well be a disaster waiting to happen.

End of Help to Buy 2 a concern for high LTV

The FCA is currently taking a look, but the question is whether they have the time and the resources to look at it closely enough and weigh up the risks given that it is a relatively small part of the lending market.

The Treasury Committee appears to have the same worries as Chairman Andrew Tyrie recently wrote to Tracey McDermott of the FCA and the deputy governor of the Bank of England, Andrew Bailey, saying the committee is “concerned to ensure that the FCA is paying due attention to the risks and the opportunities” in the peer to peer lending market, as he said that “poorly informed investors may be left with a false sense of security about the balance of risks versus returns”.

The key challenges as I see it is the unsophisticatedness of both investors and the new lenders coming into the market.  The big bridging lenders moving into peer-to-peer know what they are doing from a lending perspective.  They know how to underwrite and package a case; they therefore understand what represents a good risk where bridging and short term lending are concerned as they have been lending for years and grown as a result. For many of these lenders the move into peer-to-peer is logical as it lowers their cost of capital and makes them less reliant on big institutional investors who are likely to want much more of a say in the type of property they lend on.

Peer-to-peer investors however are typically unsophisticated investors who may well be putting in just a few thousand pounds, they are happy with higher returns than they can get through the usual channels and are very unlikely to be questioning which properties their money will be lent on.

The risk comes because this is often money that they can’t afford to lose.  Rarely, if ever, is any assessment done of the risk of the loan, or the investors’ attitude to risk as would happen if they went to an IFA.  Any money not returned therefore could well turn out to be a very real loss.

Some investors are also lured into a false sense of security by the lender’s declared reserves. While every lender gives this fund a different name, the reserves are usually only a tiny fraction of the amount of money owing, in some cases less than 2% and rarely is there a guarantee to repay any losses.

The biggest risk, both to investors and to the sector as a whole, will be if a platform itself goes down.  Investors in peer-to-peer are not protected by the Financial Compensation Scheme, so would lose everything.  The challenge is that only one bad story is needed to bring the whole sector into disrepute, which could well have a knock on effect on the bridging market as a whole

Peer-to-peer is great when it works well, providing higher returns than are usually available elsewhere, but the risks of something going wrong are still great so the likely intervention of the FCA has to be a good thing for the sake of the whole industry – including bridging.