Are institutions cherry picking the best loans?
Current Affairs

Is 'cherry picking' rife in UK P2P platforms?

A recent article on FT.com caused something of a stir in the world of peer-to-peer lending, as they announced that the Peer-to-Peer Finance Association (P2PFA) will be imposing a ban on institutional lenders ‘cherry picking’ the most desirable loans in UK platforms. The implication, of course, is that this particular practice has been taking place, and that consumers (or ‘retail investors’) are unfairly prejudiced by being left with loans carrying an inferior risk grade.

Adding fuel to the fire was the fact that some institutional lending fund managers, who are significant lenders in many of the UK’s major platforms, have announced plans to raise more funding as the deployment rate of the net proceeds from their loans is reportedly exceeding expectation.

Understandably, it raised alarm bells about an industry that, in essence, was created to serve the people, and those who have grown concerned need only look as far as the US to see an example of consumers being crowded out of peer-to-peer platforms by institutional investment.

Institutional domination in US P2P lending platforms

The industry in the US has evolved rapidly in recent years, with large swathes of money coming in from institutions such as hedge funds, investment companies and even banks. In fact, up to 90% of capital deployed by some of the larger platforms comes from these sources. In itself, such a trend need not necessarily be a problem for consumers. However, many platforms across the pond allow institutions, who typically bring greater lender capital to the table, first refusal on certain loans. And it is this preferential treatment – commonly referred to as cherry picking – that has left retail investors stuck with loans which are more likely to default.

In fact, so heavy has the involvement of institutions in the US become that the name peer-to-peer lending has morphed into ‘marketplace lending’. Conscious of such an imbalance, the market leaders in the US have even introduced ‘speed bumps’ to stem the tide of institutional investors snapping up prime loans. Such rules include limits on the number of loans institutions can purchase, and making technology available to retail investors which allows them the opportunity to compete for loans.

Is the situation similar in the UK?

While it is difficult to speak for every P2P platform, Lending Works, along with many of its competitors, are united in the belief that cherry picking is non-existent in this country. Certainly from our point of view, all lender capital, be it from a consumer or institution, is randomly matched with borrowers that fit in that lender’s credit parameters by virtue of our Fair Algorithm; meaning that no lender has - or ever will – receive preferential treatment in terms of the risk grade of the loans they are allocated.

As such, any rule to prevent cherry picking would have no effect on Lending Works’ day-to-day operations, and our Fair Algorithm will continue to underpin the fair manner in which we treat our lenders’ money. Nevertheless, we welcome any action or regulation that puts our customers’ minds at ease, and ultimately enhances the sector’s credibility. We view upholding the integrity of the whole industry as a major priority, and believe it is vital that platforms act as a collective to prevent a situation similar to the US from ever arising.

Lending Works’ platform for the people

Our recent blog post explains why we believe the arrival of institutional money, if handled correctly, will be beneficial for all our customers. However, it must still be emphasised that our platform remains consumer-focused, and that the vast majority of our lender capital is still sourced from consumers. And for us, the benefit of such a ‘balance’ is as much intrinsic as it is financial.

We take great joy from the fact that we allow individuals to either grow their money, or access a low-cost unsecured loan that allows them to buy that car they always wanted, renovate their house, or even take their kids on a dream holiday. However, the structure of Lending Works is such that it isn’t us who change lives for the better – it’s people like you. We just facilitate the process!

A lender puts their money into the platform safe in the knowledge that they will receive a great return, but also knowing that they are making a difference to borrowers’ lives. In the same way, those taking out a loan aren’t just serving themselves. Their repayments help to enhance someone’s rainy-day fund, retirement income, or even their grandchild’s university endowment in a hugely beneficial way.

It is this synergy between borrower and lender that we will always hold dear, and we hope our customers do too.

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Michael Todt

Mike joined Lending Works in early 2015 with a background in marketing and journalism. Having long held a passion for economics, he is now the chief contributor to the Lending Works blog, and regularly writes about all things peer-to-peer lending, fintech and personal finance.