The downfall of P2P lending: self-valuation, excess capital and no experience

  • 19/11/2020
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The downfall of P2P lending: self-valuation, excess capital and no experience
“Peer to peer (P2P) lending from my perspective is dead. There are exceptions, but it’s been regulated out of existence,” according to the man charged with recovering the Lendy loan book.


RSM Restructuring Advisory partner Damian Webb told the NARA property receivers conference the shocking details of how the once booming P2P property lending market collapsed.

Webb has been examining the sector for several years, with the last 18 months spent trying to recover as much funds as possible for investors in the collapsed firm Lendy.

He detailed how priority was placed on creating value for shareholders and lending out money with little regard for standard underwriting principles which eventually cost the retail investors significant sums.


More failures to come

Lendy is the highest profile of these firms to collapse but there have been others and Webb believes there will be more to come with others still in trouble.

“There are a number of operators in that space that will do well, they are well run they’ve got a good client base and they will continue, but the market is moving very much towards alternative lending out of institutional funds,” Webb said.

“We’re getting this natural selection for the benefit of the market because the poor players are effectively being killed off because they are not competitive.

“The future is alternative lending – P2P may be an aspect of that but it’s going to be a very small aspect with the main source being alternative lenders.

“I think there will be more failures in that P2P space, but it has largely been fixed or closed down by the Financial Conduct Authority (FCA),” he added.


More tech than finance

The historic failures in P2P lending over the last decade can be generally summed up by shareholder greed, too much capital, using technology to cut out credit risk processes, and lack of experience in lending.

“Many of the people involved in fintech were more technology than finance-based, they had no financial background,” Webb said.

“There was no grey hair, there was no experience, people just jumped into the sector, worked out there was an ability to deploy money and did so with minimal review of credit or understanding of lending.

“And they went in to areas I think they deemed to be simplistic, i.e. property lending, but they didn’t really understand the issues involved.”

Webb explained that all too often technology automation was at the expense of normal credit processes and therefore at the detriment of lending.

“So often the credit processes were automated and based on third party data so there weren’t the normal checks and balances you would get at standard institutions or more experienced institutions,” he continued.

“People were dependent upon and relied upon the technology and didn’t really understand whether they were doing the right process.”


‘Fintech was sexy’

Webb also revealed that many lenders had benefitted from huge excess liquidity, potentially receiving as much as £10m to £20m a month so the emphasis was on deploying capital quickly to hold on to the investors coming in to the business.

Instead of asking ‘Is this deal right?’ the need to deploy capital quickly was behind many of the decisions being made.

And he adds that many of those involved were drawn to building the value of the business, not sound investments.

“Fintech was sexy and many of the shareholders were concerned with equity value creation and announcing the value of the business,” he continued.

“The metrics were simple – there was a sizeable loan book and the profitability and ability to attract new customers.

“So having credit checks was an inhibitor of the growth of the value of the business and that’s what many of the shareholders wanted, they wanted equity value creation.

“And therefore they would bend the credit processes to ensure the value being created in the business and this fundamentally dis-aligned interests.”


‘Run roughshod over credit processes’

At the weak firms, it was typically young and inexperienced individuals leading and there was often no senior or corporate governance.

This meant firms “run roughshod over credit processes and standard banking processes that had been in place for years, creating significant value for themselves in the business but at significant expense of the retail investors investing into the platforms.”

And there were lack processes around valuations where borrowers were allowed to appoint their own valuer.

“The borrower would then say the value needs to be ‘X’ and the valuer would sign off on it and you would consistently see valuers working on a range of projects for the same lender,” Webb said.

“The P2P lenders would also lean on the valuers as they wanted to deploy the capital, so it wasn’t just the borrowers.

“So they would encourage the valuation level and would ignore things such as connected party leases, they wouldn’t read the title documentation properly, they wouldn’t engage properly.”

There are still some concerns around bounceback and CBILs loans within P2P lenders, which Webb says is producing some “very strange behaviour”. “There’s huge liquidity and still very strange practices,” he said.


Regulation and institutional funding

However, the P2P lenders left behind are largely driven with funding from capital markets and other institutional sources now, providing a safer environment with checks and balances in place.

Webb emphasised that those lenders able to attract the institutional funding are generally those with stronger governance and credit processes which these investors look for.

“A lot of the issues have been weeded out by regulations and by institutional capital coming into the sector. So the sector is in quite a good place from those perspectives,” he added.



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