I read a post by Phil Young a week or two back on whether traditional financial services is disruptable. As someone developing a peer-to-peer lending product, it will come as no surprise to you that I think it is. But at the same time, and like many advisers reading this I’m sure, I share some of the concerns raised in Phil’s piece about so-called ‘P2P’ lending.
Probably the main concern is the idea of new and inexperienced P2P lenders taking on too much risk in order to a) rapidly scale up, and b) placate investors who are baying for better than average returns. After all, if you want to be a force within P2P lending, you have to lend. Sadly, that’s where things can start to go wrong.
Irresponsible lending within P2P is certainly a growing concern across financial services. A month or two ago, for example, industry body the National Association of Commercial Finance Brokers (NACFB) sounded a warning about ‘bandwagon’ P2P lenders flooding the market. The words of Adam Tyler, the NACFB’s chief executive, probably sum up what a number of advisers are thinking:
“The success of many alternative finance providers and peer-to-peer lenders, coupled with the continued low interest rate environment, has resulted in a gold rush mentality. We have a situation where a growing number of opportunistic lenders with little if any experience are jumping on the bandwagon and combining forces with investors who are desperate for higher returns.”
It’s perfectly understandable, then, why many advisers are wary of P2P lending, and why some have gone so far as to give back their new P2P permissions in order to protect both their clients and themselves. They see new and unproven P2P lenders under pressure to generate returns, and don’t like the look of it. And in some cases, if I’m being perfectly honest, I’d probably agree.
At the same time (and I’m conscious I now risk incurring advisers’ wrath in this Dragons’ Den of the intermediary community), I firmly believe that the very fact there are so many inexperienced and unproven P2P lenders out there is precisely why advisers should embrace the sector. Now how about that for a bit of reverse psychology?
As much as I would rather it wasn’t, P2P is a bit of a minefield — and with the Innovative Finance ISA set to attract ever larger capital inflows, more and more of your clients could soon be wandering in.
And so, with interest rates at a new all-time low and P2P lending attracting ever more investors seeking real returns, advisers surely have a powerful role to play in helping investors separate the wheat from the chaff — to ensure that when their clients do add a P2P lending element to their portfolios, it’s robust rather than fly-by-night.
There’s certainly no shortage of ways for advisers to add value for their clients within P2P. A good place to start is researching the underwriting pedigree of a P2P lender. How are borrowers being assessed, and what sort of credit profiling is undertaken? And more fundamentally, how experienced are the underwriters? What’s their historic loss, or ‘default’ rate?
Also, where loans are secured, what are the assets actually secured against? On top of that, how are these assets valued, and what level of buffer is there in case that value was to fall over the course of a loan? After all, the more conservative the loan to value, the more substantial the protection for investors.
Alongside questions about underwriting and default rate, advisers can also add value for clients by probing financial strength, asking if the lender has skin in the game, querying the companies or individuals taking out the loans, and asking what the loans are being used for in the first place. And last but by no means least: just how easy is it for the client to get their money out of a P2P loan?
In summary, I believe the fact there are so many unproven P2P lenders is precisely why advisers need to roll up their sleeves and help their clients find the genuine innovators: the lenders that are in it for the long term. Because it’s not enough to be disruptive. The real value comes in being dependable, too — a mainstay for the everyday investor.