Fears as P2P loans start to sink
Six in 10 loans on one high-profile platform are in arrears. Are returns of 12pc simply too good to be true, asks Adam Williams
Peer-to-peer investors are being urged to review their portfolios as the scale of defaults facing the Lendy platform emerges. The number of companies offering peer-to-peer (P2P) loans has boomed in recent years. These platforms act as middlemen, allowing individual investors to lend money to companies and others. But industry observers have become concerned at the number of defaulting loans at Lendy, where more than 60pc of its £181m loan book has fallen behind.
The brand rose to prominence by sponsoring the prestigious Cowes Week regatta and investors have been attracted by promised returns of up to 12pc. But as well as some of its loans turning sour, legal action is being pursued against the platform and 5,500 of its investors by one developer. If successful, this could have major implications for the rest of the fledgling sector, which is already facing questions about the amount of risk consumers are being encouraged to take on.
Lendy was launched in 2012 as a way to finance marine projects and later moved into property development. But experts are now concerned that the platform has overstretched itself.
Ben Yearsley of Shore Financial Planning said there appeared to be “something lacking” at Lendy, given the volume of loans in arrears.
“I like the peer-to-peer sector, but it’s too easy to put your money in without knowing what you’ve actually bought,” he warned. “If you’re doing development finance, how much do you know about the risk? Ask yourself how much you really know about the person developing it, or the site and its location.”
Telegraph Money’s examination of Lendy’s finances shows that a significant proportion of its £181m live loan book is in arrears of some kind. Around £83m is described as non-performing – the platform said it was “no longer confident about the borrowers’ ability to repay” these loans. A further £6m is owed to investors in cases where the platform has taken control of and sold assets but where this has not been enough to repay investors.
Another £24m of loans are not considered in default by Lendy, but are behind with their payments. This is because Lendy does not consider loans to be non-performing until they are 180 days overdue.
Although Lendy is not a member of the Peer-to-Peer Finance Association, the 180-day timeline is the standard set by the trade body. It is also the timescale suggested by the Financial Conduct Authority (FCA) in its new proposals for regulation of the sector.
Parik Chandra of Downing, which operates a rival platform, said firms should take faster action. “Downing considers a loan in default if a payment is one day late, let alone 180 days,” he said. “It is quite common in property development for plans to change, but where a date is missed we would actively intervene.”
Lendy currently offers a £50 bonus to new investors. It said that, of all loans ever made through its platform, 80pc had been repaid or were not in arrears. It added that it had made “substantial investments in its due diligence and recovery processes” in the past year and would continue to do so.
Yet under its terms and conditions, investors can be made liable for Lendy’s costs when they cannot be recovered from the borrower. Lendy said it spent a six-figure sum on debt collection each year out of its own pocket but did not rule out passing this cost on to investors in future.
There could also be further woe in store for investors. One borrower is pursuing legal action against Lendy and around 5,500 individual investors, claiming that a loan they took out breached the platform’s own terms. Lendy said this claim had “little merit”.
This is thought to be the first action of its kind. If successful, it could have repercussions for the wider industry, as all P2P investors could be pursued in this way.
The level of arrears at Lendy also raises questions over the FCA’s regulation of the sector. The watchdog authorised Lendy in July despite a significant amount of investors’ cash being exposed to loans in arrears at that point. The regulator said it did not comment on individual firms.
Not all of these issues are exclusive to Lendy and investors on rival peerto-peer platforms should also be taking stock, experts said.
Neil Faulkner of P2P analysis firm 4th Way warned all investors to ensure they were diversified to avoid being a major stakeholder in a single loan or platform that goes bad.
“Investors should assure themselves that they have enough information and knowledge to make a sound assessment of the risks,” he said. “If they do not, they should not be investing and should look for the exit as calmly as possible.”
Mr Yearsley said investors should consider why borrowers were choosing to raise finance at such high rates of interest.
“If your headline rate as a saver is 8pc, for example, the borrower is probably being charged 12pc. That’s a big number and I don’t think enough people go into enough detail,” he said.
“That’s not to say you shouldn’t invest in P2P, but there is risk. There will be more failures to come.”
P2P platform Lendy is the headline sponsor of the Cowes Week regatta