P2P transparency under threat after investors flout privacy agreements

THE HIGH levels of transparency vaunted by the peer-to-peer lending industry could be under threat as platforms warn that investors are sharing too much information about bad debts.

Several P2P investor forums have launched in recent years, creating a community where users can discuss their portfolio. This can often involve detailed discussions about defaulted loans, with investors sharing communication from platforms about the recovery process.

But P2P platforms say that these investors are not only breaching their terms and conditions or privacy notices but potentially derailing their efforts in recovering funds.

This issue mainly impacts platforms offering a manual lending option. Firms that purely offer auto-invest products – including the ‘big three’ – may not be affected, as investors do not always know which specific borrowers are receiving their funds.

Some auto-invest platforms, such as Funding Circle, let investors see which businesses their money is being lent to.

“Where there is a borrower that is trying to sell or refinance a loan to redeem the existing lenders, the sort of comments that can be placed on these forums could cause the potential buyer or refinance lender to pull out,” said an executive at a P2P platform that offers a manual lending option.

“The only people being hurt are the borrower and the existing lenders.

“They have just caused their own issue.

”We know as soon as we send out an update, we will see it posted within minutes on one of the forums.

“The potential consequence is that we stop giving out updates or turn into a purely autolend platform with no information being sent to lenders.”

Recent issues regarding bad debts at platforms Lendy and Crowdstacker have been covered in the press and attracted attention on the forums. Both firms have said they are restricted in what they can say publicly because of the legal process they are going through in recovering funds.

Stuart Law, chief executive of Assetz Capital, which offers a manual lending option, said that he sees forums as a good thing but highlighted that there is a difference between transparency and rumours.

“If somebody causes gossip that is bad for the borrowers and bad for all the other investors,” he said.

“You can’t take away the transparency and openness of a forum or P2P lending, but there is a risk that platforms disclose less or tighten up on information to protect borrowers.”

He warned that investors may be putting themselves at risk of legal action if they post malicious or defamatory information on websites.

Read more: Are P2P investors better off selling bad loans or relying on recovery?

Sophie Pearce, managing director of MoneyThing, also said that she recognised the benefits of forums despite the risks.

“Many of the contributors are extremely knowledgeable and experienced and their wisdom can be very valuable to platforms as well as lenders,” she said.

“Some have specialist subject knowledge and some go to extraordinary lengths to research a particular topic.

“Forums are not without their limitations, however.

“There is a danger though that a few voices are more vociferous than others and not always used constructively, nor are they necessarily well-informed, which is helpful to no one.”

Neil Faulkner, founder of P2P analysis firm 4th Way, said forums are useful but he often sees incorrect information being shared.

“Free speech aside, investors already have a legal duty not to publicly reveal information that will help identify individual borrowers,” he said.

“This is what they signed up to through the terms and conditions when they registered to invest through each platform.

“This is especially relevant when the borrower or platform is taking measures to get a poorly performing loan or bad debt back on track.

“There are cases when the borrower’s reputation can suffer, leading to loss of confidence from its suppliers or customers, and lower prospects of that loan turning out for the good. Borrowers can also suffer embarrassment or competitive disadvantages when its financial arrangements are bandied around in public.

“If platforms want to prevent broader discussion of investors’ experiences and opinions with a wider-reaching non-disclosure agreement, they will find it difficult to both justify and enforce.

“Customers of any business can, and always will, share their experiences.”

Read more: P2P lenders face tough credit conditions as insolvencies hit record highs

Additionally, a consumer group is warning that forums could create a “digital panic” around the health of a firm.

“At the height of the last banking collapse, it was inconceivable that there would be a run on a bank. Yet when queues began forming around branches of Northern Rock, the reality of what was happening kicked in,” said Martyn James, spokesperson for Resolver, which helps investors complain about financial firms.

“When people hear rumours that a business is in trouble, they hit the internet. And if those SEO wizards have got their forums to the top of the Google rankings, that’s the first thing people will see if they go online. This is how digital panics begin.

“Having an online moan about a business is all well and good, but if you’re locked in to an investment or lending strategy and your money isn’t easily accessible, you might want to avoid saying anything too negative about a business – as it could become a real-life problem.”

P2P investors had mixed responses to platforms’ concerns about disclosure.

“Convenient of the platforms to give that as a reason for a terrible rate of recovery,” one investor told Peer2Peer Finance News via email.

“I think it lacks credibility to suggest that finance professionals, who undoubtedly perform their own extensive due diligence, would be deterred by lenders’ comments on public forums or elsewhere,” said another. “Loans that attract a lot of adverse comments are typically those where lenders consider the platform’s handling of the loan to be deficient in some way.

“If platforms seek to limit such comments, one should ask whether the platform is really seeking to remove criticism of their own procedures. I would probably reduce my manual lending if platforms seek to reduce information available significantly or to suppress discussion.”

However, another investor agreed with the platforms.

“Unless you are very knowledgeable about a particular company’s recovery process (and inevitably very few – if any – investors will be) it is foolhardy to be talking about them on forums,” the investor said.

“I can certainly see why platforms are claiming (probably quite rightly) that it is hindering the recovery process.

“I would much rather platforms kept a guard on the information and got a better return for their investors; just giving them regular outline updates on progress.”

This article featured in the April issue of Peer2Peer Finance News, now available to read online.