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Peer2Peer Finance News | September 16, 2019

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Mini-bond provider collapse highlights safety of P2P, says Orca Money

Mini-bond provider collapse highlights safety of P2P, says Orca Money
Hannah Smith

THE COLLAPSE of mini bonds provider London Capital & Finance (LCF) shows the dangers of chasing high interest rates while highlighting the relative stability of peer-to-peer lending, says Orca Money.

The P2P investment aggregator’s chief executive Iain Niblock (pictured) said investors were “duped” by the promise of an eight per cent interest rate on LCF bonds. These bonds were used to make loans to corporate borrowers to provide capital for further investment, and turned out not to be ISA eligible.

The FCA estimates 14,000 people had invested £214m through the bonds. The firm went into administration in January after the regulator ordered it to halt its regulated activity and stop marketing products.

Read more: Insolvency special report

“The high-profile collapse of mini bonds provider London Capital & Finance (LCF) plc, highlights the perils of solely chasing an interest rate,” said Niblock.

“This is a horrible situation for the savers and investors who were duped into a highly attractive interest rate. The company cleverly used aggressive marketing campaigns and social networks to attract investors.

“Critics often focus on P2P lending being risky, but mini-bonds such as these seem to get an easier time, despite several high-profile failures in recent years such as Secured Energy Bonds and Providence Bonds, worth £7.5m and £8.15m respectively.”

He noted that P2P lenders must be fully authorised and comply with FCA rules, while issuing mini-bonds is not a regulated activity, although promoting them is.

Read more: Zopa CEO: Marketing restrictions appropriate for riskier platforms

“Mini-bonds are unlisted, unregulated debt securities. They are non-transferable and illiquid. Supporters highlight that they give investors a cheaper way of accessing corporate debt than through retail bonds.

“But if investors want exposure to non-listed credit investments, P2P platforms are more heavily regulated and have stricter controls on what they can do with the money.

“Investing in the alternative lending market is complicated and there are a lot of options for investors to choose. It is easy to get blinded by the rate, while not understanding the risk.

“One of the big risks of both mini-bonds and P2P is the collapse of the platform and the underlying assets. Fraud is also a factor, so it is important to check on who you are investing in and the team behind the investments.”

He emphasised the importance of diversification across P2P platforms for investors wanting to reduce risk.

Orca launched its first ISA offering last month, which allows investors to earn up to 5.3 per cent in tax-free returns by investing across multiple P2P platforms.