Risks

The Proplend platform matches carefully selected commercial property professionals looking to borrow for business purposes, backed against UK property, with investors looking to invest. All lending contains an element of risk and we have broken them down for a better understanding.

General

Don’t invest unless you’re prepared to lose money. This is a high risk investment. You may not be able to access your money easily and are unlikely to be protected if something goes wrong.

In the UK, P2P Lending platforms are regulated and authorised by the Financial Conduct Authority (FCA). New FCA regulations which came into force on 9 December 2019 were introduced to help ensure that only investors capable of understanding the risks and of bearing the consequences, invest in P2P agreements.

Proplend is regulated by the FCA and is a HMRC authorised ISA Manager.

Lending across any P2P is a form of investment and therefore any losses incurred are not covered by FSCS. 

Proplend operates a client money account which is held with Barclays Bank.

While your funds are held in the client money account they are covered by FSCS.

All capital is at risk as lending is not comparable to depositing money in a savings account. Depending on the loans performance, there’s no guarantee that investors will be repaid the full amount of their original loan investment, nor any interest on that loan. You should be aware that past performance is no guarantee or indication of future performance.

Interest Rate Returns are not guaranteed. The interest rate shown on a loan by loan and tranche by tranche basis is the expected interest rate return that the Lender should expect if the loan performs as expected. 

Loans are published with target interest rates, but these rates are not guaranteed. There are many reasons why the target rate may not be achieved such as the Borrower not making an interest payment, the loan not being redeemed on time, the loan going into default, the collateral supporting the loan falls in value, all of which result in the loan not performing as intended.

Proplend operates a secondary market called the Proplend Loan Exchange (PLE). This offers Lenders the ability to place a loan part for sale prior to the original maturity date of the loan. 

The ability to sell is dependent on the availability of a willing buyer. If there is no willing buyer, you will have to wait for your repayment when the borrower redeems the loan or in the event of a default, that Proplend conclude the recovery process. 

There are various risks of lending through any P2P Lending Platform that could place your capital at risk and could cause loss. Some of the risks are known. For example, a Borrower or advisor could provide false and / or misleading information and / or commit fraud and / or they may make it difficult to repossess the property. This list is not exhaustive and there are other potential / unknown risks of lending that place your capital at risk in addition to these examples.

Proplend does not and cannot offer investment or tax advice.

If you are in any doubt as to whether lending via a P2P platform is suitable for you or your tax position, you should seek independent advice from a reputable financial adviser or other relevant professional.

It is a prudent financial strategy that investors should diversify both across P2P platforms as well as their individual loan portfolios to help minimise the risk to their capital.

By spreading loan investments across multiple Borrowers, this will reduce the potential impact of a single Borrower failing to repay their interest or loan capital.

It is important to note that “cash drag” which is a term used by investors to describe the negative effects on their returns of sitting on cash whilst waiting to fund an investment opportunity can occur frequently.

This is because, there is often a timing gap between the point when a Lender deposits funds and the point at which a loan is originated and matched against those funds. Therefore, any predicted returns are solely based off funds that have actually been invested into a loan and not funds that have been deposited and not yet deployed.

Lending Risk

As Lending is a form of investment it therefore carries an element of risk, even though all loans are secured against a property. 

Loans are made to commercial property investors who are either purchasing, re-financing or capital raising against a commercial property in England or Wales.

Borrowers will be either Limited Companies, LLP's, Individuals or Partnerships.

Interest is paid to Lenders on a monthly basis. For Bridge loans and VAT loans, Proplend retain a full interest sweep for the term of the loan but on an investment loan, the Borrower makes a monthly interest payment. 

The maximum loan made to any Borrower is limited to 75% of the day 1 property value, which gives Lenders a minimum of 25% equity cushion. 

If for whatever reason the value of the property falls below the level of the outstanding loan, then Lenders Capital is at Risk. 

Should the Borrower fail to make the interest payments as they fall due or redeem the loan at maturity, the loan could fall into default. 

Depending on the reason for the above, this could delay interest payments and or the loan being redeemed. 

Once in default, Proplend may appoint a LPA receiver to manage the sale of the property to recover funds to redeem the Loan.

