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How To Pass HNW Lending’s Appropriateness Test
All peer-to-peer lending companies ask you to pass an appropriateness test (investor test) before you lend, including HNW Lending.
HNW Lending's appropriateness test contains some of the easiest questions we've seen – but also a couple of real killer questions. Indeed, you won't find the answers if you go looking for them now on the HNW Lending website*.
But, before I show you how to pass the test…
Who can lend through HNW Lending?
Here's a little about who can lend through HNW Lending.
HNW Lending is available to all lenders in theory. In practice it isn't – because the minimum lending amount is £5,000 for its IFISA and £10,000 in its regular account.
You can lend through HNW Lending* 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.
- A high net-worth investor – with £100,000 income or £250,000 in wealth.
- The recipient of professional financial advice about peer-to-peer lending through HNW Lending.
- Businesses can also lend through HNW Lending.
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. HNW Lending expects you to abide by that restriction for 12 months – not all P2P lending websites require that.
How to pass HNW Lending's Appropriateness Test
Unless you are a business or have received professional investment advice (and supplied a copy of that advice to HNW Lending) you'll take HNW Lending's appropriateness test (investor test) before you lend in your first loan. The test is shown below. In it:
- The bold answers are the correct ones.
- Sometimes just one answer is correct and other times you need to select all the correct answers.
- For some questions, you actually lose points for each wrong answer.
- There are 10 questions and 22 correct answers within those questions. You need to get at least 17 points out of 22.
- If you fail the test, you'll be given just one more chance to pass.
- After each question, inside the gold lines, I provide more information if you need help understanding the questions and answers – and understanding HNW Lending 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!
Below are all the questions and answers in HNW Lending's investor test, including the correct answers. The questions might not be shown to you in the following order.
Q1. What is your relationship with HNW Lending Ltd?
- You are lending to HNW Lending Ltd.
- You are depositing funds with a HNW Lending Ltd, like putting money in a bank.
- You are lending direct to a borrower as part of a syndicate of other lenders.
Your investments through HNW Lending* involve lending directly to the end borrowers. Indeed, by 4thWay's definition, peer-to-peer lending is always lending directly to the borrowers.
Because if you were instead to lend to HNW Lending, who then lent to the property borrowers, that would potentially increase your risk of losses in the event that HNW Lending builds up other debts and then goes bust.
Note though that in the past some businesses have called themselves peer-to-peer lending even when there's no direct relationship. Always check whether you're lending directly or not. 4thWay only lists opportunities that we consider to be genuinely P2P.
Q2. Once you have invested in a loan, who is responsible for paying you back?
- The borrower.
- HNW Lending Ltd.
- The Bank of England.
- The UK Government.
Has anything changed in this test?
Dear 4thWay readers, please help us to give your fellow lenders up-to-date information. If you see anything at all in the test that's different to the questions and answers shown here, please send it over.
Q3. If the borrower does not repay the loan, what can HNW Lending potentially do to recover monies for lenders?
- Ask the Financial Services Compensation Scheme to refund investors.
- Sell the property taken as security.
- Enforce the personal guarantee of the borrower and/or any guarantors.
- Make a claim on professional negligence of the valuer and / or solicitor.
- Make a claim on fraud insurance.
- Ask the Bank of England to refund investors.
This is a busy question, for which you really need to understand what HNW Lending offers.
The Bank of England and the FSCS never reimburse investors for investments that go wrong. That applies to the stock market, P2P lending and all other investments.
HNW Lending* provides all the protections that we'd usually expect to see for this kind of lending. Each loan has pre-specified property, vehicles or other valuable items that HNW Lending is allowed to sell to recover bad debts. This is called security.
All borrowers at HNW Lending also have to offer a personal guarantee, which means that they'll cover the difference – if they can – if selling security doesn't recover the entire loan and interest due.
In property lending, it's important to have the property security sensibly or conservatively valued. HNW Lending sometimes takes shortcuts, in that it might not seek a recent valuation at all. Instead, it sometimes only allows borrowers to borrow a much smaller amount or requires additional security from them.
But where HNW Lending gets a full new, professional valuation, it expects a good job. This doesn't mean that the value has to be accurate, but it needs to have been reached with an appropriate standard of skill and care.
HNW Lending can also sue its solicitors involved in the process for professional negligence. This might happen if the solicitors have drawn up faulty loan contracts or faulty lending contracts, which prevent lenders using HNW Lending from getting their money back or the interest due to them.
