Post by wellesleyco on May 7, 2014 14:57:01 GMT
I am unsure how many of you have read this article this morning in the Daily Mail or online (This is Money). We feel it necessary to provide comment on this article as it does not necessarily cover the risks of P2P lending correctly.
www.thisismoney.co.uk/money/saving/article-2621707/Why-lending-6m-day-total-strangers-fears-grow-boom-risky-websites-offer-savers-returns-18.html
There has been a fundamental misunderstanding here about the separate risks involved with Peer-to-Peer lending and I feel that it is important to clarify. The two primary risks that Lenders are subject to are: ‘Borrower risk’ and ‘Operator risk’.
The Borrower risk is relatively understood by the author ‘If borrowers default, you can lose your cash.’
However the Operator Risk is not understood. ‘…If the peer-to-peer company collapses, there is no Financial Services Compensation Scheme safety net. This scheme protects an individual’s savings of up to £85,000 in a bank account in the event of a crisis.’
To clarify, When Cash is sent to Wellesley & Co (and for that matter, any other legitimate P2P lender) there are strict rules governing the segregation of client funds. Therefore if your funds are not lent out, and are in the ‘Client Holding Account’, this money is untouchable by any administrators in the event of the liquidation of the platform (Wellesley & Co.).
Funds held in the Client Holding Account which is with Lloyds Bank are covered if Lloyds Bank fails to the tune of £85,000.
If Wellesley & Co were to go into administration, all un-lent funds would be returned, and the Security Trustee would oversee the repayment of all outstanding loans. Therefore, provided these loans do not default, there is no reason why any lender should lose capital in the event that Wellesley & Co ceased to exist.
When Lenders’ funds are lent out then the risk is with the borrower. I appreciate that there are different models of Peer-to-Peer lending yet most diversify their P2P investment across a number of loans and therefore the risk of ‘losing all your cash’ is lower. In models such as Wellesley & Co where all lending is secured against tangible assets, if a borrower defaulted the asset would be sold in order to recover any losses. If the proceeds from the sale of an asset do not cover the loan outstanding (there is usually a 65% avg. loan-to-value buffer) Wellesley & Co is first to see a loss on their retained portion of the loan. If there was still an outstanding balance our lenders would be eligible to apply to our Provision Fund.
All provision funds are discretionary throughout the P2P industry and therefore no firm is legally permitted to offer a guarantee. Wellesley & Co however has its own capital and therefore would use those funds to ensure that no customer ever suffers a loss to the extents of the total amount of capital it has (£5m).
I don’t think the Wellesley & Co model has ‘emerged to exploit growing demand for peer-to-peer investments’. The nature of the risk mitigation that we have developed into the business model shall ensue that Wellesley & Co shall have a long future for borrowers and lenders who seek an alternative to traditional bank funding.
‘…this raises fresh concerns, since all are small online operations with no more than a handful of staff, and all have launched within the past 18 months. This makes it difficult to get any idea of track record and likely longevity’. Hence this article is premature. Peer-to-Peer lenders will not reach the levels of staff that banks employ. Simply there is no need and cutting the overheads allows the increase in offering to both borrowers and lenders.
‘They cannot call the loans ‘risk free’ — despite their promises of cash ring-fenced as a ‘guarantee’ buffer’ Wellesley & Co. explicitly does not use these terms.
www.thisismoney.co.uk/money/saving/article-2621707/Why-lending-6m-day-total-strangers-fears-grow-boom-risky-websites-offer-savers-returns-18.html
There has been a fundamental misunderstanding here about the separate risks involved with Peer-to-Peer lending and I feel that it is important to clarify. The two primary risks that Lenders are subject to are: ‘Borrower risk’ and ‘Operator risk’.
The Borrower risk is relatively understood by the author ‘If borrowers default, you can lose your cash.’
However the Operator Risk is not understood. ‘…If the peer-to-peer company collapses, there is no Financial Services Compensation Scheme safety net. This scheme protects an individual’s savings of up to £85,000 in a bank account in the event of a crisis.’
To clarify, When Cash is sent to Wellesley & Co (and for that matter, any other legitimate P2P lender) there are strict rules governing the segregation of client funds. Therefore if your funds are not lent out, and are in the ‘Client Holding Account’, this money is untouchable by any administrators in the event of the liquidation of the platform (Wellesley & Co.).
Funds held in the Client Holding Account which is with Lloyds Bank are covered if Lloyds Bank fails to the tune of £85,000.
If Wellesley & Co were to go into administration, all un-lent funds would be returned, and the Security Trustee would oversee the repayment of all outstanding loans. Therefore, provided these loans do not default, there is no reason why any lender should lose capital in the event that Wellesley & Co ceased to exist.
When Lenders’ funds are lent out then the risk is with the borrower. I appreciate that there are different models of Peer-to-Peer lending yet most diversify their P2P investment across a number of loans and therefore the risk of ‘losing all your cash’ is lower. In models such as Wellesley & Co where all lending is secured against tangible assets, if a borrower defaulted the asset would be sold in order to recover any losses. If the proceeds from the sale of an asset do not cover the loan outstanding (there is usually a 65% avg. loan-to-value buffer) Wellesley & Co is first to see a loss on their retained portion of the loan. If there was still an outstanding balance our lenders would be eligible to apply to our Provision Fund.
All provision funds are discretionary throughout the P2P industry and therefore no firm is legally permitted to offer a guarantee. Wellesley & Co however has its own capital and therefore would use those funds to ensure that no customer ever suffers a loss to the extents of the total amount of capital it has (£5m).
I don’t think the Wellesley & Co model has ‘emerged to exploit growing demand for peer-to-peer investments’. The nature of the risk mitigation that we have developed into the business model shall ensue that Wellesley & Co shall have a long future for borrowers and lenders who seek an alternative to traditional bank funding.
‘…this raises fresh concerns, since all are small online operations with no more than a handful of staff, and all have launched within the past 18 months. This makes it difficult to get any idea of track record and likely longevity’. Hence this article is premature. Peer-to-Peer lenders will not reach the levels of staff that banks employ. Simply there is no need and cutting the overheads allows the increase in offering to both borrowers and lenders.
‘They cannot call the loans ‘risk free’ — despite their promises of cash ring-fenced as a ‘guarantee’ buffer’ Wellesley & Co. explicitly does not use these terms.
