K5HBN3 Residential buildings under construction in Greenwich, London, UK
© Marcin Rogozinski/Alamy

Losses may exceed your initial investment. Those who dabble in some of the riskiest investment products will be acutely aware of this caveat. Those lending to UK property developers through peer-to-peer platform Lendy are unlikely to have considered the possibility. But one group of investors who made an £8.2m loan through the platform face the possibility of losing both their capital, and any interest owed. Additionally, a drawn out and costly legal battle threatens unless the lenders capitulate to borrowers demands.

Dismissing the borrower’s claim as “opportunistic and without merit”, Lendy outlined the dispute in a letter to the UK’s Financial Conduct Authority in September that has now come to light. This allegation may well turn out to be true. But at a time when the FCA is considering regulation to limit retail investors’ access to peer-to-peer lending the dispute does not bode well for the industry’s future.

The fintech sector is supposed to create a broader market for banking, which in theory means healthy returns for lenders and lower costs for borrowers. Limiting lenders’ access would be a step backwards. Instead regulators should look to managing the risk being offered by borrowers.

Property has been one of the fastest-growing sectors for UK peer-to-peer lending, according to the Cambridge Centre for Alternative Finance. Outstanding loans almost doubled during 2016 to £1.2bn.

If Lendy is any example one can see why. It offers a relatively high 12 per cent annual rate to those looking to lend capital. However, allowing these investors to choose their loans based on interest rate and loan-to-value measures suggests little in the way of risk management by Lendy.

Contrast this with the model at larger platforms like Funding Circle, which offers a lower return but based on a diversified portfolio of pre-selected loans. It no longer lends to developers. Forcing platforms to spread the risk, unlike the Lendy model, would be a good next step for regulators.

The Lex team is interested in hearing more from readers. Please tell us what you think in the comments section below.

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