British site FundingSecure has closed down. We are not surprised – here’s why

FundingSecure has gone into administration

British P2P investment site FundingSecure has gone into administration. This means that it has been declared insolvent and will likely cease lending operations. This announcement follows the insolvency of much larger British lender Lendy earlier this year, and Collateral UK in 2018. The announcement can be found on the FCA (British regulator’s) website here

What is this impact for investors?

It will take time to assess the full impact of this on FundingSecure investors. Because of the way P2P investments are structured, investors should in theory get back most, if not all of the funds they invested. However there is no doubt that a platform failure creates significant delays in getting funds returned, and extra uncertainty.

We see three main additional risks and uncertainties this will create: 

1. The first surrounds record keeping and documentation. We have seen in the case of Collateral UK that there can be some risks surrounding the loss of valuable records that sets out ownership of investor assets. In the case of Collateral UK the records went missing or were corrupted which created significantly more complexity for the administration staff and delays for investors. While these problems were hopefully a ‘one-off’ situation, it is common for administrators to have difficulty creating a verified, accurate list of creditors in any insolvency situation.

2. The second risk relates to the cost of the administration. Failed P2P investment platforms tend to not have large reserves of their own cash, or saleable assets. Administrators are usually paid from these sources. If there are insufficient assets, administrators are likely to seek payment of their costs from investors, even if the investor assets are typically ring-fenced legally.

3. Finally, an administration can potentially result in higher defaults, and lower recoveries on the assets. This is partly driven by changes to borrower behaviour. Some borrowers try to take advantage of the situation by stopping payments on their loans. Lower recoveries can also be due to delays in taking over full management of the loan portfolio, with limited collection and recovery efforts taking place while the administration team get fully up to speed.

FundingSecure and Lendy both got into real estate lending and failed badly at it

Prior to going into administration, both Lendy and FundingSecure were mainly focused on high risk real estate lending. The sites moved into property when they were unable to grow their core product as much as they wanted to. 

FundingSecure started as a high-value pawnbroking lender. It lent against items such as art, jewellery, vintage cars etc. These loans were very popular with P2P lenders however there was a natural limit to the pool of ‘asset rich, cash poor’ people who owned these types of assets yet were willing to pay very high rates for finance. Lendy began operations as ‘Savings Stream’ where it was better known for originating loans secured against boats.

Unfortunately both FundingSecure and Lendy failed badly at their underwriting of the real estate loans. A very high proportion of loans defaulted, and recoveries were generally both very slow and much smaller than anticipated. We believe this is because both businesses lacked the industry expertise to underwrite and manage loans in this space, particularly at the high risk end of the spectrum, where such experience is most important.

In retrospect, moving to real estate lending was a very high risk move for investors on those platforms. However it can take a long time for defaults and losses to appear in secured lending. Both Lendy and FundingSecure were able to sell a high volume of these loans before any real track record in this asset class had developed. Once the losses arrived, investors stopped buying, and the platforms were clearly never going to be able to survive.

Here's how to avoid platforms that are at risk of failing

The first obvious conclusion from above is that investors should avoid platforms that try to move away from their ‘core’ proposition. It’s very difficult, for example, to be excellent in understanding the risks of lending against art, and also a real estate development. That’s one of the reasons why we provided no editorial coverage to FundingSecure on this site, and listed them as ‘high risk’ in our tables. 

We’ve spoken in the past (our post here) how important it is to keep an eye on the lending volumes on each site you invest in. A look at FundingSecure’s volumes shows that their new lending volumes fell very quickly in 2019 – from £10m a month in 2018, to £3m a month in 2019. We use volumes as an indication of investor satisfaction with a site – if volumes are falling, it most likely indicates that investors are no longer willing to buy loans after experiencing poor returns. We saw a similar decline in volumes at Lendy before it was closed down.

For more risk factors on signs that a lender/platform may be about to fail, check out our post here on the 7 key signs.

These failures show why platform diversification is very important

These failures show why it is important to diversify any P2P investments across more than one site. Choosing at least 2-3 successful sites to spread risk, and keeping a close eye on volumes and default statistics is key. Things can change. All 3 British sites that have closed recently were all popular and successful at one point.

If you are thinking of adding some more sites to your portfolio, our comparison tables could help.

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