Risk Warnings - Our Approach
Is Peer to Peer Lending Safe?
Capital returns are not guaranteed, neither are forecast interest returns, which may also be lower than expected.
FSL primarily manages this capital risk by ensuring all assets are professionally valued and restricting the amount lent to a typical maximum range of 70% - 75% of the value (LTV). This means that if a loan does default, FSL have provisioned in the loan arrangement, a minimum of 25% buffer between what has been lent and the market value of the security.
This basic management of capital risk is supported through our approach to lending due diligence process, that targets the competence of the borrower, specifically background (not credit scoring) checks and rigorous due diligence on ownership, title in addition to the value of the security asset. A borrower monitoring process is in place, primarily to protect the interests of lenders during the period that each loan is active. In the event of a default, for pledged asset loans action is taken by FSL to sell the asset at auction, and for property bridging or development loans we may appoint a receiver, to protect your interests. Interest continues to accrue until the asset is sold.
Despite these measures, your capital does remain at risk. Investors should always review each loan carefully and decide on whether the risk vs reward proposition is acceptable to them.
Investments on our platform are highly illiquid and investors should consider these as long- term investments. There is no recognised market to sell such investments although it may be possible via FundingSecure’s secondary market.
Historic default rates and forecasts of interest returns are not an indicator of future performance.
The Financial Services Compensation Scheme (FSCS) seeks to protect the cash held in your FundingSecure Limited (‘FSL’) client money account (up to a maximum amount of £85,000), however, the investments (property loans or pledged asset loans) that you make through our platform are not protected by the FSCS.
Please read the Key Risks Category section before investing.
Risk Warnings
Your capital is at risk when investing in Peer to Peer Lending. FSL suggests that you as an investor takes independent investment advice before depositing monies with a Peer to Peer lender and ensure when you do deposit funds you diversify that portion across multi loans.
Your income returns are at risk, given the default risk or where a borrower repays the loan early and as such the amount of interest received could be less than interest calculated at the start of the loan.
Before investing in loans it’s important to understand the different categories of risk associated with each type of investment. This summary of the types of risk involved in lending is intended as a guide and is not an exhaustive list of all the specific risks factors or scenarios where investors could lose all or part of their capital.
FSL works hard to manage the risks and we believe that our product represents an attractive balance of risk and reward, however we consider property development loans to be a higher risk investment than property bridging loans or pledged asset loan.
As with all investments, particularly high-risk investments, investors should consider diversifying their exposure across a number of property development loans and limit exposure to any single loan accordingly.
FSL does not provide tax or investment advice and any general information is provided to help investors make your own informed decisions. Investors are advised to obtain appropriate tax or investment advice (such as from an independent investment adviser) where necessary.
Key Risk Category
For each risk category, FSL will describe the risk and provide an overview of our controls that seek to reduce such risks materialising.
Liquidity Risk
An investor decides they would like to withdraw their capital from the investment before the end of the term but is unable to.
It is important that Investors understand that our products are in principle illiquid as they have a minimum 6 month holding period. So, if as an investor you need access to such funds before the end of the holding period, relevant to your chosen investment, then maybe such an investment is not suitable to your needs.
Principally once investors allocate funds to an investment, such funds are unable to be withdrawn until as a minimum expectation, the end of the loan period. Investors can indicate whether they wish to hold the investment only through to the term of the loan, i.e. expected end date of the loan. FSL as part of their initial due diligence process consider the project risk. However, it remains possible that during the expected lifespan of the loan, factors such as external events like the weather or internal events such as availability of resources, may arise that extends the expected end date. As per clause 6.5 of the terms of business your exposure to this risk, beyond investors initial holding period (i.e. the original term of the loan), may still arise, where FSL considers it prudent to extend terms rather than press for default of the loan.
FSL seek to support the impact of this risk through offering a secondary trading facility, that is available for an investor seeking to ‘sell’ their investment. However, there is no guarantee that a buyer i.e. another investor, will be seeking to purchase what you are seeking to sell at that point in time nor at the price that you wish to sell the investment for.
Senior Lender Risk
E.g. the senior lender moves to enforce their security if the borrower falls into default at the end of the loan term.
FSL manages this risk in most cases as the senior lender on behalf of the investors i.e. has first charge of the security of the borrower and therefore control over default process.
Where FSL has a subordinated e.g. second charge over a loan, it typically manages this risk by capping lending < 65% LTV. However, the first charge, usually held by a bank will need to be paid back first and additional transactional charges (e.g. legal fees) can arise from the default process, that may reduce investors recovered capital.
In either case, the process of recovery may take time and there is a risk that you would not recover the full amount due to you.
