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Post by p2plender on Sept 23, 2015 7:24:31 GMT
Whilst I keep hearing this is a major risk when investing in p2p I'd like to know exactly what would/could cause the collapse of a platform and thus loss of lenders money.
My take is existing loans would be run off by a third party and there may well be a haircut to some degree.
A liquidity crunch is obviously the number one fear if when the inevitable collapse in the economy comes but surely the bigger platforms would step in and limit withdrawals to an orderly fashion.
Just wondering about worse case scenario really.
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shimself
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Post by shimself on Sept 23, 2015 8:02:38 GMT
Not so sure about the haircut, I think it's loan origination and getting new lenders that's the major running cost, getting and distributing the repayments isn't such a big effort.
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Post by reeknralf on Sept 23, 2015 8:06:04 GMT
The most obvious would be a Madoff.
For this reason I don't like platforms where
(i) It is difficult to assess if the investments are real. E.g. lots of small or obscure stuff from anonymous borrowers or borrowers who have a close relationship to the platform.
(ii) There is no auto-bid. A simple auto-bid function would take less than a day to code. SS set one up in no time at all after a stink on here. The only reason I can think of for not having one is to encourage investors to invest in a rushed panic.
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james
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Post by james on Sept 23, 2015 8:49:49 GMT
(ii) There is no auto-bid. A simple auto-bid function would take less than a day to code. SS set one up in no time at all after a stink on here. The only reason I can think of for not having one is to encourage investors to invest in a rushed panic. Bondora: autobid prevents you from having any chance to look at the deal before your money is invested. You do not get to see the deal before your bid is placed. Bondora has the choice not to use autobid (but that limits your chance of investing). Bondora has in the past abused this to cause people to lend to "young professionals" who were really just those under 25 in apparently any employment at all (fitters, tellers, shop assistants with basic education not even a degree and sometimes not even completed high school). Today the autobidder doesn't allow you to do things like selecting the country where the borrowers of the money reside, with risk levels that vary dramatically between countries. Bondora needs a supply of money for all coutries so it removed the ability to specify the country because lenders were using it to manage their risk (and perhaps simplify their tax reporting, you have to report by country if you need to use the foreign income pages). Interest rate vs risk cannot be selected by you, Bondora decides. I do not recommend using Bondora any more, I now recommend avoiding it, in part because of the abuse of autobid there. Zopa: only automatic bidding with you not getting a chance to see how your money will be invested is permitted, though you do get to choose Zopa-managed risk bands. You do not know the interest rate before your money is invested though Zopa do say that they try to keep it within a range that they specify and can change daily or even more often. Good luck on keeping up with that. Moneything: uses amount per investor per 24 hour period to prevent too-rapid filling of new loans. Details available before bidding starts. Ablrate: loans typically too large to fill so rapidly that there is no time to read documents for a new investment opportunity. Details available before bidding starts. I'm wondering which platforms your view on autobidding is based on? SavingStream, but any others?
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Post by reeknralf on Sept 23, 2015 9:12:56 GMT
The fact that some auto-bids are designed to suit the platform, not the investor, is irrelevant.
The fact that less attractive loans fill slowly is also irrelevant.
I've got precisely stuff all of the 14% ABLrate loans. The one I tried hardest on, filled in under 15 minutes. I've missed perhaps 50% of the loans on MT because they filled too fast. My life doesn't revolve round a computer, and I don't like being pressured.
But even this is misses the point. If there is an autobid, you can decide at your own convenience and leisure what you wish to bid on, and how much you wish to bid. There's no pressure. When pressure's applied, I immediately wonder why.
With no auto-bid you're pushed into a post-christmas sales mentality. Focused and primed you set your alarm. You know everyone else is primed and ready too, so the investment's just got to be really good. Better make sure you get a good slice. F5, F5, F5,....go go go. Anyone who thinks they're immune to this sort of behaviour is kidding themselves.
in edit: the most obvious culprit for panic bidding is FS. SS does have an auto-bid.
