pikestaff
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Post by pikestaff on Mar 26, 2016 18:32:20 GMT
A rebs discussion generated the assertion today that platforms must not invest in their own loans. Is this true? Is there any sense at all in this (providing that they must maintain their investment until repayment)? For me forcing platforms to invest in loans would be the number one improvement that the FCA could make. Forcing platforms to invest in their own loans would terrify me. Most platforms have such small amounts of capital that investing a meaningful amount in their own loans would raise platform risk dramatically.
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shimself
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Post by shimself on Mar 28, 2016 17:26:57 GMT
A rebs discussion generated the assertion today that platforms must not invest in their own loans. Is this true? Is there any sense at all in this (providing that they must maintain their investment until repayment)? For me forcing platforms to invest in loans would be the number one improvement that the FCA could make. Forcing platforms to invest in their own loans would terrify me. Most platforms have such small amounts of capital that investing a meaningful amount in their own loans would raise platform risk dramatically. But on the other hand -.... Only for those platforms who offer too many bad loans. Yes it would require more capital, say 5% of loans from now on, amortising, or make it a bit less say 3~4% which is the typical listing fee. Yes it would increase entry cost for new platforms, but we hardly need any more of those. But wouldn't it do a lot for self policing? Don't you think aligning interests is the absolute number one cause of disatisfaction (aka feeling ripped off) with the money business as a whole?
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pikestaff
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Post by pikestaff on Mar 29, 2016 7:32:39 GMT
shimself There's a lot of mistrust out there, certainly. But I think it's mainly down to historical baggage re the banks plus, in parts of the p2p space, poor communications. I believe that the desire of platforms to grow and prosper creates, at this stage anyway, sufficient alignment of interests because lenders will vote with their feet. Requiring platforms to fund the amounts that you suggest with capital would make them seriously cash flow negative, with the possible exception of those platforms with the very highest margins. All platforms would react in the only sensible way by looking to grow margins at our expense. An alternative (if permissible) might be to fund with debt, but that would just turn them into under-capitalised banks with massively increased risk (and thus, I hope, not permissible). You could look at smaller amounts, say 1% of each loan, but I think platforms would still look to fund this by increasing the margin. And it would still increase platform risk.
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Post by propman on Mar 29, 2016 9:28:00 GMT
A serious sized P2P is not going to be able to fund a significant proportion of loans through their Directors unless they are Oligarchs! Also, it would be bad planning for the Directors as, even if they think that their P2P company has attractive products, if anything did go wrong they would have investment losses when they were out of a job. I know it might be nice for investors to know that Directors were I that situation, but would you trust Directors who handled their own affairs so imprudently!
Personally you will never have the same interests as Directors or the companies due to equity / bonus issues, especially when it comes to winding the platform down in an orderly way to recover loans at the cost of a last gamble to keep things going.
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Post by rebsrep on Mar 29, 2016 9:36:09 GMT
I've asked REBS two different ways now for clarification, let's see I will get Chapter and Verse on why we had to stop our Catalyst scheme and post it here. Some clarification on our view: Peer to Business agreements are known as 36H Agreements. There are currently some considerations and debate around the suitability of the agreements and changes that will be needed to be made to the legislation governing p2p agreements. If Rebs lend this would be classified as Business to Business lending, B2B lending is not classified as P2P lending and therefore is inconsistent with Article 36H, causing some ambiguity as to the necessary regulatory permissions a firm or business would be required to hold. By having a purely P2P platform we can be certain that our contracts and contracted parties are 36H agreements as the legislation was intended. The addition of institutions and businesses (in the business of lending) is something we intend to review post authorisation. So you can see that there is regulatory grey area and where this is the case we want to lean on the side of being whiter than white.
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toffeeboy
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Post by toffeeboy on Apr 5, 2016 15:08:49 GMT
I will get Chapter and Verse on why we had to stop our Catalyst scheme and post it here. Some clarification on our view: Peer to Business agreements are known as 36H Agreements. There are currently some considerations and debate around the suitability of the agreements and changes that will be needed to be made to the legislation governing p2p agreements. If Rebs lend this would be classified as Business to Business lending, B2B lending is not classified as P2P lending and therefore is inconsistent with Article 36H, causing some ambiguity as to the necessary regulatory permissions a firm or business would be required to hold. By having a purely P2P platform we can be certain that our contracts and contracted parties are 36H agreements as the legislation was intended. The addition of institutions and businesses (in the business of lending) is something we intend to review post authorisation. So you can see that there is regulatory grey area and where this is the case we want to lean on the side of being whiter than white. Are you saying that other sites that allow you to lend from your business but also lend to businesses could be falling foul in a similar way or is this just because you are lending on your own site that the problems occur?
