james
Posts: 2,205
Likes: 955
|
Post by james on Dec 11, 2014 22:08:03 GMT
It would appear from your description that you've even had advance notice of the change in pricing, so have ample opportunity to sell off at the current price before the price changes if you don't like it... or have I misunderstood? The new pricing has not been disclosed for the most relevant loans, those with some impairment. Nor yet on individual loan basis for those without impairment. There's minimal opportunity to sell now because it's selling of impaired loans that is of most interest and you can't sell an impaired loan when it hasn't become impaired yet. You're right that I'll be looking to try to sell while I can those loans that I think are most likely to suffer. A system where "old" loans are sold at a completely different price to "new" ones of otherwise identical risk seems to me more likely to cause "unfairness" issues (in particular for the buyers) than imposing a consistent pricing structure across all loans. The problem there is that it changes the value of existing investments, including the value assumptions made when deciding to acquire those investments. Doing it for newly issued loans wouldn't bother me at all. There's a related issue that the current system also gave flexibility to the provider to vary the interest rates of new loans in a very broad band between around 15% and 26% or so but that seems not to have been used much. That could, if used extensively, have provided a substantial transition period with reduced losses for investors - under old or new systems. Instead we find that loans now classed as A-C and perhaps more have all been given a 15% rate when made available on the market. Not universally, there have been some exceptions. But it's very clear that the provider knew that young people with low incomes were much higher risk than middle aged people with lots of assets but still gave both a 15% rate under the existing system. Not doing that just makes the losses worse when they clearly knew that they were going to reprice but still issued at rates they knew to be inappropriate.
|
|
sl75
Posts: 2,092 
Likes: 1,245
|
Post by sl75 on Dec 11, 2014 23:16:33 GMT
The problem there is that it changes the value of existing investments, including the value assumptions made when deciding to acquire those investments. Surely only the most naïve of investors would expect the value of their investments to be unchangeable? For many investments, the company concerned need only issue a "profit warning" for the value to plummet. I have only the contents of this thread and a lot of reading between the lines to go on, but it seems this interferes with an investment strategy of holding non-impaired loans, and dumping impaired ones on the secondary market at artificially inflated prices - presumably taking advantage of less well-informed investors who didn't realise the fixed price on the secondary market didn't represent the true value?
|
|
|
|
Post by 4thway on Dec 12, 2014 15:14:15 GMT
batchoy said:
"There is also the issue of a conflict of interests with Bondora setting the SM pricing. Given that they charge fees and thus make profits on SM transactions will they be setting the SM pricing to truly reflect the value of the loans and thus protect(?) lenders or will they be skewing the value to generate liquidity thus generating greater funds for themselves."
The CEO of Bondora told me that market forces will ultimately be in charge of prices, after an initial period, although lenders will never be able to price loans below Bondora's calculation of a fair price, based on CAPM. CAPM is a measure of volatility, which is Bondora's proxy for risk. CAPM is far, far, far from perfect, often pricing the better investments more attractively than they deserve and the worst investments better than they deserve, although in CAPM's sort of half defence, it is standard and widely used.
In terms of interest rates, the prices will be fixed, for the time being, at CAPM + five percentage points. This all suggests that the high-quality loans could be priced very favourably for the risks involved. But that's just a theory for the time being.
I liked this comment from marek63:
"Markets are useful things but one thing a market provider does not normally get to do without a lot of trouble is tell investors that at the stroke of a pen they have just had the value of all of their investments changed to what the market operator thinks they should be."
You also said:
"The platform has also announced that it is to partner with a retail bank which will originate the loans, rather than it being P2P, though the dates and detailed plans for this have not been announced."
I don't think where the loans originate defines whether it's P2P (being a bit semantic/pedantic now). They all have varied ways to get loans. Wellesley originates loans itself but parks them at a bank until investors can take them up. Funding Circle partners with Santander to send them business borrowers that Santander has turned down. (Not that Funding Circle accepts dregs, but it is confident it is able to rate some kinds of business borrowers better than Santander.)
|
|
james
Posts: 2,205
Likes: 955
|
Post by james on Dec 12, 2014 20:36:13 GMT
The problem there is that it changes the value of existing investments, including the value assumptions made when deciding to acquire those investments. Surely only the most naïve of investors would expect the value of their investments to be unchangeable? Investors should also not expect that on day one the firm would offer the investments for sale at an interest rate that says they are the safest available investments - priced at 15% on a scale from 15% to 26% - then the next day say that they are some of the riskiest available and merit a risk-based rate above 26% with nothing at all changing about the borrower. At an absolute minimum that suggests that the firm has for some time been knowingly offering for sale investments at risk-based pricing below the risk level it really had the information to know that they deserved. My view at present is that the best approach for investors sold the investments may be to ask for a refund of the purchase price on the basis of mis-sale by misrepresentation by the platform.
