mrclondon, with the esteem I’ve always held you in, & before inviting you to make your much-respected views heard on other points discussed further down, may I take the liberty of testing the logic to some of the points below, in the spirit of helping build understanding amongst lenders.
One of the issues regarding p2p SMs vs a stockmarket (or even a used car supermarket to pick up on the earlier anology) is the relatively low volume of transactions makes establishing what is a fair market value very difficult.
Agreed. Not sure what solution there is to this however (aside from designing things to encourage a larger number of transactions & participants in the SM). I note some lenders here seem to have doubts based on their experiences with FC. But perhaps MT’s SM is likely to behave (& hence be designed) differently to FC’s given some fundamental differences; deal flow (10-30 loans annual MT deal flow in the foreseeable future? vs hundreds/thousands at FC), size of loans (chunkier on MT so harder to “hog”), maybe shorter loans on MT (sorry never been on FC, but if so they’d be riskier to hog on MT), a much smaller lending base (1/200th of FC’s size?, so again riskier to hog), secured loans vs unsecured, a far less known brand & marketplace etc, & (to date) a highly unproven ability to scale anything like FC have done (even in % terms) – which likely attracted a sizeable number of (also large) flippers on FC in the first place.
So whilst taking your point (& noting that a fixed price SM has failed to solve this issue & has in fact made it much worse), perhaps the only useful practical conclusion to draw is that whatever MT do with their SM, the objective should clearly be to both attract a larger number of lenders & encourage a much larger volume of transactions. A wider spread of pricing points (premium & discount) must surely help add dishes to the buffet table.
Most p2p lenders are relatively small retail investors without the knowledge and experience to determine for themsleves what a fair price is. If p2p is to remain fully open to retail investors as it is currently, some thought should be given to protecting them from exploitative pricing. I don't know what the answer is, just that retail investors interests must be protected.
1. Is there any basis for believing lenders are able to establish fair prices correctly for
new loans (but not those on the SM), without the use of crystal balls? If not, shouldn’t we be closing p2p down entirely?
2. Is there any basis for believing retail lenders have a good (let alone better) chance of guessing the fair price for say an equity, bond, foreign (or cypto) currency, gold, oil, property in Sri Lanka (all things everyday retail investors can buy happily with a click)? Aside from the volatility of most of these asset classes (which suggests a fair price isn’t easy to determine there either), secured lending at least offers a floor price of sorts (tested though that may have been in some cases). More to the point perhaps, let’s not forget that in the equity, bond, forex, gold, commodity etc markets you’re up against tens of thousands of highly motivated, deep-pocketed, global operators staffed by highly paid financial pros & banks of analysts, quants & teraflops of computing power. I would argue P2P offers a far more level playing field for the retail investor than those markets.
(As a side-note I’ve never understood, even solely in terms of P2P’s negligible market size, why this aspect seems to be controversial in some quarters. I’d far prefer the FCA focuses its attention on ensuring p2p platforms’ internal processes are up to scratch, perhaps beginning with any potential blind-spots in the existing regulations – eg ensuring lenders are not exposed to any unknown promises/commitments to provide onward development funding on DFLs in borrower contracts they’ve never seen, or perhaps banning these commitments entirely for platforms for example)
3. what exactly is an “exploitative” price, & (assuming it exists) what makes us think it’s something unique to p2p?
4. Protection. Aside from the warnings, disclaimers, t&cs & plenty of other info lenders are provided with when they sign up, I see (just as examples) 6 lines of “Your Capital is at Risk” type warnings on the available loans page & on each loan, a series of risks listed, warnings these are not all the potential risks, invitations to read both MT’s Risk Statements (another document with 7 key points covering all sorts of warnings & alerts) & the Lender T&Cs (31 clauses), the 6 line Your Capital is at Risk warning (again), not to mention reasonable documentation by some p2p platforms’ standards (a clearly identified borrower, a VR I can read, a list of FAQs etc, & updates on the loan as it proceeds). I can also see (live) progress of the loan filling, & watch the size of bids made should I so wish. After having gone through all these hoops & flags surely, at some point, I should be assuming some sort of responsibility (platform negligence aside) if things don’t go to plan? And yet I’m still not without recourse, I can complain to the platform, & if still not satisfied complain to the FOS. And later still complain on the forum, post a scathing review on TrustPilot, write to the press, my MP, hire a lawyer.
