How To Pass Assetz Capital’s Appropriateness Tests

Assetz Capital has some good questions and additional information in its appropriateness test that are worth reading properly, but I think some additional information from 4thWay will be useful for your education!

I'll get to how to pass the test shortly, but firstly…

Who can lend through Assetz Capital?

Assetz Capital is available to all lenders, with its minimum lending amount of £1. You can lend through Assetz Capital with no restrictions if you are:

• A self-certified sophisticated investor. It can be easy to certify yourself; e.g., if you have lent in two P2P loans or lending accounts in the past two years. Your previous lending through one of Assetz Capital lending accounts counts as at least one-out-of-two.
• If you have two Assetz lending accounts and your portfolios don't overlap much, you should count that as two-out-of-two, meaning you're already “sophisticated”. Indeed, you can also self certify based entirely on your past Assetz Capital lending if you have lent in two loans. Again, all lending has to have taken place in the past two years.
• A high net-worth investor – with £100,000 income or £250,000 in wealth.
• Businesses can also lend through Assetz Capital, although they still need to fit one of the above criteria. Again, your best bet is using the sophisticated investor route.

If you don't fit those categories, you're supposed to restrict yourself to investing no more than 10% of your wealth (excluding your own property) in peer-to-peer lending. Assetz Capital expects you to abide by that restriction for 12 months – not all P2P lending websites require that.

How to pass the Assetz Capital appropriateness test

I'll show you the questions and answers in the Assetz Capital investor test in a minute. In the test:

• Just one answer is correct in each multiple-choice question.
• There are 7 questions.
• All the multiple choice answers are shown in the bullet lists below.
• After each question, inside the gold lines, I provide more information if you need help understanding the questions and answers – and understanding Assetz Capital better.

About 4thWay's series on How To Pass The Investor Tests

Warning: taking these appropriateness tests can cause pain or boredom! So, while 4thWay users are far more knowledgeable than most, we want to make things quicker, simpler, more educational and more understandable for you. You get plenty of help below. And you get plenty more help for many other peer-to-peer lending and IFISA providers in our How To Pass The Investor Tests series.

I'm sure I don't need to ask you to please make sure that you do your research thoroughly on all peer-to-peer lending and IFISA providers. You can do that by reading 4thWay's guides and provider reviews, and by looking into the opportunities for yourself.

If you can't correctly answer the questions in an investor test by yourself, you probably need to do a lot more research. Because the questions they ask cover just the bare basics about how they work. The tests don't inform you about how good they are at appraising potential borrowers or any of the other essential tasks they have to do on lenders' behalf. So arguably the most important bit is missing!

So, take a deep breath. Here is Assetz Capital's investor test with our help:

1. Which of these statements properly describes the risks associated with peer-to-peer lending?

• Placing money with Assetz Capital is exactly like putting it in a savings account with a bank. The interest rate is guaranteed, my capital is safe and if anything goes wrong I am protected by the Financial Services Compensation Scheme.
• Investing with Assetz Capital is a bit like depositing money with a bank. The interest rate might change but my capital is completely safe and if anything goes wrong I am also protected by the Financial Services Compensation Scheme.
• Investing with Assetz Capital is not quite like saving with a bank. The interest rate may change but my capital is completely safe. I am not protected by the Financial Services Compensation Scheme though as the Scheme doesn't cover investment via peer-to-peer lending platforms.
• Investing with Assetz Capital is completely different to saving with a bank. My returns may vary over time depending on the performance of my loans. I should consider that all of my capital is potentially at risk. Investment via peer-to-peer platforms is not covered by the Financial Services Compensation Scheme.

You all know by now that P2P lending is a form of investment and it's not savings. The Financial Services Compensation Scheme (FSCS) doesn't protect investors in the stock market, P2P lending or any other type of investment. If it did, the risks would be the same as with savings accounts and so would the rewards – the interest rates would plummet so low you'd struggle to compete with rising prices.

2. Which of the following statements is correct in terms of what these features mean for you?

• The value of security is fixed and never changes so as long as it's more than the loan amount at outset I will never lose any money. The other features are just marketing gimmicks.
• The value of security can change over time (for example, if property prices drop during a recession) so security cannot always completely prevent loss. Diversification does spread the risk across many loans but it doesn't eliminate any risk of loss. A Provision Fund is discretionary and also could, in theory, become depleted if enough loans run into difficulties. In such a scenario the Provision Fund may not be able to cover losses. The combination of these features may provide some comfort but they do not guarantee that I will not lose any of my invested capital.
• The value of security can change but diversification means that I should always have plenty of “good” borrowers to offset any that fall into difficulties. If I make a small loss on those few “bad” borrowers the Provision Fund should be able to cover that. Overall, these features mean that I won't lose any money.
• The value of security can change and diversification only spreads the risk to avoid exposure to just one “bad” loan – it can't eliminate risk completely. If the worst happens though the Provison Fund is guaranteed to step in and cover all of my losses so my capital is completely safe.