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shimself
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Post by shimself on Sept 23, 2015 9:23:07 GMT
FK - the autobid kicks in 5 minutes after the loan is listed.
I've proposed to the p2pfa that they should insist all loans are listed for (72hours?) before bids are accepted, so as to avoid the panic bidding. I fear a platform might get lawyered into a mis-selling problem without this safeguard.
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Post by meledor on Sept 23, 2015 10:11:49 GMT
In terms of considering platform risk, I like platforms that promote a clear simple relationship between the borrower and lender. That is the essence of P2P. I dislike platforms that introduce complexity and intermediation in that relationship with special funds and added features that make the process opaque. Keeping it simple is good P2P but also means that it is far easier for a third party to step in if required.
Maybe I've misunderstood autobid but I thought that its use on some platforms encouraged investing where the approach to risk was merely the mantra of diversification (you must have a minimum 100 loans) and blind acceptance of the platform's risk bands and hence not conducive to proper due diligence by the lender on the borrower's proposal. Saving Stream's pre-funding target levels are not in that category and I'm not sure I'd class it as an autobid system anyway.
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james
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Post by james on Sept 23, 2015 10:34:24 GMT
The fact that some auto-bids are designed to suit the platform, not the investor, is irrelevant. ... If there is an autobid, you can decide at your own convenience and leisure what you wish to bid on, and how much you wish to bid. There's no pressure. When pressure's applied, I immediately wonder why. Automatic bidders do not normally work as you describe. They normally deprive the investor of the opportunity to review the loan before the bid is made. Even SavingStream may release loans to automatic bidding with no or minimal preview period. The fact that less attractive loans fill slowly is also irrelevant. They are loans and are often at quite respectable rates, perhaps twice that available at Zopa or three times that available at Wellesley. I've got precisely stuff all of the 14% ABLrate loans. The one I tried hardest on, filled in under 15 minutes. I don't have complete information but here's a sampling of secondary market sales that you may also not have participated in, even though the rates seem often to be over 12% and were available for a good deal more than just a few minutes: Containers loan 1: 12.50% AER equivalent. Last purchase I know of was a couple of weeks ago at 6.6% or so but a few weeks earlier over 9% and earlier still over 10% happened. Happened at over 12% in mid July. Containers loan 2: 14.32% AER equivalent. 10.5% within the last week and over 12% around the end of August. Containers loan 3: 12.15% AER equivalent. Over 11.5% within the last week. Last time I saw 12% or more was the first day I saw it on the secondary market. I hope that you didn't also miss those rates, but maybe you did. The opportunity to get over 12% or even over 10% may be gone for good for those three now. At the moment there's a new loan available there at 12.24% AER equivalent: 11% raw rate and 1% cashback for investments of £1,000 or more. I expect it'll fill before the 16 remaining days are up. If you want over 12% and haven't bid yet, I'm not sure it would be wise to wait much longer. in edit: the most obvious culprit for panic bidding is FS. SS does have an auto-bid. It's not just automatic bidding that you seem to like, it's automatic biding with guaranteed notice of the loan details, something even SavingStream doesn't say will always happen, though they have said that they will try. Getting good advance notice is a very good thing but not getting it doesn't make a platform inherently bad or risky.
