And so it happened. It was probably not really much of a surprise that P2P lender Lendy would enter some kind of administration one day, although perhaps it has occurred a little bit sooner than we would have envisaged. It was revealed that the FCA were monitoring operations as late as last month, and now it seems that either money or patience has run out. In truth, the demise has been happening for a very long time. I was ‘out’ of Lendy in the early part of 2018, but even then this was too late as some loans were unsaleable even then.
In typical Lendy style this was not well communicated. The timing might have been chosen well: a Friday afternoon before a Bank Holiday weekend. Even now, there may be users who may not have a clue this has happened as there have been no official communications. But on logging into the website you are greeted with an unwelcome administration notice.
What does this mean for investors?
This is not good news for investors. At the very least, you can expect your money to be tied up for a while with no interest (although no change to what was happening anyway). The loans made will now have to be unwound by the administrators, and given the incredible amount of can-kicking, the painful decisions that Lendy were too scared to take will now be done.
Money invested here, as with most P2P platforms are not covered by the Financial Services Compensation Scheme (FSCS), so the entire value is at risk.
Without going into specifics there are some absolutely terrible loans on the platform which were not defaulted because of the large losses and very bad publicity they would have brought. The better loans amounted to very few in truth, and even these may suffer a capital cut because there may be no other facilities to continue development funding.
The answers to some nagging questions will also become obvious now. Funds have gone missing in some instances without any explanation, and the Provision Fund may not be one at all, as Lendy itself used the balance as security for something.
There are also further questions of vested interest. Certainly towards the end the interests of the platform surviving became at odds of those of the investors.
Is this another Collateral?
If there is a glimmer of good news, this may not work out like the Collateral debacle. Collateral was another P2P platform which went into administration, the recovery process of which has racked up almost as many fees as recoveries and on paper investors look set to lose a high percentage of their investments.
The circumstances of demise are different in that Lendy have full authorisation from the FCA, and Collateral merely pretended to. This means that the administration is part of a process which has been already planned for (and at least part-paid for). Whilst it seems unlikely that amounts paid will be enough to fully realise the assets (and as such, deductions will be made from the amounts due to investors), the kind of delays and legal wrangling seen in the Collateral case should not be present here, and we should have an orderly process.
Mitigating against that is the fact that many of the Lendy loans are of higher complexity and greater size than Collateral ones (which had some very straightforward loans against jewellery or similar assets). It seems likely that the time taken to unwind this position might run into several years.
What about Lendy Wealth?
Lendy Wealth was a spurious black-box programme devised by Lendy in the past year. Despite claiming over £1m had been taken in, it remains to be seen how recoveries for these investments will be treated. Supposedly monies invested are apportioned to loans, there is no real concrete way of checking whether this is the case or whether funds were used for operational purposes.
What can I do now?
Unfortunately there is not much you can do about your money: at this stage it isn’t really possible to tell for definite how much will be coming back, but given the extremely poor value of the loan book, I would guess the cut would be big. In my XIRR calculations for Lendy I have been gradually impairing my remaining investment for probable losses: this has steadily increased. Even now, 50% looks quite optimistic.
There are some practical steps you can take however.
- Log on to the Lendy site and download your current account positions, investments. You can use the Export to Excel function, or even screen grabs are better than nothing. The reason being is that the site may become inactive at any time.
- Ensure that the e-mail address you have registered with Lendy is current, as the administrators will most likely use this as a form of contact.
- Keep up-to-date with reading on forums – it may be the case that there are developments that are not published elsewhere.
- Reassess your positions with respect to similar platforms and loans.
Implications for P2P Lending
The press haven’t really picked up on this too much, but in terms of total value the demise of Lendy is almost as large as the collapse of London and Capital Finance (LCF). Whilst it may be the case there was not outright fraud in this, there almost certainly will be the same very sad stories about people that have invested perhaps a little more than they could afford in these schemes.
It may be the case that the FCA come to the rescue in some way. This is a huge long shot, but given that Lendy gained full authorisation whilst a struggling company, some investors may feel slightly let down by the protection offered here.
In the meantime, there are some sobering lessons to be had. Especially for development loans, make sure what you are loaning against stacks up, and research the background of the borrower. I do believe that large-scale, peer-funded development loans of the type operated by Lendy have seen their day. One of the chief problems was that once a loan ran into trouble the borrower gains the upper hand in the resulting negotiations. This was because redemption of the loan was contingent on Gross Development Value (GDV), which a P2P platform could not afford to fund, or did not have the expertise to complete.
The collapse of Lendy also brings into focus another problem: platforms are businesses in their own right, and once they run into problems, an irreversible death spiral can occur. In Lendy’s case I am certain that their problems (and lack of dealing with them) led to the vast majority of people pulling their funds from the platform.
Therefore, it is vitally important to research the size of some of these platforms and their financial stability. In P2P world, very few platforms run at a profit, with many still running losses as they fund their growth. The oldies such as Funding Circle, Ratesetter or Zopa have large valuations attached, and in theory could ride out some turbulence by simply issuing equity (Ratesetter have done this in the past). But even so, it is unwise to keep a large percentage of your wealth in these platforms. If things start to go bad, there may be a long queue to get your money out. Funding Circle used to have almost instant sell-outs, and this time has stretched to almost 2 months recently.
We should be even extra cautious about the smaller platforms. There are many that are slickly designed but to be frank if they are loss making and unable to raise capital by other means, a sudden administration like we have seen here is the end result.
Diversification across platforms is good, with a sliding scale of more money allocated to bigger, safer platforms, but ultimately one of the most important factors is limiting your overall exposure to P2P in terms of your own net worth.
For my money I am too heavily exposed. Should you wish to reduce P2P investments into something safer, consider FSCS-protected funds, equities, trackers, or bonds. If you can do without the cashflow, then pensions contributions are tax-efficient. In these cases there is an obvious market risk, but I would consider counterparty risk to be much greater.