As a platform, we take great pride in all that we've achieved since opening our doors for business nearly six years ago. We’ve
Diversification: Making P2P lending safer
When it comes to building an investment portfolio, we at Lending Works are proponents of diversification. There are many ways to diversify, be it across companies, industries, geographies and even asset classes as a whole. Stocks and shares offer the carrot of good returns; albeit carrying higher volatility/risk, while bonds provide a safer option, but with lower yields.
Peer-to-peer lending is now recognised as a favourable investment alternative too. Aside from the excellent returns, one of the biggest appeals of lending through peer-to-peer platforms is its lack of correlation with other asset classes.
Incorporating P2P into your portfolio
In the spirit of diversification, we would never advocate investing your entire portfolio into a solitary platform, or even solely into P2P in general. Just as stock-only investing has its pitfalls, so does piling all your money into Lending Works (or wholly into the sector itself). We are very confident in what we do; however, diversifying across investment sectors can protect against “black swan” events.
In the same breath though, P2P offers a middle ground in terms of risk and reward between stocks and bonds, and has become a ‘must have’ in the eyes of many investors and institutions. No longer is it an unknown quantity. Instead, it continues to build a proven track record of consistently lucrative and safe returns for its lenders.
Adding to investor confidence is the fact that peer-to-peer lending in the UK is now regulated by the FCA, while industry bodies such as the Peer-to-Peer Finance Association (P2PFA) – of which Lending Works is a member – ensure that robust systems and controls are in place to protect customers and the reputation of the industry.
Protecting your money
The one key factor to consider is that lenders in P2P are not covered by the Financial Services Compensation Scheme; which, in equivalent terms, guarantees individual savers at a bank up to £75,000 if the institution goes bust. Peer-to-peer platforms have measures in place to counter this though, including contingency funds to cover lenders for any arrears and/or defaults they incur on the money lent to borrowers. Indeed, Lending Works' Contingency Fund is an important part of its safety framework.
With the Lending Works Shield in place, it probably won’t surprise you that our lenders have received all capital and interest payments due to them since we began operating. Our cumulative defaults to date can be found here, while the upper end of our expected defaults for the year ahead is estimated to be around 1.54%. Our Contingency Fund alone, which is regularly topped up using part of the fee and interest paid by each borrower, would be more than sufficient to cover these figures.
Diversification as a safety measure in P2P
Investors will always take into account the worst-case scenario, so in the interests of transparency, we thought we’d explain what happens in the unlikely event of the above safety measures failing all at once in the face of borrower default.
Diversification is the fundamental principle we use in minimising any losses incurred by our lenders. Firstly, when a lender transfers money into their Lending Works Wallet and makes a lending offer, the funds are matched with multiple borrowers. If lenders automatically re-lend their repayments, the repayments are then re-lent to new borrowers, thus meaning your capital is diversified across many, many different loans. This is what we refer to as ‘front-end’ diversification.
Further down the line of defence is the Lending Works Shield, which uses ‘mid-stage’ diversification to offer protection spread across all lenders. The Shield is underpinned by a meticulous underwriting process to ensure that only the most creditworthy borrowers are approved. In addition, we have the Contingency Fund, and this combination offers our lenders unrivalled protection.
But even in an extreme situation of systemic economic problems where there is default on a large scale and the Contingency Fund is depleted, the burden of individual default losses would never fall on any single lender(s).
If the Shield were to fail, a Pooling Event may be declared. In such an instance, lenders would take a pro-rata loss against capital and interest repayments due to them, which is what we refer to as ‘back-end’ diversification. Approximately speaking, for a capital loss to occur to any lender, the default rate beyond the point of a Pooling Event being declared would need to be in excess of the weighted average rate of interest on the remaining loans held by lenders among every active lender on the Lending Works books.
This process ultimately ensures that any losses are shouldered fairly. Since lenders cannot choose individual loans to invest in, it’s only right that they shouldn’t be unfairly impacted by the loans allocated to them by the platform. It should also be pointed out that if this extreme situation led to the liquidation of Lending Works, the loan book remains active, and the independent Trustee, along with our back-up services provider, would continue to run day-to-day operations ensuring all outstanding monies due to lenders will be collected and paid to them for the remainder of the lending period.
