Risk summary for P2P agreements or P2P portfolios

Estimated reading time: 2 min

Due to the potential for losses, the Financial Conduct Authority (FCA) considers this investment to be high risk.

What are the key risks?

1. You could lose the money you invest

  • Many peer-to-peer (P2P) loans are made to borrowers who can’t borrow money from traditional lenders such as banks. These borrowers have a higher risk of not paying you back.

  • Advertised rates of return aren’t guaranteed. If a borrower doesn’t pay you back as agreed, you could earn less money than expected. A higher advertised rate of return means a higher risk of losing your money.

  • These investments can be held in an Innovative Finance ISA (IFISA). An IFISA does not reduce the risk of the investment or protect you from losses, so you can still lose all your money. It only means that any potential gains from your investment will be tax free.

2. You are unlikely to get your money back quickly

  • Some P2P loans last for several years. You should be prepared to wait for your money to be returned even if the borrower repays on time.

  • Some platforms may give you the opportunity to sell your investment early through a ‘secondary market’, but there is no guarantee you will be able to find someone willing to buy.

  • Even if your agreement is advertised as affording early access to your money, you will only get your money early if someone else wants to buy your loan(s). If no one wants to buy, it could take longer to get your money back.

3. Don’t put all your eggs in one basket

  • Putting all your money into a single business or type of investment for example, is risky. Spreading your money across different investments makes you less dependent on any one to do well.

  • A good rule of thumb is not to invest more than 10% of your money in high-risk investments.

4. The P2P platform could fail

  • If the platform fails, it may be impossible for you to collect money on your loan. It could take years to get your money back, or you may not get it back at all. Even if the platform has plans in place to prevent this, they may not work in a disorderly failure.

5. You are unlikely to be protected if something goes wrong

  • The Financial Services Compensation Scheme (FSCS), in relation to claims against failed regulated firms, does not cover investments in P2P loans. You may be able to claim if you received regulated advice to invest in P2P, and the adviser has since failed. Try the FSCS investment protection checker here.

  • Protection from the Financial Ombudsman Service (FOS) does not cover poor investment performance. If you have a complaint against an FCA-regulated platform, FOS may be able to consider it. Learn more about FOS protection here.

If you are interested in learning more about how to protect yourself, visit the FCA’s website here. For further information about peer-to-peer lending (loan-based crowdfunding), visit the FCA’s website here.

October 2022 Blend In Focus

Market Reports 10 Aug 2022
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How Basel III has supported the rise of non-bank lenders

The financial crisis of 2007-2008 was driven by financial institutions investing in subprime mortgages that had a higher default risk than bank managers and regulators deemed likely. But when homeowners started to default on their mortgages, many financial institutions who had packaged and sold those mortgages incurred in large losses, and some even failed. The crisis revealed that many banks were not maintaining adequate capital and liquidity buffers to cope with stressed macro-financial conditions, let alone the excessive financial risks that some advanced economy banks had taken on. Consequently, in the aftermath of the financial crisis, the Basel Committee on Bank Supervision (BCBS) implemented regulations requiring banks to maintain some minimum capital and liquidity requirements. These set of international banking regulations, commonly referred to as Basel III, created certain guidelines designed to address the weaknesses in the banking system exposed by the crisis in order to reduce the risk of widespread system failures and future financial crisis. But while many agree that Basel III is making the banking industry more resilient, critics also argue that it is taking a toll on the economy in the process. In particular, many critics have long been sceptical about the Basel III reforms’ benefits and believe they will actually harm – rather than benefit –  businesses by causing a significant reduction in lending to SMEs. Meanwhile, this has also represented an opportunity for specialist lenders, less tied up by the constrains introduced by Basel III requirements, to step in and support lending to SMEs.

 

The impact of Basel III has been strongly felt in the development finance industry because under the new guidelines, each bank must group its assets together by risk category so that the amount of required capital is matched with the underlying risk level of each asset type. Basel III uses assets’ credit ratings to determine their risk coefficients and accordingly issues guidelines for the risk-weighted assets (or RWA) that banks need to maintain as collateral. The purpose is to prevent banks from losing large amounts of capital when a specific asset class declines sharply. And while regulators consider several tools to evaluate the risk of a specific asset, the issue is that they see development finance as carrying a higher risk than other types of lending such as mortgage or bridge lending. This is , mainly due to the lack of income streams generated by the collateralised property while it is in the development phase and to other risk factors associated with the construction and market variables such as the lack of transparency around the future cost of construction materials. Under the new regulations, there is a tightening of capital requirements for property development finance projects which makes lending to them costlier and less attractive. For example, banks that wish to maintain exposure to land acquisition, development, and construction (ADC) need to set aside RWA’s of up to 150% for loans to companies/SPVs and of up to 100% for residential ADC loans. Furthermore, newly introduced net stable funding ratio (NSFR) and liquidity coverage ratio (LCR) force banks to (i) match longer-term lending (such as for development finance) with longer-term funding, and (ii) hold more cash-like assets for project funds. Finally, there might be reluctance from banks to commit to longer-term development funding due to increased uncertainty over further regulatory tightening. Since the 2008 crisis, there have been frequent changes to regulatory standards, ranging from Basel II.5 to Basel III and to recent additional reforms to Basel III.

 

What this meant in reality is that many banks started to divest from their real estate development finance portfolio in the aftermath of the 2007-2008 global financial crisis. However, it also created an opportunity for specialist non-bank lenders like Blend. With their nimble structure, flexible funding sources, and experienced lending team, specialist non-bank lenders have demonstrated that they are able to plug the funding gap left by traditional lenders.

 

David Alcock,

MRICS, Managing Director, Blend


Blend is a specialist development finance lender that works with experienced mid-sized property developers in the UK.

For more information, please visit www.blendnetwork.com or email Melissa Turnbull, Operations Manager, at [email protected]

BLEND Loan Network Limited is authorised and regulated by the Financial Conduct Authority (Reg No: 913456).

BLEND Loan Network Limited is registered in England and Wales. Registered office: Evelyn House, 142 New Cavendish Street, London W1W 6YF.

Don’t Invest unless you’re prepared to lose money. This is a high-risk investment. You may not be able to access your money easily and are unlikely to be protected if something goes wrong. Take 2 mins to learn more.

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