By Simon Sinclair on Friday 13 December 2019
CapitalStackers' marketing and communications director Simon Sinclair shares his hopes that tightening regulations will not reduce the choice of good options for investors.
Is it more than a coincidence that big players are pulling out of the retail P2P market at the very moment the new, tighter FCA regulations come into force?
Both ThinCats and Landbay have publicly switched to institutional funding, citing the main reason as the dwindling cost-effectiveness of servicing individual investors. Both suggested that the retail sector was no longer “commercially viable”.
However, since others clearly continue to find it viable, the timing suggests other factors at play. The FCA’s tightening up of the rules – including appropriateness tests and self-certification questionnaires for investors – was intended to remove the bad actors from the industry, to clean out the stables and bring the crowd funders into the mainstream. And of course, it will do that.
However, as a couple of fairly significant babies are sluiced away with the bathwater, we’re left to wonder whether more of the good operators will be putting up the shutters and thinking it’s too much like hard work to try and boost the portfolio of Mrs Miggins.
This would be an awful shame.
Let’s make no mistake about it – this is a great moment in our industry’s history. A defining moment. Where common sense finally anchored the helium-filled headlines.
Responsible P2P operators should – indeed must - welcome tighter regulations. We should be happy to have the playing field levelled at the highest possible plane. We should never be inviting investments from people who don’t fully understand the mechanics of risk, and how it relates specifically to reward. Our business models should never be dependent on catching the unsuspecting unawares.
It’s not as if the new rules are particularly onerous. They boil down to “don’t sell things to people who don’t understand them”. Which is a pretty basic principle for organisations trusted with Mrs. Miggins’ life savings.
We should all actively seek people who understand that reward is an inter-related function of risk. As with the stock market, it generally follows that the higher the risk you take, the more chance there is of losing some or all of your money - but the higher the reward. As the rugby fly-half weighs up his options, he could make a clean break or face a spectacular wipeout. So he looks for the mismatch and targets the flailing prop in midfield. The surprisingly low LTV rate can bring the double-digit reward.
The key is information. Monitoring and reporting. The P2P “outlaws” that have gone by the wayside have largely been characterised by a lack of both. Those of us that are left must create “information environments” - an Aladdin’s cave of detail for every deal – enumerating the specifics of the borrower, the financials, the risk analysis and all the peripheral contributing factors that explain the terms of the deal. What’s the developer’s history? Can he pass the criteria for bank funding? If it’s a scheme to build houses, how do they fit in the market and are they priced correctly? What’s the plan if they don’t all sell? Who are the target buyers? Where will they work? How easy is the commute? What’s the flood risk?
This information should be easily available to the investors, on some sort of user-friendly dashboard. Not just before they invest, but throughout the life of the deal.
Of course, it’s a shame that regulations had to be imposed from above to force the cowboys to stop shooting up the town. But it’s equally sad that a couple of decent competitors have now felt all this is now beneath them, and that the game is not worth the candle.
Landbay cited their need to “compete” with the banks. Founder John Goodall lamented that other P2P platforms were lending at higher rates while Landbay was looking to compete with banks whose mortgage rates are lower.
“Our margins were being increasingly squeezed and we would have had to cut investor rates to compete,” he said.
Perhaps this is something the P2P market will have to reassess as it continues to mature. The market is plenty big enough for the banks and P2P platforms not to tread on each others’ toes. Do we compete with banks, or learn to co-exist with them? We’ve found it’s certainly possible to work in close partnership with banks on the same deals, sharing information and underpinning each others’ due diligence. Operating at different levels to push the deal over the line together, and set your respective rates accordingly.
A lot of deals - particularly property deals - need the banks. But they need P2P, too. Some banks have even started to court P2P to help them make deals happen. Even among the forest of Lendy-and-FundingSecure headlines, they’re comfortable that tightly-run P2P is a great enabler - and the small investor can derive comfort from the fact that the bank is involved, because they know bankers understand risk and reward more than most.
So it will be a great sadness if the regulations designed to remove the bad choices for investors also thinned out the good ones. There’s room for all of us, and educating our investors is not so big a burden, is it?