Market Risk – Property Loans
E.g. an economic shock leading to a substantial fall in property values, could result in the properties being worth less than the total outstanding value of debt secured against the property. The repayment of your investment relies on the sale value of the pledged asset. Any future downturn in the UK real estate selling prices or the rental returns could materially adversely affect the value of the property security, the developer's motivation to complete a development, and the developer's ability to finance repayments due to you. As well as factors impacting on the UK real estate market generally, there may be specific factors relevant to the particular area in which the property is based, or the property itself, which mean that the property cannot be sold at a sufficient price to repay all of your investment, or at all.
FSL principally seek to reduce this risk through its maximum LTV lending criteria as noted above.
A further tool we use is where a 3rd party will underwrite our loans and such macro risks transfers to them to manage. Where this is the case, it will be documented on the loan.
Developer Risk
E.g. the developer becomes insolvent or fails to complete the project with the funding received and cannot secure additional finance. Developers could misuse the invested funds without our knowledge, thereby increasing the risk of default. Developers may also become unable to complete the scheduled work on time, or at all, for financial or other reasons.
The project is sold uncompleted to another developer for below its expected completion value (Gross Development Value, GDV). Investors could lose interest and capital.
FSL has in place a lending and servicing policy. A key element of such policies is to provide governance around the lending journey. FSL’s, Credit Committee has as an objective to oversee that our processes and controls remain effective to manage such risks.
An example of us managing the developer risk is through our underwriting and due diligence processes. During the underwriting process, FundingSecure will assess the project for viability, and review the borrower’s CV to ensure they have the experience and/or correct team behind the project to successfully execute it.
During due diligence, anti-money laundering and criminal searches, together with open source data checks, will be undertaken for all directors, borrowers and any other key figures in the project to ensure their suitability and to mitigate risks.
Typically, a Quantity Surveyor (QS) will be appointed to review the scheme and report any risks to FundingSecure.
In the legal documentation for the facility there will be conditions and covenants included that must be met before more funds will be released against the security.
Upon receipt of a request for more funds, the QS will revisit the site and validate the amount of money spent on the project to date. FundingSecure will only release money in arrears of works completed so value has been added to the security.
In either case, the process of recovery may take time and there is a risk that you may not recover the full amount due to you.
Repayment Delay
E.g. the developer is unable to sell the completed property(s) or refinance the scheme before the end of the loan term
Manage impact through our contact strategy to engage early with the borrower prior to expected end date of the loan. Where FSL agrees to extend the loan and not place the borrower in default, such contract and communication intensifies. In all cases FSL seeks to maintain an open communication with investors in such loans.
Conflicts of Interest
If the developer were to be an associate of FSL, this means that FSL individuals associated with the developer could be responsible for setting interest rates on loans and may be responsible for taking recovery action against the developer.
An association between FSL and the developer will always be disclosed on the ‘Investment opportunity’ page. Any investment returns quoted will not be affected by FSL's fees, regardless of the identity of the developer. The Company's Head of Credit will never hold an interest in or with the developer and is obliged to prioritise the interests of investors over the interests of the developer.
No Cancellation Rights
Some investment products contain cancellation rights, however P2P lending is not one of these.
While your funds remain ‘available’, you can withdraw your money at any time (subject to the necessary anti money laundering checks having been completed when you onboarded).
Once you as an Investor allocate your funds to a project, you are unable to cancel your allocation. When the allocation is activated by the platform and monies settled with the borrower, your funds are then committed.
FSL has in place a secondary trading facility but this is only available once loans become active on the platform. Please review the liquidity risk management above for more details on this facility or the link.
Interest Rate and Price Inflation
Increases in market interest rates and price inflation may affect the re-sale value of the fixed rate investments adversely.
Decreases in market interest rates and deflation can have a positive impact on the value of fixed rate investments.
Taxation
The impact of taxation on your interest receipts or any capital gain made through the secondary trading facility is your responsibility. Interest returns are always quoted without taking the effect of personal taxation into account. FSL, does not provide tax advice. If you are unsure of the tax consequences of investment and how they apply to you, you should seek independent advice.
Any changes to the taxation environment or a change in the tax treatment of the Company may affect your investment returns.
Effect of FSL Own Insolvency
In line with the FCA’s requirements, FSL’s wind-down policy articulates the necessary provisions in place that aim to maintain client’s best interests. We are responsible for providing staff to monitor the borrowers repayments.
Brexit Risk
The lack of clarity and general uncertainty regarding the UK's exit from the EU is likely to increase market volatility and may impact buyer and investor confidence in the UK property market. This could adversely affect the timing and level of resale volumes.
