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.

KEY INVESTOR INFORMATION

When making any investment it is important that you understand what risks are involved. When investing through Blend, you are lending to property developers, and there is a risk of losing the money that you have invested if the borrower defaults on their loan. As a result, you should not invest more than you can afford to lose. Blend minimises the risk of loss by securing all loans against property assets with a first charge and working only with experienced developers. 

Read below to find out more information about investing through Blend. Further information is available on our FAQs page. If you still have any questions or wish to discuss further, please get in touch.

Introduction

When you make an investment through Blend’s platform you are lending money to property developers. Details of the development project are made available to you via the platform. You will see that each investment has a term and an interest rate. The term of the investment tells you when you should be repaid the money you lend, plus the interest accrued. You will see that some projects offer a higher interest rate than others. Whilst a higher interest rate means that if the loan is successful, you will receive a higher return, it usually also reflects a higher level of risk. 

Borrower Due Diligence

At Blend, we conduct an enhanced due diligence on all the borrowers that we work with. This means we take the time to understand each borrower, their business, and their previous experience before agreeing to work with them. Our Credit Underwriters meet with all prospective borrowers, visit the development site, review the profitability of the project, its location, the borrower’s experience and the exit strategy.  All projects are then reviewed by Blend’s Credit Committee. Only once the Credit Committee has approved the project will the loan be listed on the Blend platform. You will see that each loan listed on the platform has an information pack available for you to download and review. This information pack includes the information gathered as part of the due diligence process. We recommend that you read the information contained within this information pack. 

Blend is responsible for assessing the risk of the loan, including the borrower’s experience. Credit Underwriters at Blend consider a number of criteria that must be met by the borrower and by the deal before Blend considers the borrower eligible for a property loan. These criteria include the financial viability of the project, a reasonable view on the build costs and the gross development value (GDV) of the project, an informed view on the liquidity of the market at the time of exit, reasonable experience from the borrower in having delivered similar projects in the past and our view on the borrower’s ability to successfully deliver the project, and also importantly on the borrower having enough of their own personal funds committed in the project. Blend’s Credit Underwriters are responsible for determining the price at which Blend will lend to the borrower. This price will depend on multiple factors such as the regional market of the project (some regions are higher priced than others), the liquidity of the market and the liquidity of the project, the borrower’s experience, the loan to gross development value ratio (Loan-To-GDV) and the type of loan (bridge or development finance).

Borrower Late payments or defaults

In the event that a borrower fails to make a repayment when due or defaults on their loan, we have procedures in place to ensure that we manage this appropriately and effectively. The aim of any action taken by Blend is for the loan to be repaid so that investors can get their money back along with the expected interest. 

We endeavour to maintain a good relationship with our borrowers, and we will make all reasonable attempts to reschedule repayments and recover any outstanding amount. In the unlikely event that a borrower defaults on their loan, Blend will seek to exercise its first charge security on the asset and re-possess the property assets held as collateral. This can be a lengthy process; it may take several months to recover the outstanding debt, in doing this our aim is to repay investors, we also aim to repay interest for any late repayment. Having first charge on the asset should make the recovery likely, but it may not be the full amount. This means that you may not get all your invested money back. 

Your tax liabilities

We do not deduct any tax from your investment. It is the responsibility of each investor to declare any money earned from investing through Blend to their country’s tax authorities and make the required tax payments. 

We cannot provide you with any advice regarding your taxes, so if you are unsure, you should seek independent professional advice. 

Exiting your investment early: The Secondary Market

Investors who wish to liquidate their investment prior to the term of the loan coming to an end may be able to do so using our Secondary Market. 

You should be aware that lending via an electronic platform is considered an illiquid investment, this means that it may be hard to sell your investment before its term. This is because, whilst you may list your part of a loan on the Secondary Market, you may need to wait some time before another investor wishes to buy it, and there is always a risk of no one buying your loan part. There is a fee of 0.6% (or £6 for every £1,000 of capital) applied to successful sales made on the Secondary Market. The Secondary Market tab in your Lender Dashboard provides more information on the Secondary Market. 

Please visit the FAQs page for more detailed information on the Secondary Market.

We are not covered by the FSCS

Blend, just like other firms like us, is not covered by the Financial Services Compensation Scheme (FSCS). This means that if we go out of business, the FSCS will not be in a position to help. However, should this happen there are other protections in place to help protect your money. Money transferred to your Blend account are held by a third-party money services company who comply with the FCA’s CASS regime and hold funds on a segregated basis. This means that in the event that we go out of business, any uninvested funds held on your account are held separately to company money and can be returned to you at your request. Money that has been invested, or leant to a borrower, will not be immediately available to you, it will be repaid in line with the terms of our Wind Down plan (see below). As noted, your capital remains at risk and repayments cannot be guaranteed. 

Wind Down

If for any reason Blend stops operating, we have a Wind Down plan in place. This plan sets out the steps that will be taken to ensure an orderly Wind Down.

Blend has made arrangements with a third party, Resolution Compliance Limited, who is authorised and regulated by the FCA, whereby it will take over the administration of the outstanding loan contracts in the event that Blend is insolvent or ceases trading, to help ensure that the Borrowers continue to make interest and capital payments as they fall due and the appropriate amounts are then distributed to investors.

You can download our Wind Down plan or contact us for further information ([email protected]).