The Key Takeaway from Recent Failures In Alternative Finance Land

It’s all been going down in the world of alternative finance.

Anthony Hilton senior City editor of the London Evening Standard set the tone with “Peer-to-peer lending under pressure as rumours of a failure fly”. Mind you it was a rather hyperbolic title as the only conversations amongst industry-insiders were along the lines that no one seemed to know what he was talking about lol. Nor still do. In covering this, AltFi News took a deep dive into past failures in the sector.

TrustBuddy – a NASDAQ listed trans-European P2P - keeled over after evidence of “serious misconduct”.

My London Fintech Podcast episode 37 is devoted to Platform Black, the number two player in the invoice discounting P2P subsector, who recently passed the £100m mark.  They explain the significant problems with one of their borrowers which ultimately resulted in its receivership and losses to investors in the associated invoices averaging around 50% at present.

As Ryan Weeks wrote SyndicateRoom are ahead of the game when it comes to transparency and disclosure standards in an equity crowdfunding sector that provides minimal information “save for an enthusiastic version of the future, as told by the entrepreneur”. They set a new benchmark recently with an “exit interview” with the CEO of the failed Soshi Games (where the investors lost all their money).  Mind you there isn’t much of a prize for spotting the irony in the title of the hyperlink to that webpage - https://www.syndicateroom.com/about-us/success-stories/soshi-games :-D

More hot news from Ryan about Equity failures and Syndicate Room comes in Mill Residential REIT to Enter Into Liquidation? I wonder whether that will be another link in their “success stories” soon?

In the UK the FCA has a good reputation – so far – in this sector for balancing regulation and sectoral growth. MP’s recently grilled the FCA chairman and acting head on this sector and their approach. In a rather ominous comment the FCA chairman said: “What I can’t assure you of is when is the right moment to intervene.”

So do we throw up our hands in horror and turn away?

Well I think for your “nervous grandparents” eeking out the last of their savings they probably should run away – it’s not worth the health risk, let alone the wealth risk J

The TrustBuddy scenario (apparently internal fraud or massive incompetence) is a challenging one. Plenty of folks have lined-up to say they would have spotted it (of course) but it must be said this wasn’t a minnow – it was NASDAQ listed and that requires clearing hurdles designed, of course, to weed out the obviously mismanaged.

By general consensus the FCA is doing one of the best regulatory jobs in Europe. However we have seen over the past thirty years that the more financial regulation the more financial crises. It’s certainly not the cure and excessively complex and intrusive legislation has been called “the disease for which it purports to be the cure”.

So what’s the key takeaway?

Diversification – “don’t put all your eggs in one basket” is a simple principle we all know.  But then we also know we should eat more greens, go to bed earlier and drink less.

But do we do it?

Do you do it?

If tomorrow there is another hit and a platform implodes, or a borrower on a platform implodes or an equity investment disappears what’s your downside?

In uncharted waters that’s an important number to track. If it’s high then you need a lot of confidence in your platform/asset.

Failing that you can hand over all the due-diligence and selection responsibilities to one of the investment trusts in the sector and just try and stomach their rather juicy fees.