Bridging the gap: Exclusive interview with SoMo’s Simon Cottrell
SoMo’s Simon Cottrell talks to Marc Shoffman about rates, recoveries and regulation
SoMo investors are benefiting from an increase in interest rates as the cost of borrowing rises.
Simon Cottrell, head of recoveries and investor relations at SoMo, explains how the peer-to-peer bridging lender is adapting to the new economic and regulatory environment.
Marc Shoffman (MS): What trends are you seeing from investors?
Simon Cottrell (SC): We are finding a huge migration back to us from investors who maybe diversified elsewhere or who have maintained their levels of investment with us. In addition, they may have invested in stocks or cryptocurrencies.
With uncertainty in the stock market, we have found investors are now boosting their portfolios with us. While our borrowing rates are going up, so are the rates investors are receiving, which makes us a more attractive proposition.
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For that reason, we are enjoying growth and huge demand. As soon as we launch a loan it is snapped up quickly. We tend to deal with people who are disappointed that they can’t invest.
MS: What is your approach to lending?
SC: We fund short-term bridging loans. Our offering is based on bricks and mortar, the open market value of the property. We look at what it is worth on the day we do a loan and use our years of experience to apply sensible limits on the loan-to-value, which is capped at 70 per cent.
There is a moderate element of defaults but technically we are not referring to a legal default, people just go overdue. That is because the exits are either the sale of the security or they will refinance. The borrower will eventually redeem the loans. It is the nature of the business.
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We have never lost any capital to date, and we are at around 1,000 loans. That’s a positive and reassuring statistic. Because we have experience of the mechanics of an exit, we can predict what will occur during the underwriting process. We won’t agree a loan unless we can see a realistic exit at the end.
MS: What impact will regulatory changes have on your platform?
SC: We predominantly deal with high-net-worth and sophisticated investors, that is 90 per cent of our customer base. The platform also has institutions, corporates and pension funds.
We have always been on top of regulation and have an experienced team in compliance. It makes us stronger as there are others who may fall foul or cannot accommodate the changes, which creates an opportunity for us. The regulatory changes don’t faze us.
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Rules on risk disclosure and appropriateness tests help reassure investors. It will confirm if someone should or shouldn’t go through the process if they are unsure. We would rather deal with people investing in things they can afford to put money into. The regulations allow us to deal with the customers we should be working with.
Our minimum investment is £5,000. That takes away a huge proportion of the market who are looking to invest. It is proper high-net-worth individuals and people with experience in this market.
MS: What feedback do you typically receive?
SC: Our feedback is extremely positive, primarily because our rates have gone up. There are stories of other investments on other platforms that have fallen foul. We are sympathetic but investors should know what they are going to get, there is consistency in our approach. We are extremely reactive to any questions and communications with investors.
MS: How has the platform reacted to the rises in interest rates?
SC: As the Bank of England base rate goes up, you would expect interest rates to go up in line with that. The market in terms of borrowing rates has stayed the same for a while. That is because we must still be competitive so our rates match the competition. Those have crept up now.
Our borrowing rates go up and then we pass on the increases to investors. It has moved up slightly and we are kind of back to where we were in the middle part of last year.
MS: Are you expecting more or less demand?
SC: The demand at the moment is extraordinary. You could probably fill each loan four-fold. That is great for us but frustrating for some investors as they can’t get on the platform to make an investment.
We are very cautious and haven’t waivered from underwriting. The platforms doesn’t match demand with loans, we maintain a steady path and don’t feel any pinch from any competition.
MS: Are you working on any new products?
SC: As a business we are always open to looking at new products. We have been looking at marketing our product to people at auctions, where you need to turn around a loan quickly. We do an element of that but it is growing.
We have also been looking at London as its own niche market as well as development finance.
In terms of the core business, we are doing very well. Our model works, if we see an opportunity that fits and can accommodate it, we will move forward.
MS: What are your expectations for recoveries?
SC: The main impact on borrowers at the moment is they may find it more difficult to refinance. We are very fair with our borrowers and give them good notice on when loans are due. We see how they are getting on with exit plans and make them aware there is a risk they will go overdue if refinancing takes a while.
Borrowers are offered solutions but we always advise they look at all options. There are more loans going overdue as refinancing opportunities are slower, but we are very flexible. We look at each case on its own merits, and can consider an extension.
There hasn’t been an adverse effect on the business but we are keeping an eye on it. A quarter of our loans go overdue. Half of those will have resolved the situation in three months and the rest within six months.
There are a small number of occasions where we have to go into recovery. In that scenario we still manage to return capital to investors and interest in most cases.