Crowdfunding And Peer-To-Peer For SIPP And SSAS
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As increased numbers of investors turn to P2P (peer-to-peer) lending to boost their income, here are 10 vital questions you should ask a P2P platform before parting with your money
But First, An Important P2P Platform News Update
Earlier this year, Lord Adair said the losses which will emerge from P2P lending over the next five to 10 years will make the worst bankers look like lending geniuses... P2P platform
However, he's recently clarified his view saying his earlier comment had been a hastily-made, out of context statement which occurred at the end of an interview that he believed to have finished, and that his current view is that direct lenders are able to assess credit "as well or better than the incumbent banks"... P2P platform
Understand How A P2P Platform Works And The Risks Involved By Checking These 10 Areas
P2P Platform ThinCats Reveals The Results Of Its Survey
A study by the P2P platform ThinCats has discovered that almost a third of those surveyed said they’d been put off investing in more traditional asset classes following the EU Referendum. The survey also highlighted a number of investors who had been attracted to P2P lending among other alternative asset classes, as a result of the Brexit vote.
Commenting on these findings, ThinCats' chairman Kevin Caley said:
Alternative finance has come a long way in helping to plug this gap, offering some reprieve for investors, many of whom believed they would be seeing a rate rise by 2017.
A major attraction of P2P lending is it sits apart from market volatility, providing high and predictable returns, whichever way the market winds are blowing.
Kevin Caley, Chairman ThinCats
10 Detailed Questions To Ask Your Chosen P2P Platform
As the cumulative total of P2P lending approaches £8 billion (October 2016), Mark Posniak, the managing director of Dragonfly Property Finance, said it was vital people understand the risks of lending on a P2P platform before they part with their money. Here are his 10 key questions he thinks you need to ask your chosen P2P platform.
Who’s The Provider?
Are they a familiar face in the financial services sector or a complete unknown? How long have they been operating? How well capitalised are they? What sort of systems and controls do they have in place and how experienced is the underwriting team? Have they survived any major market or economic crashes? Also, if it exists, be sure to consult any third-party due diligence into the provider to help you better assess how robust they are.
Do They Have Skin In The Game?
Some P2P products include a ‘provision fund’ — a pot of money that can be used in the event of default as a sort of insurance policy. How big is it with the lender you are considering, and what level of cover does it provide? More importantly, to what extent does the P2P platform suffer if a loan goes bad? And are they ready to take a hit before you, the investor?
Are The Loans Secured?
Does the P2P platform you’re considering lend in the hope that it will get its money back, or is there a tangible security that can be called upon if a borrower were to default? Unsecured lending is worlds apart from secured lending – the latter is generally considered far less risky because if the worst case scenario did happen, the underlying asset can be sold and the lender has the opportunity to get most or all of its money back.
Who Are The Borrowers?
Each P2P platform tends to deal with specific types of borrower, whether individuals or businesses. These borrowers have widely varying motivations, levels of experience and associated risk profiles. It’s important to understand who the borrowers are and what they’re planning to do with the money that’s lent to them. Does the lender know? Does it know the sector the loans are being made in? And how, if at all, does it monitor the way its money is being spent?
What’s The Typical Loan Term?
What’s the duration of the typical loan borrowers are seeking to take out via the P2P platform? The longer the average loan length, the greater the potential impact on liquidity and the ability of investors to withdraw their money. Shorter loan terms mean quicker redemptions, which boosts liquidity.
How Diversified Is The Loan Portfolio?
It will probably vary over time, but how many loans are investors getting exposed to on average? Remember that risk can be significantly reduced if investor funds are spread across a broad portfolio of loans rather than a small handful.
How Good Is The Underwriting?
How are the borrowers assessed? What sort of credit profiling is undertaken? And if loans are secured, what assets are they secured against? How are they valued, and what level of buffer is there in case that value was to fall over the course of a loan? For example, if the loans in a portfolio are made at an average loan-to-value of 60%, that’s a 40% cushion for investors’ capital in the event of default.
What’s The Capital Loss Rate?
This is the essential yardstick of good underwriting. Never invest without asking the P2P lender for its historical ‘loss rate’ and be wary of lenders that don’t openly publish it. Past performance is not a reliable indicator of future success, but understanding it is crucial to due diligence.
How Easy Is It To Get Out?
It’s all well and fine if it’s easy to invest, but how do investors access their money when they need to? Does the product carry a fixed term, or can investors choose to withdraw at any time? And are there any costs or penalties for doing so? Some products will have a secondary market, and some providers will be able to use their balance sheet to facilitate withdrawals – while others may lock investors in for the duration of loan terms.
What’s The Risk/Reward Trade Off?
After reading the above, hopefully you won’t, but don’t, whatever you do, simply plump for the product promising the highest interest rate. Generally speaking, the higher the interest rate, the higher the level of risk investors are taking on, the less accessible their money or the greater the lock-in period. This is what professional investors call the risk/reward trade off. Or in other words, if it seems too good to be true, it probably is.
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Over time, charges can wipe out a huge part of your fund. We like AJ Bell because there are no set-up costs. If you hold passive funds, which is our preference, or shares, investment trusts, EFTs, gilts or bonds, you pay one small fixed fee no matter how large your fund. And when you come to draw your benefits either as occasional drawdown or UFPLS payments, there's a small charge for the whole year no matter how many times you access your money (many SIPP and SSAS providers charge more than this for each payment). However, you should always compare charges in detail, because AJ Bell could be more expensive than other providers, depending on the type of stockmarket assets you hold.
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Crowdfunding And Peer-To-Peer Risk Warning
When a platform has been assessed and approved by a SIPP or SSAS operator, this does not imply that any loan or investment opportunity is endorsed in any way. A SIPP or SSAS operator's due diligence review is limited to ensuring the processes and procedures of the platform are in line with both FCA and HMRC principles. It's entirely your responsibility for carrying out your own due diligence on any loan or investment opportunity before agreeing to lend or invest your pension money on a platform. As a SIPP or SSAS operator will continually review platforms from a regulatory perspective, it's possible for a platform to become 'unapproved' if something changes.
With peer-to-peer lending, your capital is at risk if you lend to individuals and businesses. You may lose some or all of the capital lent if the borrower defaults and is unable to meet its liabilities. Historic loan default rates are not necessarily indicative of future default rates. In addition, lending is an illiquid investment, which means you may not be able to access the capital you lend for the duration of the loan period, even if the platform offers a secondary market. Investing in any business involves risks, including illiquidity, lack of dividends, loss of investment and dilution, and it should be done only as part of a diversified portfolio. Crowdfunding is generally targeted at investors who are sufficiently sophisticated to understand the risks and make their own investment decisions, based on their knowledge, experience and financial capacity. Neither crowdfunding nor peer-to-peer lending is covered by the Financial Services Compensation Scheme. The tax treatment of your investment is dependent on your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of crowdfunding investment or peer-to-peer lending, you should consult a suitably qualified independent financial adviser.