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james
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Post by james on Sept 23, 2015 10:51:12 GMT
Whilst I keep hearing this is a major risk when investing in p2p I'd like to know exactly what would/could cause the collapse of a platform and thus loss of lenders money. ... Just wondering about worse case scenario really. Fraud. There's the potential to lose every penny ever sent to the platform. And the FSCS protection that normally covers up to £50k for investments isn't available for P2P. Somewhere there's perhaps already been a "long firm" in the P2P market place, though not yet known in any UK firms. A long firm is a fraudulent business that accumulates reputation and money then vanishes when the pot is big enough for the criminals. The platform itself may not be fraudulent, it could be insider fraud against the platform, or borrowers defrauding lenders. Underwriting risk is also a potential problem. Consider what I think is now over 70% of all loans that were made via Bondora to Slovak borrowers now being in default. Security can be inappropriately valued for those platforms that provide security. Or the security itself might be stolen and not or inadequately insured against that risk or say fire or flood. My take is existing loans would be run off by a third party and there may well be a haircut to some degree. Unless there is fraud that's what you should expect. Losses would probably be zero to minimal. A liquidity crunch is obviously the number one fear if when the inevitable collapse in the economy comes but surely the bigger platforms would step in and limit withdrawals to an orderly fashion. Not really possible with the current P2P firm structures, which don't now oblige them to pay unless they have received money from a borrower. The previous SavingStream model was a liquidity risk to SavingStream because they are required for loans made more than a few days ago to make the interest payments while carrying out a sale of the security. while the delay in getting interest is negative for investors, the reduced liquidity risk from the new system that does not make these payments improves the financial reliability of the SavingStream platform.
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Post by mrclondon on Sept 23, 2015 10:53:38 GMT
Whilst I keep hearing this is a major risk when investing in p2p I'd like to know exactly what would/could cause the collapse of a platform and thus loss of lenders money. My take is existing loans would be run off by a third party and there may well be a haircut to some degree. A liquidity crunch is obviously the number one fear if when the inevitable collapse in the economy comes but surely the bigger platforms would step in and limit withdrawals to an orderly fashion. Just wondering about worse case scenario really. Many of the platforms are engaged in an exponential growth strategy and are currently loss making and are predicted to remain loss making for some years to come funded by venture capital / private equity whose aim is to have something big enough to IPO a few years down the line. The collapse of a platform could easily be triggred by a loss of faith in the platform by its VC/PE backers. And its worth adding that the one platform most at risk of a short term failure is (reading between the lines) dependent on getting a new software release out and working before the VC/PE chequebook is fully opened. Yes, it is a FCA requirement for there to be a third party strategy in place to handle the run off of the loan book. And yes, you are absolutely right to expect a haircut ... the third party's remit will be to liquidate the loan book over a sensible time frame. The security related to distressed loans would be disposed of at auction with only token reserves, so many of the distressed loans on the likes of AC, TC, SS, FS, MT, ABl would be unlikely to return all the outstanding capital let alone accrued interest. The platforms which have closed thus far have all had relatively small loan books at the point of failure, and with one exception (Quakle) managed an orderly closure themselves with no downside to lenders. Yes the platforms would attempt to manage a liquidty crunch, but only in so far as they are able to continue to trade solvently.
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pikestaff
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Post by pikestaff on Sept 23, 2015 10:59:09 GMT
Whilst I keep hearing this is a major risk when investing in p2p I'd like to know exactly what would/could cause the collapse of a platform and thus loss of lenders money. My take is existing loans would be run off by a third party and there may well be a haircut to some degree. A liquidity crunch is obviously the number one fear if when the inevitable collapse in the economy comes but surely the bigger platforms would step in and limit withdrawals to an orderly fashion. Just wondering about worse case scenario really. The collapse of a regulated platform should not, of itself, cause lenders to lose money. Platforms are required to have plans in place for the administration and run-off of the loans, and I would expect the cost of the administration to be covered by the spread between what borrowers pay and what lenders receive. BUT: - There might be a haircut on the interest rate, if the spread is not sufficient to cover the costs.
- The may not be a secondary market, so you may be locked in for the full term of the loans.
- Borrowers may be more inclined to default if the platform has gone.
- Some platforms rely in part on monitoring by third party sponsors/introducers. Will they will do as good a job for a defunct platform as for one that is still sending new business their way? And what if they go out of business as well?