It's unusual to have fraud insurance and its value is usually quite limited anyway. What surprised me is that HNW Lending does actually have fraud insurance. Even though at time of writing it doesn't mention it anywhere on its public website! Nor had it ever mentioned it to any specialist at 4thWay over the past five years.
Q4. Despite all the potential ways to recover money from borrowers listed in Q3, is your capital at risk?
Q5. Is you investment on a loan on the HNW Lending Ltd platform covered by Financial Services Compensation Scheme?
No investments are ever covered by the FSCS.
That said, while your money is not on loan – meaning when it is unlent (uninvested) cash sitting at the P2P lending platform – this is often covered by the FSCS. Read more in Which P2P Lending Sites Offer FSCS Protection?
Q6. What return might I expect to get on the loans I invest in?
- A fixed rate of return like investing in a bank.
- A fixed rate of return like investing in a building society.
- A variable rate of return as the borrowers may not pay all of the interest and/or may not pay all of the capital back.
I think this question is poorly worded, because “variable rate” has a specific meaning in lending – and this isn't it.
You do get a fixed interest rate, not variable. But what HNW Lending means is that if a borrower fails to repay all the money and interest due then you might get back less than you expect. (HNW Lending has other defences, mentioned in later questions, that might still protect you in the event that a borrower doesn't pay in full.)
No investments are as certain as putting your money into bank or building society's savings account or cash ISA. But you're far more likely to grow your pot of money faster than prices rise with the money you put into a basket of P2P lending accounts and IFISAs.
Q7. If you choose to invest in HNW Lending’s Auto_Invest feature, which of the following apply
- You should have a lower risk investment as there is more diversification than investing in a single loan.
- There should be surplus interest each month that can act to “plug the gaps” of any loans where interest has been paid late or where they may be a capital shortfall.
- The Financial Services Compensation Scheme guarantees that I will get my capital back in full.
- Lenders will definitely achieve the stated 7%p.a target interest rate at all times.
- Its like investing in a bank, but paying 7%p.a.
Is it possible that HNW Lending hasn't put much effort into varying these questions? Again, the FSCS isn't involved and it's nothing like putting money in your bank at all.
Yet the correct answers deserve more explaining. It's likely that using HNW Lending's auto-invest feature will lower your risks. The most recent information from HNW Lending is that lenders using its auto-lend feature are currently spread across 57 loans and this figure has steadily risen over time. For this kind of lending, that's a very substantial spread. In any event, it sets a maximum of 10% in any one loan and a minimum of 15 loans.
HNW Lending doesn't reveal how much interest has been held back and is in the pot to “plug the gaps”. Thus, that particular safety device is not as certain to lenders. Still, it's likely to have value.
Oddly, HNW Lending* doesn't mention another protection offered to lenders who use its auto-lend feature. HNW Lending's directors lend in every single loan that is available through auto-lend. They will take the first loss on any loans that go bad. Last time I checked, on over half of those loans, the directors hold at least 10% of the total lent.
Q8. How quickly can I sell my investment?
- I can take out money any time I want like a bank.
- I can take out as much money as I want at the end of every month.
- Loans to a borrower are illiquid and so the only way to sell my investment is to wait for the borrower to repay or sell it on the secondary market.
- There is a very effective secondary market and so I can sell my loans at any time and so exit my investment even if a loan is in default.
I think that this question really should point out that you might not always be able to sell your loan to other lenders through its secondary market. There might not be enough interest from other lenders to buy.
Or it might take you longer to sell than you hoped.
Still, HNW Lending's loans are usually short term, so you can generally expect most of your money back in a year or so anyway.
You can't sell loans that have gone bad. You have to wait for HNW Lending to complete its bad-debt recovery procedures, which may or may not recover the full loan and interest due to you.
Q9. What does HNW Lending do for lenders?
- Carry out due diligence on borrowers.
- Enter into loan agreements with borrowers as agent on your behalf.
- Collect interest and capital from borrower and pay on the relevant sums to lenders.
- Undertake significant works to properties to increase their value (ie property development).
- Take enforcement action in the event that a borrower is in default.
- Buy properties or other assets.
- Prepare year end tax statement for lenders.
- Submit tax returns for lenders.
As usual in peer-to-peer lending, HNW Lending is responsible for finding and assessing borrowers, managing loans and tackling bad debts.
It also has to provide you with a tax statement, in case you need to submit information to the tax office. (Read more in How Is Peer-to-Peer Lending Taxed?)
