Graham Wellesley (pictured) is not afraid of a bit of criticism. But after a year in which his company has been a regular fixture in the financial pages, he is ready to fight back.
IT WAS one of the first peer-to-peer lenders to launch in the UK, the first to advertise on UK television, and one of the earliest members of the Peer-to-Peer Finance Association. But over the past few years, Wellesley & Co has been on the receiving end of some of the harshest criticisms that have been levelled at the P2P sector.
Earlier this year, a series of media reports publicised a 2015 report from auditor BDO which stated that Wellesley & Co was “dependent on raising further capital to continue to operate for 12 months”. Yet as of late 2017, the company is still very much in operation, with plans to re-launch its P2P business and big ambitions for the future.
Peer2Peer Finance News caught up with founder and chief executive Graham Wellesley as he hits back at the critics and sets the record straight.
P2PFN: How do you respond to reports of discrepancies in your loan book?
Graham Wellesley (GW): We’ve been attacked over the performance of our loan book, but I actually believe in terms of defaults from inception we are – if not the top performer – one of the top performers, in terms of the quality of our loan book. We’re coming into our four-year anniversary and our cumulative losses are below one per cent. These are anticipated losses, not just real ones.
P2PFN: How do you reassure nervous investors of this?
GW: The gap between our average lending rate and cost of funds is six and eight per cent. Our investor performance – whether it is in P2P investments or bonds – is 100 per cent. Our maximum loan term is five years, so we’re only one year away from going through a full cycle.
We run in some ways very similarly to a bank or building society. When we lend money we always have cash reserves, either out of our own capital or through excess investor funds. We always run a liquidity buffer.
We have an early access scheme for P2P. Early access is dependent on there being other lenders being available to take on loan, so it is not guaranteed and it is at Wellesley’s discretion. However, this is made clear to investors from start as it is part of the terms and conditions.
Our policy with the mini bonds is that early redemption requests will only be consented in exceptional circumstances, for example bereavement and serious financial hardship. Again, this is made clear to investors from the start that it is a term investment.
P2PFN: Why do you think Wellesley has received such bad publicity over the past year?
GW: I think the criticism was very unfair. The negative publicity started in relation to our mini-bonds.
We are not a bank. So a PRA-regulated bank issuing bonds has regulatory capital ratios. But why would you compare a mini-bond in a non-bank to a bond at a regulated bank? I don’t think it’s a fair comparison. We have raised the largest mini-bonds in the UK in excess of £50m. That money can be used as operating capital of the business and that’s all fully disclosed before anyone invests. We still operate with a positive NAV.
We traded positively in the second half of the year and we traded positively in the first half of the year. As at 31 July 2017, we had funded 261 loans, with loan facilities worth £494.51m, and this loan book is diversified across the UK.
Read more: Are P2P capital calls a bad sign?
P2PFN: Is Wellesley & Co profitable?
GW: On a rolling 12-month basis as of 30 June, the business made a profit of around £2m.
Tell me one P2P lender in the top five that’s profitable. So why are we being aggressively attacked in the press as a company that has done incredibly badly, when our relative performance relative to our peer group is better than others?
We were attacked by FT Alphaville regarding capital ratios on mini-bonds as compared to a bank. We pay a premium interest rate on our mini-bonds and we fully disclose the risk associated with the mini-bond and we didn’t believe it was a fair criticism.
P2PFN: Some news reports focused on a number of personal investments that you made into the business. Can you explain why you made the choice to invest yourself?
GW: From day one I knew that not being a regulated bank, it was going to be a question of competence from the investors. On day one, I didn’t have a track record so I invested aggressively in my main board and governance. My chairman for instance has been head of credit at Swiss Re and Lloyds. Other board members are top lawyers. These people aren’t there for the money. We also have incredibly good input and oversight from a governance point of view. If we were doing anything unorthodox our team would have flagged that up immediately.
The other very important thing that was reported in the press was the loss we held. In February, my chief risk officer recommended the loss accrual of £4.2m. We had the right under our contract to pass those losses to our investors and that would have represented less than half a per cent to our investors. However, we chose as a board on a discretionary basis to stand in front of those accruals.
I felt that over time the quality of the brand will be directly correlated to your long-term performance. So it was an effort to ensure that we retained an unblemished performance record.
And when we got the bad press the actual investor reaction was minimal – withdrawals were substantially less than one per cent.
P2PFN: Who is your typical investor?
GW: We do not tend to attract high-net-worth individuals – our typical investor is middle class, between 45 and 75 years old, and with an average deposit of somewhere north of £20,000. People approach us. The client take-on is over the internet.
Read more: The P2P Power 50
P2PFN: What is your average loan size and return?
GW: Our average loan this year was £11m with an average LTV of 64.2 per cent. Every borrower must have a good track record and expertise in both location and product. But the very key thing in the property market post-Brexit is that my average unit value is substantially below £600,000, so I am in the highest liquidity band. I do not like backing central London, or any unit values in excess of £600,000. In fact, 71 per cent of our properties are valued at below £300,000.
I’m not sure what Brexit holds for us but uncertainty represents illiquidity. So we have increased our average loan size, lowered our LTVs so our return is lower than it was two years ago, and we have very specific credit criteria. We’ve just hired a guy in the North and a guy in the South West, and we are diversified all across the UK.
P2PFN: How do you respond to the allegations that you have personally issued loans to the business?
GW: When we took the loss against the accrual there was a loan of £1.6m, but the actual loan that funded the business was £2.5m and that was actually charged against a property.
I didn’t have that much money in cash so I put up an asset to back the loan that was lower than 50 per cent LTV, but that was against a policy of having a positive NAV. Most of our competitors would have a negative NAV.
P2PFN: What’s next for Wellesley?
GW: We have an interim license from the Financial Conduct Authority (FCA) and we expect to get full approval very soon.
We have altered our P2P model in line with new FCA regulations, and we expect to re-launch our P2P platform soon. Preparations are going very well but we do not have a firm date for the launch yet.
P2PFN: How do you plan to separate the bond business from the P2P business?
GW: There will be separation between the two products although investors can choose between them. The bonds will be issued by Wellesley Finance, and the P2P business will be operated by Wellesley & Co.
P2PFN: Do you have any plans to launch an IFISA?
GW: We are already ISA compliant with our bonds under a stocks and shares ISA. We will also do the Innovative Finance ISA, but we’re waiting for the sign off from the FCA.