Junk P2P & Minibonds
Discussion
Over the years since the credit crunch I’ve been quite vocal in my disdain for the rise of the lightly regulated financial product. My primary issue is that they attract all the crooks, the regulator never polices them appropriately and they sucker in the most vulnerable of us.
Our financial innovation is hugely important and I have no issues whatsoever with how we are so good at evolving and expanding our products and services in the UK but we have a regulator who knowingly refuses to proactively enforce its own guidance but sees itself more as a Lewisham street cleaner who just exists to clean up after. We have too few deterrents for people who make their living stealing from investors (I have never known a time when so many are active) and we have huge numbers of investors both old and young who are simply falling into two camps of either not being sufficiently savvy or having wilful greed. All three parties share the blame and responsibility and all three need to change.
Anyway, this brings me to two of my most contemptible financial products. The P2P loan and the mini bond. Neither are covered by the FSCS, neither have been properly regulated, both are rife with criminals and also incompetents and both draw new punters in like a moth to a flame because of their desperate desire or need for impossible returns coming Img with a general misunderstanding that these kinds of returns are actually feasible.
Both these products are pretty nasty. They rely specifically on the miss-pricing of risk so from the absolute outset they have an inherent flaw that ultimately condemns then to failure. But the real issue and toxicity of the products is that on the marketing side they make out that they are comparable to savings products from legitimate banks. This is the real deception around which this pyramid of failure has been built.
A bank when it lends is acting as the counter party, with these products the platform is not. It is just an agent facilitating and taking its fees. It carries no risk in this regard which is why they have been incentivised to execute any old business regardless of risk to try and build market share and earn fees without paying any regard to the long term risks of this debt.
As a lender to a bank your capital is not at risk (usual caveats etc). With P2P and minibonds your capital is 100% at risk at all times.
Due diligence on borrowers and assets? In order to keep costs down these are kept to a minimum. That is what has opened the door to widespread fraud. These inexperienced firms went out offerering loans to entities that banks had said no to. That opened the door for every shark to apply for their free money. Weak due diligence is guaranteed to facilitate fraud. Guaranteed. Both these products are built on the premise of weak due diligence.
Unlike a bank, these lenders are incentivised to not enforce debts. That again is a fundamental flaw from the outset. There isn’t a money lender that has ever existed that hasn’t understood the absolute importance of fear to underpin the loan.
The key breakdown is that in the bank scenario you are lending the bank £10,000 and the Govt is underwriting this. Your upside is limited by global base rates to maybe 2% or thereabouts but your risk is tiny. With P2P and minibonds you are lending directly to the borrower with absolutely no recourse and you’re £10,000 is 100% at risk. The two products are not remotely comparable. One is a secure savings product and the other is a speculative capital investment where you have no control but also zero share of the capital upside.
These products have great potential and this potential will probably start to be realised in the next evolution but at this time we are entering into the end phase of the first evolution where time is catching up on all those loans that were never going to be repaid and all those assets which don’t exist or have been fraudulently over valued. And just generally catching up on the inherent flaws in the models.
We are now seeing the evidence of what many have been warning of. Assets never existing, massive pay away fees to introducers, negligible due diligence, zero enforcement of debts and just generally lots of bearded charlatans talking about how they’ve completely reinvented in just a few minutes the process of prudent lending that has taken over a thousand years to even get remotely palatable.
So we have LCF finally grabbing the headlines on the minibonds front. £250m of client money gone in what allegedly looks like was a systematic fraud from the outset. We are hearing rumblings from vulture funds that set up to pillage underperforming minibonds that they have not yet found one which has the assets that were claimed in the issueing prospectus and we are now learning that regulated and unregulated agents have been actively selling minibonds to individuals that most financial professionals would consider extremely inappropriate for such investments.
Lendy is looking to be the poster boy in the P2P market, highlighting publicly the inherent failings of the product in its main guise. And it looks like FundingSecure is now publicly joining it.