In HNW Lending's development loans, it doesn't get involved in the actual development project. Some experience here would do HNW Lending some good, as it could potentially step in to get a project back on track. But provided HNW Lending tightly limits the amount developers can borrow – which it does – it can contain the risks without involving itself on the ground.
Q10. In the event that HNW [Lending] were to become insolvent or otherwise fail, which of the following may occur?
- HNW [Lending] may not continue to post new loans for investment on the platform.
- The FCA’s Client money protection rules in relation to HNW’s Client Account may not continue to apply if the Administrator appointed does not have the relevant regulatory approvals.
- Lenders may need to take over the collection of interest and capital themselves.
- Lenders may not get their capital back in full.
- The Administrator may choose to no longer operate the HNW Lending website.
- The Financial Conduct Authority will step in to ensure that lenders receive all their investments back in full.
This question is super important for you to understand. Not just so you can see the actual risks clearly, but also so that you don't worry too much about less likely risks.
This has got a lot of different parts. I'm going to need subheadings:
No more new loans
When any P2P lending website goes out of business, it's not going to take on new loans during its controlled wind-down period. And you don't want it to. You want it – or the administrators – to cut costs and focus entirely on administering the existing loans until they are fully repaid.
Anyway, can I just ask, which of you would want to lend in new loans offered through a company that's just gone bust?…That's what I thought.
On the FCA's client money protection rules
Could that answer have been any less clear?
So, the FCA requires P2P lending platforms and IFISA providers to be very careful custodians of any unlent money that you have with them. Primarily, this means putting the money in a segregated account for lenders, but also what it does with the money. The platform can only take any money off you from that account if it is agreed with you in your contract, e.g. to cover any fees.
It's common for administrators to fall outside of the FCA's direct control, which means that they don't strictly have to adhere to the many and varied rules protecting your cash. However, they can't just take your money and give it to someone else just like that. They are appointed to be responsible, not irresponsible.
What's more, any administrators that HNW Lending wanted to appoint would need the approval of the FCA. The FCA works with many administrators on a regular basis. These administrators earn a good living from it. And so they know what is expected of them if they want to keep getting that work.
For example, administrators appointed to wind down the P2P platform FundingSecure made it clear in writing several times that the FCA's rules on client money would be taken into account in all of their efforts.
Do you want to collect payments and recover bad debts yourself?
HNW Lending* tells me that this scenario is “technically possible according to the legislation” and thus it's in the FCA's guidelines used by peer-to-peer lending companies.
But it seems HNW Lending is covering its back with the regulator by mentioning this in its investor test.
There have been quite a few peer-to-peer lending companies that have closed down having not made it in the competitive field of money lending, as you would probably expect by now. Most of these platforms have closed smoothly. To the best of my knowledge, not one of them has ended up saying that lenders have to take over the managing of loans. The administrators or the platforms themselves have continued to do this.
HNW Lending does relatively few, larger loans that are easy to manage. It's very unlikely that you and a thousand other lenders would be called upon to do this for yourselves. Not when one person and their lawyer could probably manage it by themselves.
You might not get all your money back
You might lose money whether the P2P provider or IFISA provider goes bust or not. In either event, the biggest risk remains that bad debts can't be recovered.
The website will close down
It's very likely the website would close down if administrators take over. But they would still keep a lot of the hidden infrastructure that enables them to more easily pay lenders back over time.
The FCA doesn't get involved in managing investments
The regulator will ensure sensible administrators are appointed and will stay in close contact with them. They might also investigate to ensure the directors and senior staff at HNW Lending did nothing dodgy.
But its not their job to prop up lenders. There will be no “stepping in”. There was a risk of losing money before the closure and there will continue to be one afterwards. That's investing for you.
HNW Lending has a lot of skin in the game
HNW Lending* make a very good point on its website. The directors lend a large amount of money in many, many of the same loans that lenders do – and they take first loss if bad debts can't be recovered. With so much of the directors' money tied into the loans, they have strong personal reasons for wanting any wind down of its business to go smoothly.
Pages linked to in this guide:
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.
*Commission, fees and impartial research: our service is free to you. 4thWay shows dozens of P2P lending accounts in our accurate comparison tables and we add new ones as they make it through our listing process. We receive compensation from HNW Lending and other P2P lending companies not mentioned above either when you click through from our website and open accounts with them, or to cover the costs of conducting our calculated stress tests and ratings assessments. We vigorously ensure that this doesn't affect our editorial independence. Read How we earn money fairly with your help.