I like this question as it will make lenders think. The most negative answer is the correct one.

Neither security or a provision fund is a guarantee against losses. With the type of lending that Assetz Capital does, the security should frequently help lenders recover all their money, including interest owed to them. This is now backed up by its pretty long record.

Most of the rest of the time, you'll still make substantial recoveries. But losses certainly can and do happen.

Where Assetz Capital has lending accounts with provision funds, those funds might not always cover amounts that are not recovered using the security. Indeed, during some recessions, 4thWay expects Assetz Capital's provision funds to be completely used up.

However, Assetz Capital doesn't mention above another powerful defence against losses: the interest you earn. When you include this additional protection, the risk of making an overall loss at Assetz Capital comes down significantly.

3. Which of these is an accurate description of your relationship with Assetz Capital and the borrower under a peer-to-peer loan?

• I lend my money to Assetz Capital so Assetz Capital is the borrower. Assetz Capital decides how and where to invest the money I have lent them so that they can pay me my interest.
• My money is used to buy shares in Assetz Capital. Assetz Capital is a lender which makes loans to the various borrowers listed on their platform. Assetz Capital pays me a monthly dividend based on how much money they make from their loans.
• Assetz Capital is a bank. I deposit money with Assetz Capital, as I would with any other bank, and Assetz Capital lends that money out to borrowers. I am paid monthly interest on the money held on deposit.
• I lend my money to borrowers either by choosing the borrowers myself or by using an automated account. The loans are between me and the borrower. Assetz Capital acts as agent and security trustee.

The whole point of peer-to-peer is that you lend directly to the end borrowers. You don't lend to the P2P lending company or IFISA provider in the middle. This noticeably lowers your risks in the event that the P2P lending company goes out of business and the loans need to be wound down.

With Assetz Capital, you can choose borrowers yourself or have your money lent out automatically.

A security trustee is a business or other agent that looks after the security on your behalf.

P2P lending has nothing to do with buying shares. (Although some P2P lending from other providers is legally structured in a way that is rather like buying shares, but with the legal contracts meaning that the risk and reward is the same as lending. That's just not worth going into here…)

4. Which of these statements is correct with respect to credit risk when investing in peer-to-peer loans?

• I am lending money to one or more borrowers via the Assetz Capital platform. As a result I am exposed directly to the credit risk of those borrowers; if the borrower cannot repay their loan my investment is at risk.
• Because Assetz Capital is like a bank I am not exposed directly to a borrower's credit risk. If a borrower can't repay their loan, Assetz Capital might have to pay me less interest on my investment.
• Even though I am lending money directly to borrowers, Assetz Capital will step in if things start to go wrong and I won't lose any money. I don't need to think about credit risk.
• I lend my money to Assetz Capital for a fixed interest rate and they then lend their own money to borrowers. Assetz Capital needs to worry about the credit risk of borrowers but it doesn't affect me.

It seems Assetz Capital is drilling home what it's already said in other questions. Of course you risk losing money if borrowers don't repay. And you are lending directly to the borrowers, not Assetz Capital.

The risk of losses due to borrowers being unable to repay – the “credit risk” – is the most common reason why lenders might suffer any losses. Read about the other Key Risks In Peer-To-Peer Lending.

5. Which of these statements best describes the liquidity of peer-to-peer loans?

• Peer-to-peer loans are technically an illiquid investment which would ordinarily have to be held for the duration of the loan. Some peer-to-peer lending platforms, including Assetz Capital, offer a secondary market where loans may be traded if other lenders are willing to purchase them, allowing the original investor to exit early provided someone is willing to buy their loan from them. However the ability to exit early cannot be guaranteed and should it not be possible to find a buyer for a loan the original investor would have to hold that loan until either a buyer could be found, the loan repaid or went through a recovery process (in the event of a default).
• All peer-to-peer loans are completely liquid so investors can always access their money immediately simply by asking for it.
• Peer-to-peer loans are technically illiquid investments but Assetz Capital guarantees complete liquidity in all circumstances for all investors in its automated Investment Accounts.
• Peer-to-peer loans are normally a highly liquid investment but Assetz Capital makes them less liquid on some of their Investment Accounts by imposing 30 or 90 day notice periods for withdrawals. After these notice periods there is an absolute guarantee that any loans held will be sold and investors will receive their money immediately, without exceptions.

As usual in P2P and IFISA lending, you might be able to sell your loans through a secondary market, but it isn't always going to be possible.

Assetz Capital has a great record so far, but lenders should rest assured that all or most providers will, at some point, suffer bottlenecks. For example, during a recession a sizeable minority of lenders could panic. If they all try to get their money out at the same time, many of them will fail to do so.

They'll then have to wait until either the borrowers repay or the bottleneck clears. But they will continue to earn interest while they wait.

6. Which of these correctly describes the role of Assetz Capital and the scope of its services, including what Assetz Capital does and does not do on behalf of lenders?