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shimself
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Post by shimself on Apr 5, 2016 15:45:34 GMT
I will get Chapter and Verse on why we had to stop our Catalyst scheme and post it here. Some clarification on our view: Peer to Business agreements are known as 36H Agreements. There are currently some considerations and debate around the suitability of the agreements and changes that will be needed to be made to the legislation governing p2p agreements. If Rebs lend this would be classified as Business to Business lending, B2B lending is not classified as P2P lending and therefore is inconsistent with Article 36H, causing some ambiguity as to the necessary regulatory permissions a firm or business would be required to hold. By having a purely P2P platform we can be certain that our contracts and contracted parties are 36H agreements as the legislation was intended. The addition of institutions and businesses (in the business of lending) is something we intend to review post authorisation. So you can see that there is regulatory grey area and where this is the case we want to lean on the side of being whiter than white. Thanks for the reply. Pursuing my campaign to encourage (force?) platforms to have skin in the game, is there somone in the FCA that you know of that I could lobby? PM me please.
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james
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Post by james on Apr 6, 2016 20:20:36 GMT
If Rebs lend this would be classified as Business to Business lending, B2B lending is not classified as P2P lending and therefore is inconsistent with Article 36H, causing some ambiguity as to the necessary regulatory permissions a firm or business would be required to hold. Perhaps there is some confusion here between the sometimes completely fine B2B P2P and the mention of lending by the platform in 36H? The FCA explains it somewhat more simply when saying what a P2P agreement is (my bold): " (a) (in relation to a borrower) in accordance with article 36H of the Regulated Activities Order, an agreement by which one person provides another person with credit (within the meaning of article 60L of the Regulated Activities Order) and in relation to which:
(i) the operator of the electronic system in relation to lending which facilitates the agreement does not provide credit (within that meaning), assume the rights (by assignment or operation of law) of a person who provided credit, or receive credit under the agreement;
(ii) the borrower is an individual; and
(iii) either condition (A) or (B) is satisfied:
(A) the lender provides credit (within that meaning) of less than or equal to £25,000; or
(B) the agreement is not entered into by the borrower wholly or predominantly for the purposes of a business carried on, or intended to be carried on, by the borrower.
(b) (in relation to a lender) in accordance with article 36H of the Regulated Activities Order, an agreement by which one person provides another person with credit (within the meaning of article 60L of the Regulated Activities Order) and in relation to which either:
(i) the lender is an individual or was an individual at the time the agreement was entered into; or
(ii) if the lender is not an individual or was not an individual at the time the agreement was entered into, either condition (A) or (B) is satisfied, or was satisfied at the time the agreement was entered into:
(A) the lender provides credit (within that meaning) of less than or equal to £25,000; or
(B) the agreement is not entered into by the borrower wholly or predominantly for the purposes of a business carried on, or intended to be carried on, by the borrower;
provided, in either case, that the operator of the electronic system in relation to lending which facilitates the agreement does not provide credit (within that meaning), assume the rights (by assignment or operation of law) of a person who provided credit, or receive credit under the agreement." 36H says much the same thing by referring to the platform as A and B and C as lender and borrower, with B and C the parties making the agreement. It then specifies that a business can lend to a consumer for a non-business purpose provided the amount is no more than 25k or that a business is a relevant person for lending to a business if it's a partnership with at least one non-corporate body or an unincorporated body of persons. Either of these ways of specifying things is potentially troublesome, depending on how things are structured.
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Post by Reged on Apr 7, 2016 16:33:19 GMT
I invest with lendinvest, which classes itself as a p2p, and finances all its loans up front. Only when the loan is completed does it seek investment from its members.
