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.
What are the risks involved with P2P lending?
Whilst much has been written about the fantastic returns offered to lenders by peer-to-peer lending platforms, it is important to fully understand the risks involved too. We have therefore set out the key risks and how each of these has been mitigated by Lending Works.
Whilst Lending Works only lends to prime, creditworthy borrowers who not only have an excellent credit history but can also demonstrate that they can afford their loan, there does still exist the risk that some borrowers may default on their loans. This could be due to unforeseen circumstances such as a loss of employment or ill health, or it could be due to something more sinister such as a deliberate attempt to defraud.
Borrower defaults could negatively impact the returns lenders receive. As such, Lending Works has gone the extra mile to ensure that lenders receive exactly what they expect by creating the Lending Works Shield. The Shield is both a reserve fund, which pays out in the event of missed or late loan repayments, and a series of insurance policies which protect against borrower defaults, fraud and cybercrime. No other peer-to-peer lender offers this.
The Shield reserve fund is designed to comfortably cover the company’s expected rate of missed and late loan repayments, and is constantly topped up using part of the fee paid by each Lending Works borrower. In the event of any missed payments by borrowers, the reserve fund makes the expected payments to lenders instead. If money is subsequently recovered from borrowers this gets paid back into the reserve fund.
Lending Works has taken out a series of insurance policies which protect our lenders against the risk of borrower defaults, fraud and cybercrime. No other peer-to-peer lender offers this.
It should be noted that peer-to-peer loans, unlike traditional savings, are not covered by the Financial Services Compensation Scheme (FSCS).
The P2P platform goes out of business
Lenders often ask what would happen if the P2P platform through which they lend their money no longer existed, for example if the platform provider failed. The Financial Conduct Authority (FCA) took over regulation of the P2P sector on 1 April 2014, and made it mandatory for platform providers to have contingency arrangements to manage their loans in the event that they no longer existed.
Lending Works already had these arrangements in place prior to 1 April 2014 with a back-up services provider. Since the contracts are directly between lenders and borrowers, the services provider would effectively manage the company’s loan book to maturity to ensure that payments from borrowers are received as scheduled and capital and interest payments are returned to lenders as expected. For this service, the back-up services provider would take a fee. So, whilst this would slightly impact returns received, lenders have increased confidence that their loan contracts are safe.
In addition, all lending funds are held in a ring-fenced Trust, completely segregated from the day-to-day operations of Lending Works. The company has no access to these funds and so in the event of a platform failure all un-lent funds would be returned to lenders.
Your money may not be lent straight away
Once you transfer money in and make it available to lend, interest is only earned once your lending offers get matched to borrowers seeking a loan over the same term. There does exist a risk that it takes some time to match your offers and therefore your returns are slightly less than expected. This is sometimes known as 'cash drag'.
Lending Works has a sophisticated algorithm called the ‘Fair Algorithm’ which allocates lending capital in the fairest way possible. This takes into consideration the length of time that a lender has had an offer outstanding and also the value of lending capital on the offer, to ensure that the time taken to match offers is minimised. We are constantly working to reduce the time taken to match offers to ensure that lenders receive exactly what they expect.
Our innovative Quick Withdraw facility provides lenders with the option to access their money while it is still on loan with borrowers, provided there are other lenders available to purchase your loans. There is a small fee for using Quick Withdraw of 0.6% of the amount being sold. Also, if the rates on your loans are lower than the current lending rates, you'll be charged an additional fee to ensure the lenders acquiring your loans receive what they're expecting.
You may also like our guide: Is peer-to-peer lending safe? Risks & Regulations
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.
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