The growth in interest in lending funds and lending platforms is understandable. These can be investment funds that, instead of buying and selling stocks, instead lend money and benefit from the income in terms of interest paid. Alternatively, peer to peer lending platforms can offer investors a range of different projects they can lend to. It is a way for investors to access what we call ‘uncorrelated returns’ – investments that they hope make a steady return regardless of where the stock market or other public markets are going.
Lending funds and peer to peer lending platforms will tend to specialise in different types of finance – for example, lending to small businesses, or for the purposes of property development. Where the UK regulator, the FCA, has become concerned recently, is the way lending funds are explaining what they do to the general public. People frequently do not understand how the fund manager is making his money.
While investors may understand the supply and demand characteristics that drive a stock market, some peer to peer lending can be quite specialised, along with the way that risks are assessed as part of that.
Lendinvest, one of the most high profile loan management firms, which used to advertise regularly on billboards in London, is actually introducing an exam for investors interested in alternative lending opportunities before they can write a cheque. Clients will need to pass the exam to invest, and those already invested in the company’s funds will also have to pass. The test will take into account current net worth, investments and the level of understanding of the investment being made. According to Christian Faes, CEO of Lendinvest, roughly 90% of its existing customers should pass.
The company is also going to restructure the loans on its platform into investment funds, more conventional legal vehicles which it hopes will reassure the regulator.
The Armchair Trader spoke to Lendinvest this morning, and they confirmed that the exam would only apply to investors in its lending platform and not to fund investors. The company’s UK lending fund is already closed to new investment, but investors interested in the returns from loans to UK real estate projects can still invest via the firm’s Luxembourg fund.
What is interesting is the company is moving to introduce the exam before the FCA requires one. As with the CFD trading industry, alternative lending companies are beginning to understand they must make more effort to vet their potential clients for their level of expertise, rather than simply accepting their money. It is the responsible thing to do.