Prime real estate property platform CapitalRise has reacted to the City regulator’s temporary marketing ban on mini-bonds, which has cut out some of the firm’s existing investors.
The platform’s co-founder and chief executive Uma Rajah (pictured) said that it was “a shame” that restricted investors could no longer be included in the marketing of these products, but added that CapitalRise was in a more fortunate position than most, as the majority of its lender-base is made up of sophisticated, high net worth, or corporate investors.
“We totally understand why the regulator decided to implement this temporary restriction, whilst they decide on the appropriate longer term rules that will be put in place,” Rajah told Peer2Peer Finance News.
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“The industry will be working closely with the regulator during this consultation period and providing their views. We are very fortunate that these temporary restrictions don’t have a real impact on our business.
“However one observation that we have is that they do temporarily create a discrepancy between the risk perception of P2P and bond-based platforms offering potentially similar types of property loans which I imagine the longer term rules may address.
“The key driver of the underlying risk associated with investing in a property loan is the credit quality of that loan rather than the investment structure (P2P loan vs bond). However, it is hard though for investors to compare loan quality from platform to platform.”
CapitalRise’s investment model incorporates a special purpose vehicle (SPV) for each loan, which is ringfenced for the investor if it goes bad.
Investors purchase mini-bonds and the money is then transferred into the SPV where it is used to create the loan for the borrower.
Once the money is repaid, it goes back into the SPV which is then used to repay the investors.
In November, the Financial Conduct Authority (FCA) temporarily banned the mass marketing of mini-bonds to resticted investors.
As a result, from 1 January 2020, CapitalRise could no longer market its products to restricted investors.
“We can no longer serve that category,” explained Rajah. “That is a shame because we can no longer serve a small group of our existing investors, which is not why we set up this business.
“It does mean we are no longer able to service part of our customer base and that doesn’t feel right.
“P2P lenders are able to continue to service different products to those type of customers and you could argue the quality of our loans are better in some ways but because we use a slightly different regulatory structure, we can’t.
“I hope that the regulator will realise this isn’t quite right, but it is what it is.”
However, CapitalRise was prepared for the ban as the firm was already considering focusing its marketing efforts towards high-net-worth (HNW) individuals.
“From our perspective we are slightly fortunate, we thought we might move in that direction,” Rajah said.
“So, the proportion of those [restricted] investors in our client base had reduced. It hasn’t had a big impact commercially on our business.
“But it’s a shame for firms offering access to these property loans via a bond structure compared to a P2P structure.”