Transparency and Provision Funds – Our CEO’s Thoughts
As an active peer to peer lending participant, you’re probably aware of some negative media coverage around the wholesale lending practices of one of the UK’s biggest peer to peer platforms – as well as the potential losses resulting from those loans defaulting.
Wholesale lending is a practice where monies placed onto a platform by investors are used to facilitate a loan to a company or other alternative finance platform – those funds being lent on to individual or SME borrowers. The Financial Conduct Authority (FCA) view this as a banking activity, for which P2P platforms do not hold the appropriate permissions and have sought to stop the practice.
In 2016, the FCA sent out ‘Dear CEO’ letters to all platforms, asking us to confirm whether we had been involved in such practices. I confirmed that Proplend has never been involved in wholesale lending. But these recent high-profile failings have highlighted two issues which I believe are fundamental to peer to peer lending – the importance of transparency and the ineffectiveness of provision funds.
I believe for peer to peer lending to be effective there’s a fundamental requirement for transparency – when lenders don’t know who they’re lending to they open themselves up to greater risks.
So, not only do we allow our lenders to pick and choose the loans they invest in, we also fully disclose the identity of the borrowers and the interest rate they’re paying. There is little value to the lender knowing that they are earning 5% p.a. when the borrower is actually paying 10% p.a. for the loan and the platform is earning the margin. That’s a fundamentally different risk profile.
Just as importantly, Proplend provides full details of the property against which the loans are secured, who the tenants are and what income they are generating for the borrower.
Whilst these funds are popular with many P2P platforms as excellent marketing tools, they do tend to give the impression that lenders are fully protected and won’t lose money. This is surely then at odds with the regulator’s requirement for all platforms to reinforce the ‘Capital at Risk’ message across all communications. I wouldn’t be surprised if the FCA moved to close them down.
Proplend has never operated a Provision Fund. Partly because these pooled funds are effectively unregulated collective investment schemes (UCITS) which again, P2P platforms do not have the regulatory authorisation to operate. But also, because we feel there’s a better, more direct way of minimising lending risk.
I believe in a lending model where each and every borrower should have to evidence their creditworthiness by offering sufficient asset-backed security and income streams to fully justify their own loans – we don’t take an aggregated view to risk.
Proplend loans are property-backed and the security of the asset along with the 6-month interest reserve are loan specific – there is no pooling or cross-subsidisation of losses. One lender shouldn’t have to subsidise the loss of another lender, when each lender is making their own investment decisions based on their own risk appetite.
The platform in question stepped in when their wholesale lending practices looked like wiping out their Provision Fund several times over – possibly taking a chunk of their customer base with it. If a platform can continue to declare “no investor losses” under those circumstances, then the value of claims like these should be taken with a pinch of salt.
I take considerable pride in our current record of no loan defaults and no lender losses, but I feel compelled to reinforce to Proplend lenders that they are engaging in P2P property lending. There will be loans which go into default and lender capital is at risk.
I firmly believe that our growing platform offers better risk adjusted returns than many larger platforms with deeper pockets and bigger advertising budgets. Thank you for your continued trust and support.
Proplend CEO and Founder