grumpsimus
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Post by grumpsimus on Feb 22, 2020 23:12:15 GMT
I have been thinking about the reasons FS failed, not just poor decisions and bad management, but the underlying reasons. I think that this can be traced back to two decisions.
The first was to setup as a P2P lender using a pawnbroking licence. Pawnbroking is a very simple business, your lend money against goods which you take possesion of (usually valuable chattels i.e gold jewellery or expensive watches etc) at not more than 50% of the value. The borrower redeems the goods at the end of the six months term by paying back the amount of the loan plus the interest on the loan. If the goods are not redeemed they are sold and the lender takes his capital, interest and the costs of selling the goods. Any surplus is returned to the borrower. Therefore, all the profit comes at the end of the term.
FS started using this model with P2P lenders providing the finance. Soon they found a shortage of goods to lend against and a surplus of funds to lend. Like all new companies they were keen to expand the business, the more money they lent the more they could make. They made the second decision to expand into property lending, where there was plenty of demand for large loans. However, this does fit well with the pawnbroking model, in particular loans for developments don't fit with a 6 month term. Also FS appeared to have no knowledge or experience of property lending.
In the pawnbroking model with chattels you have no interest in wether the borrower can pay back the loan, you have the goods and can sell if required. Property is a completely different, you need to be certain the borrower is capable of carrying out the development and it is a viable scheme. You need to know your borrower very well!
We all know what happened to far too many of the property loans, often draging on for years with no return for lenders or FS.
It is therefore ironic that it was the £2.5m Artwork loan that finally broke FS, where they made the fundemental error of failing to take possesion of the goods.
I would be interested to learn what others think?
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ozboy
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Mine's a Large One! (Snigger, snigger .......)
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Post by ozboy on Feb 22, 2020 23:41:33 GMT
Oh, I dunno, maybe blatantly lying about something being there when it wasn't might have contributed ever so slightly to the downfall?
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michaelc
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Say No To T.D.S.
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Post by michaelc on Feb 23, 2020 0:13:23 GMT
grumpsimus if their downfall was simply a mistake or pair of mistakes I suspect most people wouldn't be so angry. There is plenty of evidence to suggest that the directors frankly didn't care what happened because they made money regardless. If it was just a pair of mistakes why would, for example, one of the directors borrow from lenders without telling them (Reading terraced house loan). As far as I can see, they were taking millions of pounds of our cash and going to trade shows to find borrowers. Once a deal was brokered with a borrower, they could take a cut. Why care about the risk the loan might not be repaid? Just keep writing meaningless updates to postpone and postpone and postpone until their reputation was so low no new lender's money was forthcoming. That was the prompt to wind up the fun, take the last bit of cash they could and shut the company down. Meanwhile, the FCA allowed such an operation to continue. They even granted it "ISA" status - the IFISA. That's right, a seemingly similar idea to the regular ISA run by your bank on the high street. By granting this company the ability to offer an "ISA", did the FCA want people to think the integrity of the operation behind FS was at least in the same ballpark as a bank? I certainly thought the ISA badge provided a significant degree of credibility. Oh how wrong was I.
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foolsgold
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Post by foolsgold on Feb 23, 2020 0:28:58 GMT
Having the IFISA status was the only reason I ever invested in FS......I thought that having the approval of the FCA made it a legitimate risk with FS lending no more than 75 LTV which is worst case scenario what a repossesed property would obtain at auction.
I though in extreme market conditions auctioned properties may fail to achieve 70 LTV but it would be the exception rather than the rule
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Post by dan1 on Feb 23, 2020 8:53:45 GMT
Greed
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jj
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Jolly Jammy
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Post by jj on Feb 23, 2020 9:07:58 GMT
Lack of intregrity.
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Post by spareapennyor2 on Feb 23, 2020 9:08:08 GMT
Funding Secure
the Irony
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Post by bracknellboy on Feb 23, 2020 9:56:57 GMT
All of the above ?
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adrian77
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Post by adrian77 on Feb 23, 2020 15:25:01 GMT
I agree with all of the above - not least greed. But as I said earlier, wonder if there was any relation to this platform and the directors past roles of providing development finance and also whether the directors thought they could inflate the loan book regardless of quality and float the business and make a quick killing...They also seemed completely clueless about how the property development business works in the real world.
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jo
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dead
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Post by jo on Feb 23, 2020 15:59:49 GMT
It was the single road getting to Nijmegen.
Sorry. I think it's practically the same reason for all of them - the refusal to recognise a problem whilst the asset still may have untainted value and before the (exponentially with time) rising costs of recovery become untenable. *
*Waves at remaining platforms still doing the above.
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grumpsimus
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Post by grumpsimus on Feb 23, 2020 16:02:24 GMT
I agree with all of the above - not least greed. But as I said earlier, wonder if there was any relation to this platform and the directors past roles of providing development finance and also whether the directors thought they could inflate the loan book regardless of quality and float the business and make a quick killing...They also seemed completely clueless about how the property development business works in the real world. Adrian77
Clearly there was an substantial element of inflating the loan book as fast as possible, which as you suggest affected the quality of the loan book. This is of course the reason it ended up with so many very poor and defaulted property loans.
I still think the basic model of using pawnbroking to finance very speculative property developments was never going to be a viable business.
I have a background in property and am amazed at how FS operated. There specialist lenders for development finance and they operate a very differrent model. Firstly, they are far more selective about who they would lend to, weeding out the chancers and conmen who think it good to have a go with other peoples money. Secondly, they would look for a track record of successful development. They would expect the borrower to have a reasonable level of equity. Probably won't lend more than 60% of GDV. They would appoint their own Surveyor to first asses the viability of the development, then to regularly monitor its progress, releasing funding in stages. Doesn't sound much like how FS operated!
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Godanubis
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Anubis is known as the god of death and is the oldest and most popular of ancient Egyptian deities.
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Post by Godanubis on Feb 23, 2020 21:50:39 GMT
Failure can only be assessed at the end of the process which is miles away and depends on Administration.
For the thousandth time show an overall loss on completed loans in the loan book ?
Look at it factually not emotionally . !!!
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Post by crystal on Feb 24, 2020 9:01:24 GMT
One might argue that at least partial failure has already occurred ?
Lending money for scheme that may or may not obtain planning approval (ie, outside the control of the lender) is highly risky. Lending money based on the value of completed schemes is very unlikely to work and I doubt we will see P2P ever operate successfully at scale in this area.
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adrian77
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Post by adrian77 on Feb 24, 2020 9:26:42 GMT
indeed - that said it depends upon your position - as an investor I feel like I have been mugged by Tyson Fury
Not so sure the directors regard it as a failure - depends what their end-game was....pound to a penny they will come out of this shambles better than I and a lot of us will do!
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grumpsimus
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Post by grumpsimus on Feb 24, 2020 11:43:31 GMT
Failure can only be assessed at the end of the process which is miles away and depends on Administration. The factual position is that FS has already failed. The Directors decided that it could not continue as a going concern and called in Administrators.
The first Administrators report appeared to show few grounds for optimism for creditors or lenders. Updates since then have not shown any improvement in the position. Known recoveries are generally poor, with the Administrators taking a cut for fees and costs. Lenders can not even withdraw any cash in their accounts.
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