Why we take the diversification approach to safety
We believe the Pooling Event to be the fairest way, given that our lenders do not have the choice of which borrowers they are allocated to. Instead, we use a system we call the ‘Fair Algorithm’, which fairly allocates loans to our lenders.
Some platforms take a different approach, whereby money from lenders is lent out in small chunks (as little as £10) to a multitude of borrowers. In essence, this is taking front-end diversification a step further than we do. The downside though is that rather than pooling any losses, the individual lenders will lose the entirety of these chunks for each default not covered by the respective contingency funds, meaning some lenders could end up losing out substantially while others are unaffected.
Transparent and safe
It is clear that the combination of front-end and back-end diversification will minimise any potential losses to lenders, but it must also be reiterated that the likelihood of a Pooling Event being declared is incredibly slim - even in the case of the economic climate taking a dramatic turn for the worse. In fact, throughout the recent financial crisis, default rates in prime consumer peer-to-peer lending platforms only reached between 2 and 5% in the UK – the sort of figures our robust safety measures are well equipped to deal with.
That said, these are eventualities that need to be considered, and by offering a transparent insight into the worst-case scenario, we trust we are giving all our lenders – current and prospective – the required facts so that they can make a completely informed decision.
Yet it is the best-case scenario which has consistently prevailed within ethical and successful platforms such as Lending Works, and is the core reason why our pedigree continues to be characterised by satisfied lenders who enjoy outstanding returns.
Our website offers information about saving, investing, tax and other financial matters, but not personal advice. If you're not sure whether peer-to-peer lending is right for you, please seek independent financial advice, and if you decide to invest with Lending Works, please read our Key Lender Information PDF first.
Since opening our doors back in 2014, we’ve always prided ourselves on living and breathing two key principles at Lending Works: innovation, and putting the customer first in everything we do.
With the retail sector enduring its fair share of challenges, companies are looking at new ways to attract customers, and drive conversion. In an overcrowded, dog-eat-dog marketplace, with behemoths such as Amazon flexing their muscle, it’s easier said than done.
On 4 June 2019, the Financial Conduct Authority (FCA) released its new regulatory framework for peer-to-peer lending (P2P); a Policy Statement known as PS19/14. As you might imagine, it's a document which, following a three-month consultation, is a hefty read of no fewer than 102 pages.
In a difficult climate, customer acquisition and lead generation present stern challenges for UK retailers, and a great deal of marketing spend invariably gets directed towards getting feet through the door.
Over the last decade, there can be little dispute that the reputation of mainstream banks – and particularly the so-called ‘Big Four’ (HSBC, Barclays, Lloyds and RBS) – is at its lowest ebb.
The peer-to-peer (P2P) lending industry is now regulated by the Financial Conduct Authority (FCA). The regulatory framework has been designed to protect customers and promote effective competition.
January tends to be a comedown following the Christmas festivities, and, from a personal finance perspective, a time for many Britons to lick their wounds. In particular, for those who’ve over-extended their credit card, it may feel like the walls have started to close in.
A new year, and indeed a new decade has dawned. Reflecting on 2019, what seemed to have got lost in the noise and political hysteria was the fact that the UK economy actually held up remarkably well.
As the good times rolled in the mid-2000s, only a precious few sounded the alarm as lending became increasingly reckless. Northern Rock's infamous 'Together' 125 per cent mortgage epitomised the rush for high loan-to-value (LTV) deals at a time when it was thought that house prices would just keep going up forever.
For those with an eye on the economy, 'GDP day' is always one to mark off in the calendar each month. And it's been a hot topic for the UK in 2019, with the latest update showing zero growth for the period from August to October.
One of the perceived strengths of the auto-enrolment pension scheme is its simplicity – indeed, it is actually a greater effort for an employee to opt-out of a workplace pension than it is to be enrolled into one. No further actions are required, and the retirement fund grows as the months and years pass by.