Funding Circle Buries Its Data: Should Lenders Be Worried?
From now on, just Funding Circle itself and the partner it has commissioned, AltFi, will be able to access and assess the details of all the loans Funding Circle has ever made.
Funding Circle has removed access to this powerful and important data for the public, and independent analysts such as 4thWay's risk specialists, credit experts and investment journalists.
The loan book, which used to be easily accessible to download with few steps, contained every historical loan Funding Circle ever made. Up until spring 2018, Funding Circle had updated it on a daily basis with a record of new loans made and whether existing loans had been repaid, fallen late or gone into default, as well as showing recoveries made, the borrower grade and the type of loan.
It is this data that allows 4thWay's experts to conduct international banking standard tests to see how a P2P lending site's loans might perform in a severe recession. Without a commitment to regularly updated data, Funding Circle has lost its 4thWay PLUS Ratings and 4thWay Risk Scores.
Funding Circle goes into reverse
Funding Circle's about-turn on access to its detailed data happens at a time when the number of platforms that have started providing full data access either publicly or to independent analysts has been rising quickly.
Just a few weeks ago, 4thWay had contacted all platforms that did not provide details of every loan to let them know that we expect that information to be available to the public and/or to independent researchers.
4thWay has been requiring a greater level of regular information and data from platforms in order for them to be continually assessed for a rating. Based on experience, 4thWay's experts have been trending towards even greater emphasis on platforms that are very transparent.
Why is Funding Circle doing this?
Now that Funding Circle is looking to be listed on the stock market, perhaps its pride has risen further. It is also possible that its backers believe that it should not publish information any more, although I'm finding it tricky to think of a lot of specific reasons why they would do so.
After Funding Circle restricted access to its preferred partner only last week, we contacted Funding Circle for a comment. A Funding Circle spokesperson said of the new restrictions: “We have to limit the potential avenues for public access” and “We won’t be able to provide third-party analysts with ongoing access to loanbook-level data”.
Funding Circle had previously queried why 4thWay did not give its lending accounts the very top 4thWay PLUS Rating.
What should we make of this big step backwards
My view is that this is nothing less than extraordinary. It is an extremely bizarre move to go so rapidly backwards on transparency.
One of several advantages of peer-to-peer lending over bond investing has been the level of detail available to investors and analysts. Even lenders who don't use the detailed data for themselves can get reassurance from the fact that others will be doing so.
Maintaining complete openness on every loan shows that things are continuing to go well, which is why the rest of the industry is opening up as well.
Should you be worried?
I think the majority of existing lenders with existing loans probably don't have much to worry about. Up until this point, Funding Circle's overall performance has been excellent provided you spread your money across hundreds of loans and re-lent regularly.
4thWay has been receiving calls and emails from an increasing number of dissatisfied Funding Circle lenders, who say that too many debts are going bad. As far as 4thWay's experts could see from the last data Funding Circle provided – before it withdrew it – there were no signs that the complaints were justified. The vast majority of lenders who spread their money across hundreds of loans and have held on till they earned enough interest, and until recoveries of any bad debt had progressed, should end up being satisfied with their results.
Should you keep lending through Funding Circle?
Regarding lending in new loans in the future, lenders should always adjust their views of a P2P lending site based on the level of transparency, potentially reducing or closing their holdings where there is less openness.
Transparency is such an important thing for investors to assess risks, whether they invest in the stock market, IFISAs or anything else. That is why it is one of the 10 P2P Investing Principles that we brought to you in 2014.
Taking away access to data from investors and independent analysts, and restricting it to just one favoured provider, doesn't fit that bill:
Principle Three of the 10 P2P Investing Principles: Treat buried information as if there's a reason, missing or ambiguous information as if it contains bad news, and decreased information as if it contains worse news. Demand more verifiable information the less that is provided freely.
Prior to this announcement, I was very optimistic for Funding Circle lenders. Now, with future loans, based on our standard approach to transparency, I feel like it's a little bit more of a wait-and-see what happens.
If it appears from the summary statistics on its website, and from any other ways we can corroborate (sadly no longer the loan book) that it has continued to have a good record on new loans over the coming years relative to similar peer-to-peer lending sites and similar bank lending portfolios, especially through and after its listing on the stock market, it could become one of the few unrated P2P lending sites that one or more of my colleagues and I might still be interested in.
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The 4thWay® PLUS Ratings are calculations developed by professional risk modellers (someone who models risks for the banks), experienced investors and a debt specialist from one of the major consultancy firms. They measure the interest you earn against the risk of suffering losses from borrowers being unable to repay their loans in scenarios up to a serious recession and a major property crash. The ratings assume you spread your money across hundreds or thousands of loans, and continue lending until all your loans are repaid. They assume you lend across 6-12 rated P2P lending accounts or IFISAs, and measure your overall performance across all of them, not against individual performances.
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