When it comes to peer-to-peer (P2P) lending, advisers could be forgiven for feeling they’re between a rock and a hard place.
On the one hand, there’s the FCA promoting the sector by automatically handing out new permissions. On the other, with inflation rising and interest rates cut even lower, advisers have more and more clients desperately seeking real returns —and turning to P2P lending in ever larger numbers as a result.
To top it all off, the launch of the ‘Innovative Finance ISA’ in April has sparked even more interest from mainstream investors attracted by the ISA brand. Some predict 500,000 new investors could soon enter the market for the first time.
IFAs understandably cautious
Despite this, financial advisers have remained cautious, with a few even choosing to give back their permissions. They see new and unproven P2P lenders under pressure to generate returns, and for some — understandably — it just doesn’t stack up.
But I would argue that the very reason there are so many unproven P2P lenders out there is precisely why advisers need to get stuck in and help their clients separate the wheat from the chaff.
Surely this is an untapped opportunity for smart advisers to add value to their clients, not to mention their own books? With this in mind, below is an eight-point stress-test that might prove helpful when performing any due diligence.
- Who is the provider? What’s their track record? How well capitalised are they, and what sort of systems and controls are in place?
- Are the loans secured? Is there a tangible security that can be called upon if a borrower defaults? If the worst were to happen, the underlying asset can be sold and the lender can get most or all of their money back.
- Skin in the game? What does the product provider suffer if a loan goes bad? At Octopus, for example, we invest 5% in every loan – which would be lost first in the unlikely event that anything was to go wrong. It aligns our interests directly with investors.
- Who are the borrowers? Each P2P platform tends to appeal to specific types of borrower, be they individuals or businesses, with widely varying motivations and associated risk profiles. It’s important to understand what they’re planning to do with the money that’s lent to them. Does the lender know?
- How good is the underwriting? The next stage is crucial: how are borrowers assessed? What sort of credit profiling is undertaken? And if loans are secured, what assets are they secured against? How are they valued, and what level of buffer is there in case that value was to fall over the course of a loan?
- What’s the loss rate? Always ask the P2P lender for their loss rate and be wary of lenders that don’t openly publish it. Past performance is not a reliable indicator of future success but at Octopus Choice, we’ve loaned more than £2 billion over the past seven years, and lost less than 0.1%.
- How easy is it to get out? It might be easy to invest, but how do your clients access their money out when they need to? Does the product carry a fixed term, or can investors choose to withdraw at any time? And are there any penalties?
- And finally – what’s in it for me? Is it adviser-friendly? Does the product make it easy for you to manage multiple clients simultaneously – or facilitate adviser charging?
In summary, in an unfamiliar market with many unproven P2P lenders, sound financial advice has never been more important. Against this backdrop, advisers have a crucial role to play in helping their clients find dependable providers with robust propositions.
Richard Wazacz is head of Octopus Choice, the secured lending product from Octopus Investments