So aside from adding a “Are you sure you want to invest” hoop for investors to click before confirming their bid, I’m not really sure what else needs to be done to protect lenders from themselves, & actually think P2P is arguably well ahead of the game vs other asset classes at least on this front.
The news flow on loans is almost always bad news…. Paying a premium for p2p debt is IMHO a fools errand, as you are only a step away from receiving bad news which will cancel the prospect of recovering the premium in the future.
What about when planning permission is obtained, a development proceeds successfully within or even below budget/timeline, sales of units being built come in faster (or at better prices) than expected, a borrower (or its parent/ other connected cos) reports good figures / refis other funding lines onto lower cost debt or repays it / reduces its costs / gets new customers / a competitor goes bust etc. Or govt policy changes favourably for our borrower or an entire sector (eg corporate taxation is lowered, business rates are cut, new measures to support housebuilding or house buyers are introduced), or something adverse happens in the stock market or another country or asset class that brings fresh lender money into the UK property market / p2p etc?
Most if not all of the above are things that do, can & will happen regularly, but perhaps we’re more (& maybe understandably) tuned into the bad news?
I take the point that in practice the balance is (probably) likely to weigh more heavily towards more news being bad, but prohibiting premiums entirely on that basis (& without even considering the benefits to premiums others have pointed out) seems a touch rash. A better approach might simply be to allow a narrower range of premiums than for discounts.
when platforms allow premiums I take advanatge of them as a seller to rip off the unwary buyers.
I’m hearing you (& have no doubt you’ve made some profitable transactions) but sorry, no you don’t. You offer your units on the market, & have no idea why someone might be buying them or the reasons why they might judge X or Y to be an acceptable price. The fact that you’ve made a profit on the sale makes your action no less noble.
We need to be careful not to fall into the trap of thinking that the way we personally value a loan is the ”right” way, that we’ve discovered some form of fundamental truth, & that anyone who diverges from that valuation is a sucker. Markets are simply meeting places for buyers & sellers, it is not for us to judge what the right prices for others are. That’s as unknowable as their motivations, their opportunity costs & their points of references. The only function we can (& should) perform is to make the right valuation for ourselves, &, if the transaction is made, hope it works out well.
So unknowable is other participants’ thinking that even price signals shouldn’t be taken as conclusive. You can have your units up for sale at 1% premium, I might think that 2% (or 3%) is a fair price but if someone is offering it at par I’ll buy his. The market signal suggests the fair value is par but it’s definitely not (in my case), I’ve just got a better deal than I was intending to.
Whilst deluding ourselves we might be better judges of what the fair price might be for others (no criticism intended btw, I think we all do it) is an already slippery slope, there seem to be other far more slippery ones other folk are sliding down. The market is made up of many different buyers & sellers, each with their unknown motivations & opportunity costs, & the sum of what we all do leads to a given set of transactions being closed at prices
willingly entered into by all the trading parties.
The fact that ultimately (only time will tell, & no-one has a crystal ball) some will earn more profit than others & some will lose is no indication of there having been any exploitation. It’s just the normal functioning of the market (you simply can’t have a market without profits & losses being made). Further, it is
essential (this seems to be a basic point some are missing) that all participants act “selfishly” in their own interests, without this the market can’t function, fair prices can’t be discovered, investors can’t make rational decisions, it all falls apart. It’s also imperative the market (that’s us) shows no mercy – if we make the wrong call we lose if we don’t we’re alright. The market can’t work any other way. Ofcourse, if we’re less confident about our call we have a simple tool at our disposal no-one can take away from us (the decision on how much to invest, if at all).
I’ve struggled to understand the logic of some comments, ultimately they seem to expect some peculiar rules to be applied to P2P that no-one would live with in any other sphere of life.
