If it sounds too good to be true, it often is.

There were shockwaves in the lending sector recently with the collapse of property development finance lending specialist Lendy. This left Lendy’s 20,000 investors facing the loss of a large proportion of the more than £160m outstanding loans on the platform.

The failure of Lendy was only one high-profile example of the peer-to-peer lending sector that has been rocked in recent months.

As traditional banks and financial institutions retracted from development finance and other risky loans in the aftermath of the financial crisis, it allowed the establishment and rapid growth of peer-to-peer (P2P) lending platforms. This was welcomed at the time to offset falls in bank lending, and without the risk aversion or performance issues of traditional banks, peer-to-peer platforms were providing a lifeline to borrowers who struggled to get a borrowing through traditional channels.

While only Zopa was operating during the last financial crisis, both politicians and regulators saw P2P as a way to make up for the drop in lending by banks. Not only was there a huge demand for borrowing, there were also plenty of investors willing to invest their savings, due to the low-rate environment. A perfect storm of circumstance saw the industry grow rapidly. Data from Brismo suggests that over £6.7bn was lent by British P2P companies over the past 12 months, which is £1bn more than rest of Europe combined.

However, the FCA have now imposed new regulations to prevent unsophisticated lenders being lured in by high returns. The new rules will aim to limit the marketing, strengthen governance and credit underwriting, whilst also forcing lenders to be more prepared for failure. The City watchdog will ban new investors from investing more than 10pc of their wealth in P2P loans, and will also force platforms to tell investors when a borrower is unlikely to meet their obligations, even if they are yet to technically default.

We would always urge caution from any property developer looking to borrow from a P2P lending platform. Equally, it’s important for investors to do their homework (as Lendy investors will no doubt testify). There are some very good companies out there, but there are also plenty that have no track record, nor the infrastructure to underwrite loans properly. Always ensure your lender passes the credibility test.

If a lender is offering more leverage at cheaper rates than anyone else, it may sound great today, but if you get 6 months into your development, and the lender goes pop then your left with a half-built development that no one will fund. Similarly, for investors, if a lender is offering anything more than 5% as a return, then you need to question how sustainable this is.

As a broker, we monitor the industry closely and like to think we have a better view than most of which lenders will still be standing after the next downturn. We would suggest that it’s better to use a broker who will assess all options (not just P2P), and if P2P is the best option, ensure the necessary due diligence is done on that lender.

Do the maths. If they are taking undue risks (with you), then they’re probably doing the same with others. The concern is that the ease of setting up a P2P lending platform has attracted companies that lacked the required credit expertise to manage an economic downturn, so you will need to question if the lending platform is likely to be around for the duration of your loan or investment.

 

 

July 2019