While the P2P market continues to steadily grow, one on-going question remains: What is the best way to safeguard investor funds?
The market to date has lured early adopters, HNW individuals and other savvy investors, but in order to grow and expand, one thing is critical – attracting a large number of retail investors. Mitigation of risk is important for the experienced investors. They understand the risks and are willing to jeopardise a little for big returns. However, in order to convert new retail investors to P2P, more reassurance is definitely required.
FCA accreditation will go a long way in helping achieve this. It will provide reassurance and facilitate step change growth. So too will much clearer methods used by P2P platforms. Protecting investors and minimising the impact of loan defaults will be key. Retail investors will be lured by the headline return figures. However, they don’t want to have to pore over countless credit reports to make a decision on a £1,000 loan. They want to trust the methodology and best practice implemented by the P2P platforms.
However, we’re a long way from perfect.
Ask the top ten P2P lenders about what they are doing, and you will get ten different responses. Provision funds, diversification strategies, risk management and tangible assets are some key deployments.
Ultimately the success of individual P2P players and the market as a whole depends on defining and implementing a unified code of best practice in relation to the use of tangible assets.
From our perspective, the use of tangible assets are best for larger loans. Yet there remains is no clear definition of what this means. Nor how they are assessed, valued, vetted and utilised if required.
Here’s the abridged dictionary definition:
Tangible – something that is touchable and enduring
Intangible – something that is ethereal and untouchable
Applied to banking, there are two clear distinctions and some very grey middle ground.
Property, plant and machinery and stock are all tangible assets. They are physically present and we can touch them and value them against recognised valuation methods.
Goodwill is completely intangible. A brand has an intangible value. The Coke brand is just a name, you can’t touch it or lock it away but it has $100bn+ value just as a brand name. The product is tangible and people pay for it by the litre. It’s cheap as a product but the company value is the brand name.
Now for the grey area. In B2B finance, this specifically refers to the assessment of debtor books. Invoices can be tangible as thy exist physically. However, the value of each and every invoice varies for many reasons. Such as: retention on title issues, call off stock, contra invoices, failure to complete contracts etc. In a default situation, the ability to get back 100p in the pound on the debtor book is near on nil. Ultimately, this means there is an element of intangibility to it.
As an example, one legal services business applied for funding through Assetz. Its tangible asset was its WIP. Our definition of tangible assets didn’t include WIP. Due to the work not being completed and if the business goes bust it’s hard to sell part finished work. However, as the company’s WIP are verified law suits awaiting settlements which have been agreed and guaranteed by the defendants, in this case it is a tangible asset, and the company got its loan.
The progress of the P2P market ultimately depends on platforms adhering to the pure definitions of tangible. Any wavering from this leaks risk, defaults and ultimately losses. Loose definitions of key concepts, such as tangible assets are risk damaging the industry.
While gaps and loopholes may appear from time to time, responsible lenders need to continuously adapt with a single purpose in mind. Safeguarding investors in order to grow the reputation and future of the market.
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Founder and CEO of Assetz Capital