It will be interesting to see how these two products evolve to be fit for purpose and it would be good if this thread could track that evolution over the coming years. At the same time as people become aware of issues with other minibonds and P2P platforms it would be of use to discuss them here.
Our financial innovation is hugely important and I have no issues whatsoever with how we are so good at evolving and expanding our products and services in the UK but we have a regulator who knowingly refuses to proactively enforce its own guidance but sees itself more as a Lewisham street cleaner who just exists to clean up after. We have too few deterrents for people who make their living stealing from investors (I have never known a time when so many are active) and we have huge numbers of investors both old and young who are simply falling into two camps of either not being sufficiently savvy or having wilful greed. All three parties share the blame and responsibility and all three need to change.
Anyway, this brings me to two of my most contemptible financial products. The P2P loan and the mini bond. Neither are covered by the FSCS, neither have been properly regulated, both are rife with criminals and also incompetents and both draw new punters in like a moth to a flame because of their desperate desire or need for impossible returns coming Img with a general misunderstanding that these kinds of returns are actually feasible.
Both these products are pretty nasty. They rely specifically on the miss-pricing of risk so from the absolute outset they have an inherent flaw that ultimately condemns then to failure. But the real issue and toxicity of the products is that on the marketing side they make out that they are comparable to savings products from legitimate banks. This is the real deception around which this pyramid of failure has been built.
A bank when it lends is acting as the counter party, with these products the platform is not. It is just an agent facilitating and taking its fees. It carries no risk in this regard which is why they have been incentivised to execute any old business regardless of risk to try and build market share and earn fees without paying any regard to the long term risks of this debt.
As a lender to a bank your capital is not at risk (usual caveats etc). With P2P and minibonds your capital is 100% at risk at all times.
Due diligence on borrowers and assets? In order to keep costs down these are kept to a minimum. That is what has opened the door to widespread fraud. These inexperienced firms went out offerering loans to entities that banks had said no to. That opened the door for every shark to apply for their free money. Weak due diligence is guaranteed to facilitate fraud. Guaranteed. Both these products are built on the premise of weak due diligence.
Unlike a bank, these lenders are incentivised to not enforce debts. That again is a fundamental flaw from the outset. There isn’t a money lender that has ever existed that hasn’t understood the absolute importance of fear to underpin the loan.
The key breakdown is that in the bank scenario you are lending the bank £10,000 and the Govt is underwriting this. Your upside is limited by global base rates to maybe 2% or thereabouts but your risk is tiny. With P2P and minibonds you are lending directly to the borrower with absolutely no recourse and you’re £10,000 is 100% at risk. The two products are not remotely comparable. One is a secure savings product and the other is a speculative capital investment where you have no control but also zero share of the capital upside.
These products have great potential and this potential will probably start to be realised in the next evolution but at this time we are entering into the end phase of the first evolution where time is catching up on all those loans that were never going to be repaid and all those assets which don’t exist or have been fraudulently over valued. And just generally catching up on the inherent flaws in the models.
We are now seeing the evidence of what many have been warning of. Assets never existing, massive pay away fees to introducers, negligible due diligence, zero enforcement of debts and just generally lots of bearded charlatans talking about how they’ve completely reinvented in just a few minutes the process of prudent lending that has taken over a thousand years to even get remotely palatable.
So we have LCF finally grabbing the headlines on the minibonds front. £250m of client money gone in what allegedly looks like was a systematic fraud from the outset. We are hearing rumblings from vulture funds that set up to pillage underperforming minibonds that they have not yet found one which has the assets that were claimed in the issueing prospectus and we are now learning that regulated and unregulated agents have been actively selling minibonds to individuals that most financial professionals would consider extremely inappropriate for such investments.
Lendy is looking to be the poster boy in the P2P market, highlighting publicly the inherent failings of the product in its main guise. And it looks like FundingSecure is now publicly joining it.
It will be interesting to see how these two products evolve to be fit for purpose and it would be good if this thread could track that evolution over the coming years. At the same time as people become aware of issues with other minibonds and P2P platforms it would be of use to discuss them here.
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