Three reasons Lendy’s collapse shouldn’t put you off investing in P2P loans
WHEN Lendy went into administration, it was not exactly a surprise due to mounting arrears, but it still sent shockwaves throughout the industry. With the Financial Conduct Authority on the brink of announcing its final rules on reforms of the sector, this has been the bad publicity the industry doesn’t need.
However – the future is still bright for peer-to-peer lending and here is why investors should not be dissuaded by Lendy’s collapse.
1. Don’t tar the entire industry with the same brush
Lendy’s collapse was a platform-specific issue, putting management’s strategy into question and the platform’s underwriting criteria. Would one failed, listed company put investors off putting money into stocks and shares? Unlikely.
Many have argued that P2P isn’t really an asset class due to the plethora of business models and types of loans on offer – what’s important is the quality of the underlying loans.
2. Don’t be scared by defaults
Due to the relative nascence of the industry, many platforms have been able to boast of zero defaults to date. But it is highly unlikely things can stay that way forever. Defaults are cyclical – with loans most likely to go bad near the start or end of their term – so maturing platforms are likely to see more bad debts. Furthermore, unless you’ve been living under a rock, you’ll know that the economy is worsening, which will have a knock-on effect on almost every industry.
Defaults are inevitable and do not mean that platforms are not worth investing in. What’s important is that the platform has adopted responsible underwriting processes, is as transparent as possible and has identified ways to mitigate risk for investors. Read our recent special report on how platforms mitigate risk.
A number of platforms have commissioned stress tests to forecast how their loanbooks would fare in a downturn. For example, Landbay predicts its investors would still receive returns of more than three per cent in the event of a recession.
3. Lessons learnt
Lendy’s collapse is undeniably stressful for any connected stakeholders, including the many retail investors who are now worrying about recouping their funds. Hopefully, appointed administrator RSM will manage to pick through Lendy’s loanbook enough to recover some money for creditors and investors alike.
However, this high-profile platform collapse should provide a learning curve in terms of best practices and regulatory oversight.
Furthermore, some consolidation is actually a good thing in the longer term, leaving the best players and creating a stronger industry as a whole.