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Industry comments on Funding Circle changes
It has been alost two weeks since Funding Circle raised their minumum lending rates, and then amended them following feedback from lenders. Some of Funding Circle's peers within the industry have added some of their comments.
Comment from ReBuildingSociety:
There’s one topic dominating the peer-to-peer discussion boards at the moment – the decision for Funding Circle to implement a minimum bid restriction on its auctions.
Some of the criticism aimed at Funding Circle is that it has restricted the market and made it almost impossible for the crowd’s due diligence process to take place, such is the speed at which auctions are filling.
It is easy to sympathise with Funding Circle in the sense that it is dealing with quirks of a market that it created and every step is a step into the unknown. The minimum bid gives borrowers a clear view of the rate it will pay and will make marketing to borrowers and brokers much easier – it is now a fixed rate auction.
It is a sign of the popularity of the sector that too many people want to lend to UK businesses through Funding Circle for the existing auction process to support them. You could realistically assume that the typical Funding Circle lender profile has shifted from an investor to a saver and will shift again post-regulation.
All this is good news for the competition.
It will push early adopters onto the next level of platform, like rebuildingsociety.com, giving lenders greater choice in the market and allowing them to more evenly align the risk they see in the borrower to the rate they’re comfortable with. It is naïve in the extreme to believe that every C-rated business on Funding Circle carries the same risk.
That is an institutional approach and this market grew on the individuality of the lender market and the ‘fun’ aspect of evaluating and interacting with business owners, which rebuildingsociety.com wants to retain and nourish.
Comments from Assetz Capital:
I wanted to pass comment as someone working in another P2P platform, as this is indeed a big development and has the potential to affect the wider industry and not just Funding Circle. The rationale behind the change has never (as far as I know) been explicitly set out, but it's easy to guess that it's down to FC's concern that interest rates were too low for the associated risk. In theory, the change would result in less-experienced investors lending at a higher rate, meaning that their portfolio can withstand the likely proportion of defaults. However, what it's more likely to do in my opinion, is favour the less-experienced lenders, by driving out investors who want to get under the skin of a company (often by asking questions) before bidding. It's a tough situation to be in, but this isn't a road we'll go down - I'm confident that in the right environment and with risk properly explained and represented (this is key), interest rates will settle at a fair number. At Assetz Capital, and as experienced SME and Property bankers, we have already made an in-depth assessment of the risk. Whilst we offer fixed rate auctions to our lenders, we feel that the risk is priced fairly for both the borrower and a lender and is not subject to the whim of inexperienced investors.
Defaults might have formed part of the decision in setting minimum bid and, if this is the case, I full support Funding Circle in ensuring the less experience investors’ portfolios can withstand defaults. At Assetz Capital we take a different approach in taking tangible asset security against each loan so that should a default occur the ability to recover all, or at least most, of the lenders capital is greatly increased. As such, we do not feel the need to set minimum bid rates.