|
|
james
Posts: 2,205
Likes: 955
|
Post by james on Dec 12, 2014 20:47:42 GMT
I have only the contents of this thread and a lot of reading between the lines to go on, but it seems this interferes with an investment strategy of holding non-impaired loans, and dumping impaired ones on the secondary market at artificially inflated prices - presumably taking advantage of less well-informed investors who didn't realise the fixed price on the secondary market didn't represent the true value? Such investments do not normally sell for an increased price. They typically sell at a discount. With no change in the risk description by the platform loans might take a discount of 10-25% or more to sell, depending on the way the platform describes the risk of the investment and how late or whatever the loan may be. What has changed is that the platform has taken existing investments sold at one expectation of default and recovery and now describes the same investments with no change at all in the borrower details as having a substantially higher risk level. And since risk and price are related that means whether impaired or not, the price at resale can be expected to fall because it takes a drop in price to change from say an original 15% rate to a new described-risk-based rate of 26% even before allowing for new treatment of impairment pricing and offering a prospective buyer an appropriate additional discount for taking the default and recovery risk. That drop is due to the action of the platform and its original description of the risk at the time the investment was offered for sale to investors and the risk it is now saying it thinks the investment has. P2x platforms are not solely places that collect payments, they are acting as a ratings business when they use risk-based interest rates to pitch investments for sale to investors. If they choose to pitch the investments for sale at risk-based pricing that is below the risk-based pricing that they know the investment deserves then that's a problem, at a minimum for ethics and conflict of interest.
|
|
james
Posts: 2,205
Likes: 955
|
Post by james on Dec 12, 2014 21:17:07 GMT
I liked this comment from marek63: "Markets are useful things but one thing a market provider does not normally get to do without a lot of trouble is tell investors that at the stroke of a pen they have just had the value of all of their investments changed to what the market operator thinks they should be." You also said: ..."The platform has also announced that it is to partner with a retail bank which will originate the loans, rather than it being P2P, though the dates and detailed plans for this have not been announced." I'm glad you liked it, though you got the author wrong: The platform has also announced that it is to partner with a retail bank which will originate the loans, rather than it being P2P, though the dates and detailed plans for this have not been announced. ... Markets are useful things but one thing a market provider does not normally get to do without a lot of trouble is tell investors that at the stroke of a pen they have just had the value of all of their investments changed to what the market operator thinks they should be. I don't think where the loans originate defines whether it's P2P (being a bit semantic/pedantic now). They all have varied ways to get loans. Wellesley originates loans itself but parks them at a bank until investors can take them up. Funding Circle partners with Santander to send them business borrowers that Santander has turned down. (Not that Funding Circle accepts dregs, but it is confident it is able to rate some kinds of business borrowers better than Santander.) I do think it matters. In part because that is at the heart of how some platforms did an end-run around the law and regulations, making the loan contracts directly between lender and borrower. P2x covers this difference nicely, encompassing both direct and indirect lending. But there can be substantive legal differences as well. Consider say a P2P firm that issues annual statements to borrowers. One did that to me as a borrower and made significant errors, like not correctly subtracting payments to get a correct closing balance and overcharging me interest due to wrong calculations in two different ways, so effectively all statements were wrong. Bad news: issue wrong statements and you get to refund all interest for the period covered by the statement. A platform using lender-borrower direct contracts might try to dodge its liability for this by arguing that it wasn't obliged to even issue the statements because it wasn't the lender. Thereby dumping its lenders who had consumer credit licenses into the boiling water for failing to issue any annual statements at all, hence causing them to lose all interest that they charged on any of their loans. Whether the platform could dodge appears to have rather nicely been addressed by the Northern rock High Court decision in the case NRAM plc v and (1) Jeffrey Patrick McAdam (2) Ann Hartley that because NR claimed on its statements that it was issuing them under the CCA it has the liability even though it didn't really have to issue the statements at all. P2P firms that issue the loans themselves don't get any opportunity to try this responsibility dodge, since they contractually did do the lending.
|
|
sl75
Posts: 2,092
Likes: 1,245
|
Post by sl75 on Dec 12, 2014 23:17:37 GMT
What has changed is that the platform has taken existing investments sold at one expectation of default and recovery and now describes the same investments with no change at all in the borrower details as having a substantially higher risk level. Hypothetically, let's suppose the platform's old risk model wasn't perfect, and that it now has a better risk model. You appear to suggest the platform should then completely ignore their better risk model w.r.t. existing loans, knowingly allowing them to trade at a purported risk level that now seems inappropriate according to the new better risk model!
|
|
james
Posts: 2,205
Likes: 955
|
Post by james on Dec 13, 2014 8:08:46 GMT
Hypothetically, lets consider what it means if on a Monday the platform was describing a loan it was offering as having the lowest risk-based interest rate available, 15% in a range from 15% to 26%, then on the Tuesday described the same loan as E grade and meriting a risk-based interest rate of 25%. What should investors who were sold the loan by the platform on the Monday think about now being told that it needed a 25% rate to be worth accepting the platform's offer of the loan?
Did the platform suddenly discover something new about the borrower between the Monday and the Tuesday? Or did it just decide to ignore what it knew on the Monday?
This is one reason why it may be appropriate for investors who were offered loans from the platform to ask for sales to be reversed or sales where the old description of the risk is lower than the new description of the risk. What did the platform know, when did it know it and why did it choose not to use the information in the pricing when it had the flexibility and had specifically said that it was using that flexibility to set the appropriate interest rate?
I know broadly what I think about the scenario: that for at least part of the time the platform had the information but chose not to use it. For all of the time when it had the information but chose not to use it it's my view that the platform was mis-selling the investments to investors who wrongly trusted that it really was using the interest rate flexibility it had to price the interest rate according the risk, as it said it was doing.
I'm still pondering what I think the best resolution may be but reversing the sales is the traditional remedy for wrongly described investments, including those where the risk was mis-represented to investors.
|
|
