P2P Guide

43 42 THE PRACTICAL ROUTE TO P2P THE PRACTICAL ROUTE TO P2P P2P Lending process Loan application on a P2P website, specifying the amount to borrow and the loan term Credit check The platform conducts a credit check and adds successful requests to the online marketplace Investors bid to lend money and declare how much they will lend and the interest rate they will charge. OR... Investors auto-lend Platform picks a portfolio of loans that aims to meet lenders’ appetite for risk and returns criteria Loan is arranged The business pays the fee to the platform and receives the money Investors can resell the loan on a secondary market at a premium, or wait for the repayment plus interest Monitor investments However, it is prudent to carry out regular reviews of clients’ P2P investments, returns and defaults to maintain an ongoing awareness of success or otherwise and rising risks, identify any default trends (perhaps sector or platform related) and to decide on any relevant course of action (e.g. liquidate the loan on a secondary market, change clients’ favoured loan types/terms/risk profile or perhaps stop automatic reinvestment). Incentives and offers It is not uncommon for P2P platforms to offer ad hoc bonuses and deals. These can be interesting and make initial returns very attractive, but shouldn’t be the main component of any decision to invest. Instead, they may be a nice little extra on top of a robust investment proposition, but they still require a review of the terms and conditions to understand how your client may be eligible. Whether or not you need an innovative finance ISA will depend on the rate of tax you currently pay, how much you are prepared to invest and the rate of return you expect to receive. WHICH, MARCH 2018 What if? 8.3 Advisers can mitigate the risk of something going wrong by taking the following steps: Invest in the lower-risk underlying loans, via the bigger platforms in each P2P sub-sector, mitigating investment risk. Diversify across 2-3 of these platforms, mitigating the risk of a platform failing. Only invest small amounts at first, and only after conventional financial planning needs (pension contributions, insurance premiums, conventional investment) have been met, mitigating the risk of a bad investment having wider impacts on the client. Fully document any research and education activities and download reviews of platforms, to evidence your due diligence in the event of any challenge. Fully document any recommendation to invest in P2P lending, including an explanation of why P2P was chosen instead of more conventional investments and why a particular platform was chosen over and above another, to evidence suitability in the event of any challenge. Checklist for Investment Recommendation documentation 1. Financial Circumstances 1.1. Agreed Objectives & Priorities 1.2. Other Potential Needs 1.3. Attitude to Investment Risk 2. Recommendations 2.1. Why this Product? 2.2. Product Information 2.3. Why this Provider? 2.4. Cost 2.5. Other Options Considered 3. Risk Warnings & Possible Disadvantages 4. Important Information 4.1. Regular Reviews 4.2. Changes to Circumstances 4.3. Client Declaration Britain’s P2P lending sector has fared well so far as a result of a regulatory approach that is pragmatic and flexible; the Financial Conduct Authority puts P2P lenders through a rigorous process before granting them full approval, but is keen to let it be known that it is here to help, not hinder. WHICH, MARCH 2018