Update on HNW Lending In August 2020
The FCA has stated that it's asking HNW Lending* to go over and improve some of its policies and procedures. In the meantime, HNW Lending has voluntarily agreed with the to stop any further lending made by small investors, called “ ”, at least temporarily. This includes lenders classed as either or as , who will not continue lending new money and buying loan parts from existing lenders.
4thWay's current view is for lenders using HNW Lending to hold and do nothing (not withstanding our standard guidance to spread your money across lots of P2P lending accounts/and loans). We'll update you again at the end of September.
It's highly notable that this is not a compulsory suspension ordered by the FCA. Also the FCA hasn't publicised this in an announcement for the press to pick up on, which is standard procedure when a company commits grievous errors and faces serious action. And the FCA is asking HNW Lending to make some changes – it's not shutting it down.
My overall opinion is that the FCA is being cautious about a type of lending that it's unfamiliar with, because it's not usually regulated.
Correction: the first paragraph was corrected to state that sophisticated and high net worth lenders are also stopped from lending at present. Previously it said they could continue to lend.
We talked to HNW Lending and the FCA, and looked into as many details as we've been able to obtain. Let's take a look at those together.
HNW Lending's public statement
Firstly, here's what HNW Lending is publicly allowed to say, with the wording of this statement agreed by the regulator:
“Further to feedback from the FCA and concerns we have in relation to Covid-19 and its impact on the lending market as well as a lack of appropriate lending opportunities, we have temporarily suspended sales of loan participations to.
“We will write to you once this suspension has been lifted and we apologise for the inconvenience that this may cause you.”
That's not in the least helpful in understanding what the FCA's “feedback” is, so let's move on.
HNW Lending off the record
I talked to HNW Lending's CEO, who was unable to give me any information I'm allowed to publish, since it has to agree with the FCA what it writes in public. (More on that in a few minutes.)
What he told me does seem to correlate with the FCA's version.
HNW Lending on the record
After discussing the FCA, CEO Ben Shaw added that just a very small proportion of loans have lost money or are expected to. He still believes all outstanding bad debts will be recovered in full.
Just one loan has been approved since the pandemic started, but Shaw said that September looks more promising.
Shaw lends in HNW Lending* loans taking a , which helps to align his interests with lenders.
What the FCA says
The FCA confirmed to 4thWay that it does indeed sometimes ask financial companies to agree any wording that it wants to make public or provide to its customers, which tallies with what HNW Lending said.
The FCA has revealed that it's asking HNW Lending to voluntarily work on its processes in a few areas. It won't provide specific details, but broadly they are in the following categories.
HNW Lending is being asked to review its risk assessment. This might mean creating risk-management policies, implementing them or maintaining them, or a combination of those. It might mean identifying risks from HNW Lending's activities, its processes and systems. It might also mean looking into the risk level that HNW Lending itself can tolerate.
HNW Lending is being asked to review and implement a risk-management framework that fits FCA requirements. This could mean that it wants HNW Lending to change arrangements, processes or mechanisms to manage all the risks of its own business.
Finally, HNW Lending is also to look at risk control of the actual loans, meaning its assessment of its borrowers. This may or may not include how it assesses existing borrowers that are seeking to renew their loans.
Why HNW Lending?
As the FCA doesn't provide details and HNW Lending cannot, we can just speculate as to why it's been asked to do this. Yet there seems to be a few fairly easy hypotheses that we can make. And I believe it will be a combination of these reasons:
We've always called HNW Lending a “swinger”, which is the 4thWay team's colloquial term for a P2P lending platform that's prepared to sometimes loosely assess borrowers, and even, provided the overall picture shows that the considerably outweighs the size of the loan. This is often supported by other appealing factors about the .
It's partly down to this kind of risk assessment style that these loans can attract higher lending interest rates. Borrowers are pleased because they can potentially get their money faster, which is often a big selling point for these kinds of loans.
Swingers also tend to beor providers where high proportions of loans turn bad. But – if they are good at what they do – they typically recover these bad debts in full.
As a swinging lender, its no surprise if the FCA is demanding more traditional methodology that it's more familiar and comfortable with. And I don't think that is a bad thing. That would explain what the FCA is asking HNW Lending to look into:
2. Regulator is unfamiliar with this kind of lending
This sort of lending has not been regulated by the FCA in the past and it's only being regulated at all because its through an online P2P platform. The FCA itself has a learning curve, in my view, to assess the risks correctly. Therefore, I think it's bound to be cautious.
3. Superficial similarities to some closed P2P lending sites
Well-known competitors of HNW Lending – Lendy and FundingSecure – did the same kind of lending, and they turned out badly. The main difference was that those companies appear to have been poor at recovering bad debt. HNW Lending has so far done very well since 2014. Its high proportion of loans at under 50% of thevaluations – often well under – certainly helps.
These kinds of loans have been around for a long time – long before the P2P lending industry existed. So the destiny of the loans comes down to the competence of the people making the decisions.
4. Square pegs in round holes?
If you look at examples of the sort of thing the FCA expects of P2P platforms, it expects loans to be categorised by risk, including an assessment of the chance of a loan turning bad. It also wants to see projections of losses in the event that a loan does turn bad.
This is something that a lender doing HNW Lending's sorts of loans wouldn't normally do – at least not with any kind of mathematical model. The main reason is usually because with these loans you just approve them if you think they aren't going to lose any money even if they turn bad. You just take bad loans on the chin, since the majority of them should ultimately be paid back with interest earned up until repayment.
Another reason these kinds of forecasts aren't done in this lending is that it's not easy to come by a large historical dataset in order to make such precise forecasts. So that could be some thing like a square peg for a round hole, in HNW Lending's case.
Similarly, a P2P lending company also needs to regularly assess whether it has set interest rates appropriately on individual loans, based on their performance, and keep records of such. It's not easy to make this sort of retrospective analysis useful in future lending without a very large number of historical loans.
The bottom line
Investors that buy and sell rapidly based on a whiff of information have typically performed a lot worse than those who've just been patient. It would be premature and rather panicky for existing lenders who are alreadyto take any action at this stage.
My best guess is that this will be resolved during September. Await for further information.
Read the HNW Lending Review.
Independent opinion: the opinions expressed are those of the author(s) and not held by 4thWay. 4thWay is not regulated by the ESMA or the FCA, and does not provide personalised advice. The material is for general information and education purposes only and not intended to incite you to lend.
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