Fend Off Peer-To-Peer Lending Fraud & Incompetence

In China, the number of websites offering lending platforms once reached more than 2,000. For a long time after that, 80 of them were being closed down every month due to peer-to-peer lending fraud or incompetence.

The UK is far from China in more ways than one. Actual fraud in P2P lending has been very minimal.

But, wherever money is in play, fraud and incompetence will be taking place against some people, somewhere. Be it in the stock market, property or something else.

So, if you want to do P2P lending, including through IFISAs, or if you want to lend through other online direct lending accounts, here are some very simple, basic checks for fraud, dishonesty and incompetence, which will massively reduce your risks.

At the time of writing, these three checklists would have either helped all investors to steer clear of the (relatively few) disasters that have occurred so far, or they would have helped you to pull out before it was too late.

It's a solid way to nearly eliminate these kinds of risks from your lending.

Remember rule number one from 4thWay's 10 P2P Investing Principles: “If there's any doubt about lending at all, the answer's “No”.

Checklist one: the main peer-to-peer lending fraud and incompetence checklist

Any one of these is a massive warning sign of potential fraud:

• No entry on the Financial Conduct Authority's register.
• An entry on the FCA's unauthorised firms register.
• No mention of regulation on the website and no FCA registration number.
• No registered company name, company number or registered address is provided.
• You can't find the company on the national register where the company says it is based. (For the UK, see the online register at Companies House.)
• No secure website. (No “https”, with an “s” on the end, in the website address bar.)
• No opportunity to contact them by telephone, the number doesn't function or the line quality is poor.
• No contact or staff names on the website.
• No meaningful response when you attempt to contact them.
• They show frustration or aggression when you ask questions and when you tell them that you want to get a second opinion before putting any money in.
• You are cold-called by the provider, a broker or other agent, and asked to invest your money. Just hang up!
• Being told it is low risk, no risk, or “guaranteed”.
• Hardly mentioning the risks or not mentioning them at all.
• Being rushed to make a decision to hand over your money, e.g. through aggressive short-time windows of opportunity to get on board or massive introductory offers that expire soon.
• You're feeling pressure from them to give up your details and/or transfer money. Don't do it!

Checklist two: the more of these signs, the higher the risk

Not all the individual signs on this list automatically mean that there is fraud, negligence or stupidity going on. Not by any means!

But the more of these that you see, the more sceptical you should be about lending your money:

• Overuse of highly technical, complicated and confusing answers to your questions.
• Not being listed on prominent websites such as 4thWay.
• Worrying question marks in 4thWay’s assessment of the P2P lending site.
• No mention of the company in online publications, such as industry news sites or blogs.
• They claim to be linked to, or financially backed by, major companies or high-profile figures, but there's no independent source (such as a news publication) to support that.
• (If you can read company accounts) lots of question marks about their business or finances, including small companies making losses while paying very high director salaries or making very large corporate loans to connected parties.
• You can't find reports about the key people elsewhere, e.g. on LinkedIn or in articles, along with their professed lending, banking or other financial experience.
• If they claim to have a very long record (e.g. five years or more) with average historical interest rates above 10% and no bad debts.
• Regardless of how long or short their record is, if the expected return is far higher than that, e.g. 20%+, you need to assess this with great, great care.
• Very ambiguous information and wording, conflicting information and statistics that are rarely updated.
• No detailed explanation of how they assess risk and assess borrowers.
• Be very sceptical of invitations to join “exclusive” clubs or investments.
• Use of conspiracy theories. (“The bankers and the wealthy are trying to keep this investment from you.”)

Third checklist – powerful (but increasingly rare) signs of fraud

The following are very common signs of fraud, but they will be getting less and less common these days, since AI tools will be helping fraudsters to more easily overcome them.

I've therefore demoted them to the third checklist, because we're going to start seeing these ones less often from now on.

Still, take all of these as very strong warning signs if you do see them:

• Poor quality website, often with pictures that don't have any kind of consistency in their theme or any kind of reason why those images were chosen.
• Hardly anything clickable or doable on the website.
• Poor English on the website and marketing materials, or an overseas location.
• Claims of being experts while providing no information about the key people making the lending decisions and the processes they use.
• Very few details about their record so far, including incomplete or few statistics, especially compared to other P2P lending sites.

Due to AI, the absence of the warning signs in that third checklist can no longer be trusted to mean that the risk of fraud is low. So use the other checklists as well.

What happens if you're scammed? Be kind to yourself

Please, please try not to feel ashamed of yourself if, anywhere and at any time in your life, you ever fall for fraud or are scammed.

That's a very common reaction, but it's completely and utterly unfair on yourself.

Firstly, it is the fraudsters who should be ashamed, not the victims.

Secondly, all of us are scammed in some way multiple times throughout our lives.

Often it's just small things like someone secretly marking up the price of something a little because they want an extra cut. Sometimes the scams will be bigger.

But we can't possibly avoid all of them, regardless of size. Our defences can never be up all the time, and we can't always be wise, awake or alert.

Please try and accept what happened to you. Know it was them that did wrong, not you. Try to learn from it, forgive yourself and move on.

For more on peer-to-peer lending fraud and similar subjects:

How To Check The Financial Services Register For Monsters.

The 13 Key Peer-To-Peer Lending Risks.

Try also the FCA's scam guidance and MoneyHelper's scam guidance.

Other pages linked to in this article:

4thWay's 10 P2P Investing Principles.