As £165m Lendy collapses, experts warn 'a dozen more peer-to-peer firms will follow'
First posted - 1 June 2019 - https://www.telegraph.co.uk/investing/news/165m-lendy-collapses-experts-warn-dozen-peer-to-peer-firms-will/
Peer-to-peer investors have been left fearing for their cash after the collapse of a major platform sparked warnings that a dozen others also could crash in the near future. Savers have ploughed billions of pounds into fledgling peer-to-peer (P2P) services, which let ordinary people and small businesses lend to each other, cutting out the big banks. While investments of varying risk are available, some platforms have tempted consumers with returns of more than 12pc on high-risk projects. But the collapse of one large platform, Lendy, which offered loans on property developments, has concerned investors across the sector. It fell into administration at the end of last month with more than half of its borrowers in arrears. Around 20,000 investors now face a nervous wait to see how much of their £165m can be recovered by administrators.
The City watchdog, the Financial Conduct Authority (FCA), has estimated that 275,000 people have cash in peer-to-peer, investing more than £5bn across 68 providers. But a leading analyst of the industry has warned that investors should prepare for at least one more major platform to close in distress in the next year. Another industry expert claimed that more than a dozen platforms could fall by the wayside.
Roger Gewolb of FairMoney, a loan broker, and the Campaign for Fair Finance warned of further crashes. “I expect at least one large player to go and between six and a dozen or more smaller firms to close down,” he said. Neil Faulkner of the 4th Way, a P2P analyst, added: “I imagine there will be maybe one rocky collapse per year. On top of that, platforms that don’t make enough progress will simply stop approving new loans and wind down their existing loan books without any fuss.” One firm has already announced its intention to exit the sector in this way. Days after Lendy’s collapse, BondMason announced that it would close its business, warning that increased costs meant it was unable to continue offering investors worthwhile returns. It had typically paid 6pc for investments in property projects and will wind down its business over the next 18 months.
Mario Lupori of RateSetter, another P2P firm, said the closure of platforms was inevitable, describing it as “Darwinism in action”. He said: “Just like in any other industry, businesses that are not up to scratch – being badly run or having weak business models – simply cannot survive for long.” But it is the platforms that collapse, such as Lendy, that have people most concerned. Investors in such firms face a triple whammy of problems. The primary issue is that there have been widespread defaults and late payments, meaning the borrowers concerned have little chance of refinancing elsewhere and returning cash to Lendy investors.
Second, while administrators can take control of failed projects to try to sell them on, this can be difficult, as other businesses are often reluctant to take over half-finished projects. And third, the costs of the administration process are likely to be significant, which will also eat into the pot of cash that should be returned to investors. One Lendy user, Leon Kreitzman, 75, of London, said he was concerned that he would see little of his £10,000 investment returned. “I will just have to be patient and hope that much of it will be recovered,” he said.
Privately, reputable peer-to-peer firms have expressed concerns to Telegraph Money that bad actors are undermining confidence in the entire sector. One demanded faster action from the FCA in cases of bad practice. The FCA will release new guidelines for the industry this week. This newspaper previously disclosed that the regulator gave Lendy the green light to continue trading in July 2018, despite users of the platform already battling against widespread arrears. The regulator is investigating the circumstances that led to Lendy entering administration.
Mr Gewolb called for stronger regulation of the sector. “Until then, it will not be surprising in the slightest if there are further crashes, even spectacular ones among the larger players,” he warned. How can investors spot a safe P2P platform? Mr Faulkner urged investors to avoid those that failed to publish clear information about how they assessed borrowers, their level of bad debts or how they planned to recover money from borrowers in default. “If it is at all sketchy or unclear, avoid,” he said. “A number of platforms simply don’t provide enough information for investors, so the assumption is that they have something to hide.” He said investors should diversify across multiple platforms, rather than being wholly exposed to one. This way, even if one platform fails, it should represent only a small part of an investor’s portfolio. Paul Smee of the P2PFA, an industry group, supported this strategy.