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james
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Post by james on Apr 7, 2016 21:23:15 GMT
I invest with lendinvest, which classes itself as a p2p, and finances all its loans up front. Only when the loan is completed does it seek investment from its members. Not all P2P is 36H compliant P2P and there's nothing wrong with that as long as a platform doesn't leave the issue unclear to potential and actual investors, potentially misleading them into thinking that the 36H only features can be available, like bad debt relief (that's also available to compatible foreign licensed firms). Another platform which funds first then passes on to the final lenders is MoneyThing. The initial lending can't be 36H but may be in effect just an independent bridging loan from the platform prior to the final ones being put in place via a 36H compliant mechanism. I don't know whether LendInvest says its's 36H but I don't rule out platforms from being 36H just because they do some initial funding themselves.
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shimself
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Post by shimself on Apr 8, 2016 7:45:25 GMT
I invest with lendinvest, which classes itself as a p2p, and finances all its loans up front. Only when the loan is completed does it seek investment from its members. Not all P2P is 36H compliant P2P and there's nothing wrong with that as long as a platform doesn't leave the issue unclear to potential and actual investors, potentially misleading them into thinking that the 36H only features can be available, like bad debt relief (that's also available to compatible foreign licensed firms). Another platform which funds first then passes on to the final lenders is MoneyThing. The initial lending can't be 36H but may be in effect just an independent bridging loan from the platform prior to the final ones being put in place via a 36H compliant mechanism. I don't know whether LendInvest says its's 36H but I don't rule out platforms from being 36H just because they do some initial funding themselves. But what makes the difference for me is a platform who are co-invested right through to the end, so if the loan is struggling they are as keen on recovery as we are. A bit of seed money recovered once the loan is up and running isn't the same thing
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Post by lb on Apr 8, 2016 8:05:39 GMT
I think the problem with skin in the game (from FCA perspective) is that it blurs the distinction between platform money/client money and therefore leaves additional platform risk of creditors having a claim against the entire pool of assets - I could be wrong and I am sure there are other reasons
Also P2P was not intended to include balance sheet lending but just matching borrowers with lenders
I dont think they have banned it anyway ... if they do then many platforms wont get authorised or have to change their model
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bigfoot12
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Post by bigfoot12 on Apr 8, 2016 12:19:17 GMT
I understand (from a slightly different context) they are worried about own funds being used to fill an 'auction' which might not otherwise have filled. In the P2P context that might be a platform filling the last 5-10% of a loan, which triggers fees of 4%. That investment is not being made for the same reasons as the other investors. I don't know if that is the problem highlighted here.
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Post by chris on Apr 8, 2016 12:21:06 GMT
I think the problem with skin in the game (from FCA perspective) is that it blurs the distinction between platform money/client money and therefore leaves additional platform risk of creditors having a claim against the entire pool of assets - I could be wrong and I am sure there are other reasons Also P2P was not intended to include balance sheet lending but just matching borrowers with lenders I dont think they have banned it anyway ... if they do then many platforms wont get authorised or have to change their model Having checked with our compliance officer when this thread was started the FCA really have banned it for Article 36H agreements. If platforms are still putting their own skin in the game then either the loans aren't straight forward article 36H agreements or the platforms run the risk of the FCA being a bit miffed when they find out.
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Post by chris on Apr 8, 2016 12:53:04 GMT
Having checked with our compliance officer when this thread was started the FCA really have banned it for Article 36H agreements. If platforms are still putting their own skin in the game then either the loans aren't straight forward article 36H agreements or the platforms run the risk of the FCA being a bit miffed when they find out. This doesn't totally surprise me as we see this type of approach taken into other parts of the financial services industry with regard to co-investment. For example, an investment management LLP cannot invest it's balance sheet in the funds it manages. Since investment managers cannot hold or control client monies, if they invested their own balance sheet they would have control over it, creating a potential conflict. Here P2P platforms are acting as agents between borrowers and lenders. The moment they invest their own balance sheet, they take principal risk as a lender, negating their agent status and possibly creating a conflict. As I said before, however, this does not stop the directors of an investment manager investing their own personal assets in the funds they manage (and clients often demand this). Similarly, I do not see why the directors of a P2P platform, as individuals, would be barred from investing their own capital in the loans of their platform. Moreover, it seems that many directors of platforms already do exactly that. From that perspective their interests are already aligned with other lenders. Completely agree and our many (all I think) of our senior staff and directors invest via the platform. It's the conflict that arises from the platform's own funds being invested that the FCA are seeking to remove, at least as I understand it and you more eloquently explained.
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