The only logical explanation I can find is that such proponents are counting on using another method of playing the market – the invest & list – which harms everyone else (lenders that don’t adopt this strategy - or do it more slowly - in particular, but ultimately everyone & most of all MT itself!) at no cost to them. Ironically this is a particularly powerful tool in the hands of a BH. Invest 200k & list it the second I can, the loan’s become mine.
If otoh these thoughts are held by less predatory investors, who simply prefer to continue to believe that a par price (so plainly wrong for a depreciating asset) is the right price & always will be then fine, they can continue to trade at par. Nothing changes for them, least of all their (sorry) plainly wrong maths.
Another point. The reason (in my case, & I suspect many others) here are nudging MT to review their SM is because we’d like them to survive. Some comments on this. My back of envelope figs suggest MT (&/or similar platforms) need to originate £30-45m of new loans every year in order to have genuinely good long-term prospects in the P2P market. A fairly cursory look at their performance to date, examining the repeat business likely from completed loans, does not paint a pretty picture (if we assume BPF, & other large borrowers who don’t seem to be looked on favourably by p2p platforms now, & who MT are certainly in no position to fund atm, won’t be coming back). So that business – which I estimate to mean an increase of 6-8.5x previous levels - needs to come from new places.
In the “current” lending climate on 10%+ p2p (it’s actually been deteriorating for 18M & might worsen further) that’s not a small task. Consider the possibility of the FCA tightening their restrictions on who P2P can be marketed to – that won’t help. Consider that very few platforms (large or small) are making any profit, that there are too many platforms (hardly a week goes by without seeing someone raising cash from equity investors to stay alive), that many are bound to fail, that for this & other reasons much bad press is likely in the months & years to come & we clearly have a challenging picture ahead.
I wouldn’t be making an effort if I didn’t think
MoneyThing &
sophie had a fighting chance to make it. They have things going for them, it is still do-able. But changing the SM (& generally being much more ruthless – I’d like to say single-minded but I think it will take more than that - in their drive to profitability) is essential if they’re going to even have a chance of getting that first small step forward.
Those who insist on the SM staying unchanged have a right to their opinion, but pains me though it does to say so, the only way errors in their thinking can be corrected are by the market. Please don’t take it personally, & please (above all) don’t expect to have the right to bring MT down with you.
With apologies for length, my main personal thoughts on the SM:
a. a fundamental rehaul is essential, it’s a question of survival
b. whatever the new SM looks like, the over-riding objective should be to encourage more lenders to participate & larger volumes of transactions to be made
c. whilst relaxed about how it is done, a narrower trading range for premiums than for discounts seems to make sense
d. premiums serve many purposes, namely they
i) allow demand & supply to be rebalanced (in the same way discounts do, in fact one is fairly useless without the other)
ii) allow positive news on loans (which does happen) to be priced in, not to mention offer more flexibility for the pricing of amortizing loans (whose risk profile differs from interest-only loans)
iii) allow a price to be attached to diversification & liquidity (eg for small & popular loans, why should you be forced to sell your units at the govt’s price if the market will offer you more?)
iv) offer an opportunity for new lenders to come on-board (even when there are no loan units available at the government’s price)
v) encourage greater deployment into & usage of lenders’ ISA accounts (adding a potential £20k/yr/registered lender to MT’s funding base)
vi) encourage lenders to think more before investing. Arguably the unsophisticated nature of some of MT’s lender base is one reason we have the SM block we have now
Happy to leave it to MT to determine how to do things, & happy also that they engage with those with experience of the pitfalls that have happened on FC/Abl etc. Wrt FC however, I would hope that both MT & the lenders they engage with bear in mind the possibly quite different fundamental aspects & likely behaviour between these SMs. They may well not be comparable.
Last but not least (have to find one way of becoming unpopular), if the new SM will take time to develop, I personally wouldn’t have any problems with a sales fee being charged or interest deducted for the lister until it is enacted, particularly if it might make a material difference to MT’s short-term prospects (up to £40k a month in the latter scenario).
On a side-note mentioned by others, I do agree with the idea that the focus should be on 8-10% loans moving forwards, much of the gains beyond this being largely illusory.