P2P Guide

25 24 SUITABILITY, DUE DILIGENCE & FURTHER CONSIDERATIONS SUITABILITY, DUE DILIGENCE & FURTHER CONSIDERATIONS SELECTION & DIVERSIFICATION Who is picking the loans? Does the investor take some responsibility or is the process controlled automatically by the platform? If it’s the former, is the investor suitably qualified to do so? If it’s the latter, are they an experienced lender, well- versed in building a loan portfolio and how well spread are the loans across sectors, loan terms and underlying borrowers? UNDERWRITING How are the borrowers assessed? What sort of credit profiling is undertaken? Does the product provider have an experienced underwriting team and a robust process to analyse every loan application? What is that process? BORROWERS Who are they? This will inform their risk profiles – are they individuals or businesses and what are they planning to do with the money that’s lent to them? Does the lender know? PAST PERFORMANCE Analysis of past performance to determine if the platform has delivered returns as expected and if there is any evidence of a decline in the quality of the loan book or changes in the underlying business model (such as pivoting from P2C to P2B lending for example). If the loss rate isn’t openly published, it could be cause for concern. Much of this work can be outsourced to independent review providers such as in:review. Many platforms (and all members of the P2P Finance Association) also publish full details of their loan books online (and some send loan-by-loan cash-flow data to AltFi Data to construct the analytics AltFi Data make available to their customers). Advisers will find that most P2P platforms are very transparent compared to other alternative investment options. FINANCIALS & CONTINUITY Analysis of the platform operator’s financial strength, its capital adequacy and its business continuity and disaster recovery plan (including its triggers, costings and timings). What sort of systems and controls do they have in place? Will the platform be here in 3/5/10 years, time? LIQUIDITY Analysis of the conditions attached to the loans including early repayment, redemption, cancellation and transfer. Is access to the loaned funds allowed at all during the term of the loan and, if so, is there any cost or penalty? How is any early access facilitated – is there a secondary market in which investors can sell their loan parts, or can the product provider or platform buy back loan parts before the end of the loan term? What are the associated arrangements? SECURITY Examine the security attached to the loans if there is any. Are there assets that can be used to fund repayment of the debt if the borrower defaults? How are they valued, is the valuer reputable and independent and what is the loan to value? Is there headroom for potential falls in value of the security over the course of a loan? How and when can any security be enforced, and what are the platform operator’s assessment procedures on default, late payment and provision fund analysis? COMPLIANCE Consider the platform operator’s regulatory compliance, including its high level controls, CASS compliance, AML, capital adequacy, client reporting, promotional material and its complaints procedures. PARTIES Review of any ongoing counterparties, including their provenance, experience and regulatory record. Further Considerations Of course, typical key metrics must also be included in any due diligence review, including what is the expected term of the investment, what fees are levied and when (on both lender and borrower) and whether adviser charging is facilitated. Advisers must also ensure that they have appropriate Professional Indemnity cover in place. Due Diligence 3.2 Advisers have rather onerous due diligence obligations when it comes to any investment, but particularly when investing in something new and alternative. What follows is a checklist for advisers to refer to when conducting due diligence on P2P lending platforms. PLATFORM OPERATOR Analysis of the operator, its trading and lending history, directors and key stakeholders. If it exists, be sure to consult any third party due diligence into the provider, to help you better assess how robust they are. INVESTOR ALIGNMENT What does the platform operator have at stake? Some P2P platforms maintain a ‘provision fund’ – a pot of money that can be used in the event of default as a sort of insurance policy. How big is it, and what level of cover does it provide? But more importantly, what does the platform operator suffer if a loan goes bad? For example, in the case of its product, Octopus Choice, Octopus Investments contributes 5% to each and every loan – which would be lost first in the unlikely event that anything was to go wrong. It aligns their interest with investors.