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Platform Loans – Survival Of The Fittest

The latter part of 2019 has seen, quite rightly, a greater focus on the regulation of process and enhancing transparency requirements in the sector following the failure of peer-to-peer (P2P) platforms such as Lendy. Lendy’s failure was linked – completely unfairly – with a number of problems experienced by investors in unregulated investments, notably mini-bonds. The best-known of these failures the London & Capital Finance debacle. It’s in the light of these problems that the FCA decided to propose a limit on investor exposure to alternative loan assets.

The essence of the FCA’s proposal is this: Investors should not commit more than 10 per cent of their portfolio to platform lending (aka P2P). The move comes amid a broader drive towards greater transparency in reporting defaults and bad debts in platforms’ loan books, more scrupulous risk management requirements and clarity on dealing with wind-downs in the event of a platform failure.

As far as the alternative lending sector is concerned, the 10 per cent limit is actually good news. Consider the figures:

The larger question, though, is whether there’s an implicit asset-management decision here – by limiting P2P exposure, isn’t the FCA at the same time both accepting P2P as a valid asset class and setting up an asset allocation model, with P2P as the sexy 10 per cent of the cash  exposure?

The argument for this seems pretty persuasive: think of the brouhaha as Neil Woodford’s income vehicle fell out of favour with intermediary/introducer, Hargreaves Lansdown. By deeming the fund not fit for purpose, the necessary implication is that the fund was previously actively deemed suitable for investors. This is, in everything but name, advice.

Yesterday, we were talking about the need for acceptance of platform lending as an asset class. The FCA move could be considered a first step down that path.



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