The shield

Double typos it is. Corrected now to next update on 20/11/2019.

The portfolio projection falls under COBS 4.6.7R (1) (ca), which requires that information that contains an indication of future performance is based on performance scenarios in different market conditions (both negative and positive scenarios), and reflects the nature and risks of the specified types of investments included in the analysis.

This is obviously important and reiterates the fact that P2P investing does not offer a fixed, guaranteed return and that performance will vary over time. 

Thanks

Hi zlb

Thanks for your question. This is one that has come up a few times.

To address the first point, to be clear I am not suggesting that there is no inherent risk in the underlying portfolio - particularly so given the political and economic uncertainty surrounding the UK at the moment. However, we have taken a number of steps to 'de-risk' the portfolio by tightening up certain segments which were performing disproportionately poorly in earlier cohorts. This should lead to reduced losses... but of course there always remains a wider risk that the UK will experience a difficult period, during which household finances become stretched, existing potentially expensive debt becomes harder to refinance and default/bankruptcy/IVA levels across the UK increase. What happens over the next few weeks could indicate whether that's likely any time soon.

In relation to your specific question, I'll try to answer this in a number of ways.

Firstly, I'm not suggesting that Lending Works is simply able to charge higher interest rates, for lower risk borrowers, than other platforms. I always try to avoid comparisons with other platforms, in any case, especially given these are usually likely to be based on incomplete information. However, there are very real examples where lower risk borrowers are willing to pay a premium, which I'll come onto.

In most areas of commerce, cheaper is not always better - hence the fact most people are walking around with iPhones. While the consumer credit market is slightly different, increasingly driven by price aggregation (price comparison websites (PCWs) such as MoneySuperMarket, ComparetheMarket etc), you need to look a little deeper to understand the market dynamics.

The short answer as to why someone might be willing to pay more for their loan: certainty, speed and convenience. The long answer: Read on...

The representative APR rules were brought in to ensure lenders could not advertise a headline rate which was only offered to a small subset of customers. Instead, the representative APR must be the rate at which at least 51% of customers receive (or better). This sounds fine in principle, except it has unwelcome side effects, partly driven by the increasing popularity of PCWs. In order to appear at or near the top of the PCW tables, and therefore take the lion's share of the 'clicks', lenders would in many cases need to offer a loss-leading headline rate (say 2.9%). If super prime customers are effectively under-paying, what this means is that the remaining 49% of customers need to over-pay to balance the books and ensure that lender achieves its target returns. This generally causes a pretty terrible user experience for the 49% as the rate advertised is rarely the rate they receive (think tenants, those with middle of the road credit scores, average incomes, much of the UK...).

Lending Works, alongside a few other lenders, has been part of a recent shift in the market towards "real rate, real eligibility". What this means in practice is that when you receive a quote on a PCW, we'll quote you a personalised, guaranteed rate, based on your specific personal circumstances, and a real 'eligibility' or likelihood of approval - in many cases 100% pre-approved.

So an example of a customer's online decision might be Lending Works offering a guaranteed, pre-approved rate of 12.9%, or five other lenders offering a representative APR of 3.9% with a 75% chance of approval (these are generally now displayed on leading PCWs). Some customers will apply to all five other lenders in order to find out the specific rate that lender is able to offer them, after filling out pages of information and perhaps being manually underwritten, and then compare the remaining offers (some will be declined at that point and potentially incur hard credit searches). However, many people would prefer the certainty and convenience of a guaranteed, pre-approved rate and complete the process in a few minutes, receiving their funds a few hours later so they can get on with their lives. 

Sorry for the long answer but I thought it was worth providing some background as this question has come up here a few times.

Thanks

I am interested in this too, I do not currently invest with LW, I was all ready to do so then looked at the statistics page where the actual defaults are quite a lot higher than the estimated, and also the rate to borrowers has gone up over the years, which Laurence at Financial Thing noted in his review.

I then read this forum where a lot has been written about the shield cash decreasing.  So I am holding fire on LW until I see things improve and I hope they do as really I like what I see with them, and that their rep is active in the forums but that alone is not enough in this political climate. 

I currently only invest with Ratesetter.   To LW, I could be one of many holding off investing due to shield depletion/underestimation of losses, I understand there are always risks but this is why I do this research, and look pessimistically. 

Same position here. Look after 4 chunkyish accounts for various family members and have been enjoying the experience for about 4 years but unless a clearer picture emerges I will head for the exit before the rush.

Hi Ace

Please see note above regarding an update on the Shield and other items related to PS19/14.

Regarding the recent decrease in cash drag - this was actually primarily due to a single very large loan sale (single investor, almost £1m, which was for a property purchase). These things happen from time to time. I had hoped investors would be pleased that the queue came back down so quickly!

Thanks

That's certainly not the norm - the average is currently around £28k, though I would have thought the modal value will be lower than that (I must find that out at some point...). 

I think it's right to be cautious about any investment and the FCA's new rules do actually promote that point to help ensure people don't put all their eggs in one basket, so to speak. We do try to have this conversation with investors anyway - I'd certainly be alarmed if anyone put their entire net worth into one P2P platform (or any other investment for that matter).