• Assetz Capital sources loans but, beyond that, it just provides an online platform where lenders can find businesses wishing to borrow money. It doesn't undertake any due diligence or make any information regarding the borrower available to lenders. Assetz Capital doesn't monitor loans once they have drawn down.
• Assetz Capital sources loans and makes them available to lenders via its online platform. Assetz Capital collects information from borrowers and presents this information in a Credit Report which is available to lenders. Assetz Capital conducts due diligence on borrowers to the extent described in its Terms & Conditions but cannot and does not warrant that all information obtained from the borrower is complete and correct. Assetz Capital assesses the credit risk of borrowers and prices each loan according to risk, based on the information available. Assetz Capital monitors loans on behalf of lenders in accordance with the type of loan and posts updates regarding any changes via its online platform. In the event that a loan defaults, Assetz Capital will undertake recovery work in respect of the defaulted loan in accordance with its Terms & Conditions.
• Assetz Capital sources loans and makes the name and address of the borrower available to lenders. Lenders are expected to conduct their own due diligence before deciding whether to lend money to a borrower. Assetz Capital does not assess the credit risk of the borrower and lenders are obliged to decide for themselves what interest rate they should offer the borrower. Assetz Capital doesn't monitor any loans after they draw down; lenders need to do that. In the event that a loan should default, lenders would need to pursue recovery themselves as Assetz Capital doesn't provide this service.
• Assetz Capital provides every conceivable detail regarding every borrower to every lender, having checked everything at least twice. Assetz Capital guarantees that everything the borrower tells them is always correct. Assetz Capital visits every borrower at least once per week just to confirm that everything is still okay. In the event that a loan should default, Assetz Capital will send a team of bailiffs to the borrower that same day and full recovery of the loan should be possible by the end of the following week (unless that week includes a Bank Holiday, in which case it will take an extra day).

As usual in P2P lending, Assetz Capital does all the work of a bank in finding borrowers, approving or rejecting them, administering the loans, chasing payments, and recovering bad debts. There are no guarantees that every loan will work out – because not every loan will.

7. Which of these statements best describes the situation if a peer-to-peer lending platform should become insolvent or otherwise fail?

• If a peer-to-peer lending platform fails all investments made on the platform are covered by the Financial Services Compensation Scheme and are refundable to the investor as soon as the platform declares that it is in difficulty.
• Peer-to-peer lending platforms all operate an agreement between themselves such that, should a platform become insolvent or otherwise fail, the other platforms will divide up the failed platform's loan book. Each platform will take a percentage of the failed platform's loans and manage those loans from that point onward.
• It is a requirement of Financial Conduct Authority regulations that peer-to-peer lending platforms have a formal, documented Wind Down Plan which allows for the orderly wind down of the firm and its loan book if the firm should fail, often involving a third-party “stepping in” to manage the loan book until all of the loans have repaid (or been through a recovery process, in the event of a default). Repayments from borrowers should continue to flow to lenders in accordance with the terms of the loan, which is between the individual lender and the borrower. Funds not invested in loans should be held as Client Money, in accordance with FCA rules, and should therefore be available to be returned to investors. Some functionality of the platform might be reduced or lost, such as the closure of a secondary market. In such a scenario lenders would have to hold their loans for the remainder of the term.
• There are no rules covering the failure of a peer-to-peer lending platform. Borrowers don't have to continue to repay their loans if the platform isn't there any more and all money held by the platform is automatically lost.

All P2P lending companies have wind-down plans in the event they decide to stop new lending or if they go out of business.

The plans are inspected by the Financial Conduct Authority (FCA). The FCA's oversight is far from a guarantee against losses, but winding down an existing book of loans is usually relatively simple for a reasonably competent provider to both plan for and do.

The costs in winding down a book of loans are usually low, because all advertising costs, and many staff related to marketing and assessing new loans, can be jettisoned. (In the nicest way, hopefully.)

It's reassuring that Assetz Capital has already appointed two experienced firms that can help with its wind down, if it came to that. Assetz's wind-down plan is well constructed and so it looks good for lenders.

We already know the FSCS doesn't apply frpm question 1!

Visit Assetz Capital.

Read the Assetz Capital Review.

Pages linked to in this guide:

How To Pass The Investor Tests.

4thWay guides.

4thWay P2P lending website/IFISA provider reviews.

The Key Risks In Peer-To-Peer Lending.

Independent opinion: 4thWay will help you to identify your options and narrow down your choices. We suggest what you could do, but we won't tell you what to do or where to lend; the decision is yours. We are responsible for the accuracy and quality of the information we provide, but not for any decision you make based on it. The material is for general information and education purposes only.

We are not financial, legal or tax advisors, which means that we don't offer advice or recommendations based on your circumstances and goals.

The opinions expressed are those of the author(s) and not held by 4thWay. 4thWay is not regulated by ESMA or the FCA. All the specialists and researchers who conduct research and write articles for 4thWay are subject to 4thWay's Editorial Code of Practice. For more, please see 4thWay's terms and conditions.

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