ARCHOVER chief executive Angus Dent has urged peer-to-peer lending platforms to do more to educate investors about risks in the wake of the Lendy and Neil Woodford scandals.
The boss and founder of the P2P business lender said that some platforms in the sector do not fully explain the risks attached to their investment offering.
“The trouble starts when companies either don’t tell the whole truth in the first place, or when they don’t rectify commercially fortuitous misconceptions,” Dent (pictured) said.
“To an extent, everyone connected with the financial services industry is guilty. The public, and even some sections of the media, are inclined to believe what they want to believe when something new and attractive appears on the scene. Only later, when things start to go wrong, those same enthusiasts will invariably look for someone else to blame for their own lack of nous.”
Dent pointed towards the way P2P platforms were marketed in the past, “when the alternative finance revolution was in its early stages and commentators and politicians alike were buzzing with enthusiasm.”
During this time, Dent said, the public was not discouraged from viewing investment in P2P loans as a new and more lucrative form of savings. However, he added that “it wasn’t true then and it isn’t true now.”
As the alternative finance sector has grown, it has been subject to tighter regulation and greater public scrutiny. Over the past year, high-profile platform failures such as Collateral and Lendy have placed retail funds at risk and sparked concerns among investors about what might happen to their money in the event of a platform closure.
Similarly, the decline of the once-popular Neil Woodford funds has highlighted the risks associated with holding illiquid investments.
Read more: Lendy collapse: Who’s to blame?
“It should be incumbent on us all to remind investors that higher returns come at a price – it’s called ‘risk’,” said Dent. “The failure of Lendy has acted as a useful reminder that property isn’t always a sure fire way to profit because it isn’t readily convertible into cash.
“Neil Woodford has demonstrated that shares in unquoted companies can also be hard to shift in a fire sale. Investors in H2O Asset Management have had the same problem.
“Liquidity isn’t a given, and it isn’t good business to allow investors to believe that it is.”
Dent urged P2P platforms to take closer look at how they explain risk in order to avoid losing the trust of their lending communities.
“So long as the risks are pointed out honestly and clearly from the outset, investors can’t complain that they were never made aware of the potential pitfalls,” Dent added. “There will be the occasional mistake and from time to time people will lose money. What we can do at our end is tell the truth and make sure that speed of transaction, whilst important, is no substitute for proper credit analysis.
“Risk is not a dirty word when put in the context of reward.”