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Is Somo Truly P2P Lending?
Peer-to-peer lending is not a regulated phrase. By 4thWay's definition, any online lending company is peer-to-peer if it structures itself and its loans to offer the same level of protection as direct lending, in order to protect lenders in the event that the lending company itself goes bust.
So our definition takes the practical approach, based on whether the main risk that is being addressed by the P2P setup is being addressed through other structures.
Such structures can be achieved in different ways.
The most common way is to create direct lending agreements that the regulator calls “P2P agreements”. If you're a little familiar with the technical side of this, you'll know these are article 36H agreements.
Another common way to facilitate what is effectively direct lending can be through setting up bonds correctly, possibly through special companies called special purpose vehicles (SPVs). When set up correctly, these are “bankruptcy-remote” – sheltered from other connected business' bankruptcy.
It can all get quite complicated to ascertain if an online lending company is genuinely P2P, based on the legal basis of each loan contract or how the benefit of that contract is passed from one lender to another, as well as how, and if, the lenders can be properly identified for each borrower.
Somo's way to make its lending “P2P like”
Somo has gone another route in how it's legally structured.
It lends money to the end borrowers itself. It then assigns not the entire loan contract itself but the beneficial part of the loan contract (meaning the repayment of the debt and the interest due) to lenders using Somo's online platform.
Technically, lenders using the platform are lending to Somo, but Somo's obligation to repay is limited to whatever the end borrower repays.
Somo then uses a trust to protect lenders' cash, as well as the proceeds received from end borrowers. The property security is also held on trust for the exclusive benefit of lenders, allocated to each individual lender as per the terms of the trust.
A lawyer has confirmed to us that this structure as described should protect lenders from seeing their money being diverted to Barclays Bank – or whoever – in the event that Somo went bust. This is provided that Somo has set up the trusts and agreements correctly.
Our legal advisor said: “Legally these protections can work and all but eliminate insolvency risk – but they must be strictly followed in practice.”