Also a liquidity crunch should not, of itself, cause the collapse of any regulated p2p platform, because they do not guarantee liquidity. If nobody wants to buy our loans we are stuck with them. We will not be able to take our money out until the underlying loans are repaid. That's one of the key differences between a bank account and p2p. However, if there were such a liquidity crunch it would reduce confidence in the platforms affected. Depending on its severity and duration that could well lead to the platform(s) going out of business. Accounts with provision funds complicate matters further. On RS, if it looks likely that there may be a shortfall on the provision fund, this triggers a "resolution event", whereupon all lenders interests are pooled and paid out pro rata as the loans repay. This means that monthly lenders are pooled with 1, 3 and 4-5 year lenders, who then all have a portfolio which will pay out over 5 years with an average term of around 3 years. If this ever happens, RS will almost certainly cease trading. RS will work hard to try to maintain the provision fund at a sufficient level that this does not happen, by increasing the credit fees that they charge to new borrowers. But a very sharp rise in credit losses could cause a problem especially if it was combined with a sharp drop in new lending. The structure of some other accounts with a provision fund is less clear and some of them might suffer more if there was a rush for the exit. All of the above applies to true p2p only and not where we are lending to the platform. The risks where we are lending to the platform are greater. Edit: crossed with james and mrclondon's posts, with which I largely agree.
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bigfoot12
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Post by bigfoot12 on Sept 23, 2015 11:08:10 GMT
Whilst I keep hearing this is a major risk when investing in p2p I'd like to know exactly what would/could cause the collapse of a platform and thus loss of lenders money. My take is existing loans would be run off by a third party and there may well be a haircut to some degree. A liquidity crunch is obviously the number one fear if when the inevitable collapse in the economy comes but surely the bigger platforms would step in and limit withdrawals to an orderly fashion. Just wondering about worse case scenario really. A platform might get sued by a disgruntled investor (many have erroneous information on their websites). Or a platform might be fined by the regulator. Or the investors backing it might decide that the on going losses aren't worth it. Lots of other possibilities like hacking, IT errors which transfer money to the wrong accounts (and then struggle to get it back), a bust provision fund might take down the platform; probably each of these is unlikely but you asked for a worst case. Some platforms are the lender, in an insolvency you might worry that you become an unsecured creditor of the failed platform rather than having direct ownership of the loans. If the failure was technological you might worry that the the platform or its replacement wasn't able to collect or allocate the debts. I think that a borrower from a failed platform is more likely to 'chance his arm' and not pay back to see what happens. I am not in general very confident of the resolution policies of most platforms. How likely are they to succeed if the platform had some sort of disorderly failure. Having said that I do have some money in a number of platforms. I lend on only those platforms where I believe I am lending to the borrower, and not to the platform. You point about liquidity crunch highlights the risk of even a diverse approach. If any large platforms fails I think that all platforms will face a difficult few months, and I assume that I would not be able to access any of the money on any platform for an extended time period. Edit Crossed with previous 3 posts which are largely similar to mine except I am concerned about a knock on liquidity problem should it start.
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Post by ablrateandy on Sept 23, 2015 11:15:02 GMT
The security related to distressed loans would be disposed of at auction with only token reserves, so many of the distressed loans on the likes of AC, TC, SS, FS, MT, ABl would be unlikely to return all the outstanding capital let alone accrued interest. Sorry to butt in, but that is a bit too sweeping and in the case of our platform incorrect or very misleading. Where the platform is no longer extant, the asset operator would continue to make payments according to the terms of the loan. If the operator was no longer able to make payments AND the platform was no longer extant, a third party specialist would be appointed and seek to recover and sell or re-lease the asset in an orderly manner. Aircraft in particular do not go up in some sort of fire-sale auction and we would work with that specialist to maximise revenue. I would also debate your point about what recovery level there would be (but it is a moot point as we have no distressed loans on the site and we are not planning on closing down) . I, personally, am comfortable that there is no loan on our platform that would be unable to meet capital repayments in the event of a wind-down. 
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