This could cause the loan not to be repaid in full, leading to Lenders capital being lost. 

Proplend offer three types of loans, a medium term (max 3 years) investment loan for an income producing commercial property, a sub 18 month shorter term bridge loan for a non income producing commercial property and a 3 month VAT loan. 

Should the Borrower fail to make that interest payment for any reason, Proplend holds a minimum of 3 months interest reserve in order to make interest payments to Lenders whilst we engage with the Borrower. Lenders are at risk should Borrowers not make their monthly interest payments as they fall due or the interest reserve is fully utilised. 

Each loan (except VAT loans) are secured by way of a 1st legal charge against the property which is registered with the Land Registry and for a corporate Borrower, a Debenture which is registered with Companies House and a Personal Guarantee. 

Property values could fall in value due to loss of tenants and or property income, changes to the general economic, financial and geopolitical environment. 

Loan to Value (LTV) Risk

Loan to Value is an important Risk Metric for all property transactions.

LTV is the gross loan amount divided by the value of the property expressed as a percentage.  If a property is worth £1m and the gross loan amount is £750,000, then the LTV is 75%.

Generally speaking, the higher the LTV, the higher the risk of the loan.

Proplend splits all loans in up to three LTV based risk Tranches which enables Lenders with different risk parameters and return requirements to all participate in the same loan. 

Splitting loans into Tranches is a long established institutional capital structure and would usually be termed as senior debt loan (Tranche A), junior debt loan (Tranche B) and mezzanine loan (Tranche C). 

When a loan redeems, Tranches are paid back in order of seniority. Tranche A is paid back first, Tranche B second and Tranche C last.

LTV is important as it shows how much equity the Borrower has in the property. The equity provides a cushion to manage any day to day movement in the value of the property. 

The Borrowers equity takes the first loss should there be a drop in the value of the property.  

Proplend splits loan in up to three LTV based risk Tranches.

Tranche A is 0-50% LTV;

Tranche B is 51-65% LTV and

Tranche C is 66-75% LTV.

The higher the LTV (or Tranche) the higher the risk but the higher the return received by the Lender. 

Platform Risk

If you don’t see an answer to your question, you can send us an email [email protected] or call us.

All regulated P2P platforms are required by the Financial Conduct Authority (FCA) to have adequate provision in place to manage and administer P2P agreements in the event of their failure. Further to this, there is a requirement that platforms commit to a seamless wind down and that the processes in place are appropriate and proportionate to the size and nature of their activities.

This means that in the event that a platform were to cease trading, a back-up service provider would take the platform’s place in operationally managing and administering the existing loan contracts between Lenders and Borrowers. The back-up service provider would continue to receive loan repayments from Borrowers, and to process and distribute these payments to Lenders.

Any money waiting to be allocated to loans are held within a segregated client account at Barclays Bank. Uninvested monies will earn interest at the prevailing Barclays Client Money Account Rate and are passed onto Lenders.

While your money is held in the Client Money Accounts it is covered by FSCS. 

Proplend has put in place detailed procedures (called our “Living Will”) to reduce the likelihood of it failing while there are loans outstanding on the platform.

These measures include:

  1. keeping high levels of cash reserves in excess of our regulatory requirements
  2. a fee model which results in us only getting paid in full after loans have been repaid and
  3. identifying a key skeleton staff who have agreed to make themselves available to wind-down the loans if Proplend suffers economic hardship.

Our Living Will Summary document is extensive and provides a reasonably detailed summary of how it operates.

In the event that Proplend were to become insolvent despite our Living Will procedures:

  1. it is possible that P2P loans may cease to be managed and administered before they mature;
  2. it is possible that any person involved in the continued management and administration of P2P loans (such as an insolvency practitioner) may not be subject to the same regulatory regime and requirements as Proplend, so the regulatory protections may be reduced or no longer available; and
  3. it is likely that the majority of balances due to Lenders are those due from Borrowers rather than from Proplend itself, so a Lender’s entitlement to any client money held by the firm would not include those balances that Proplend has not yet received from Borrowers.

Should Proplend not be able to continue as a going concern and service its loan book, it has engaged the services of the Resolution Compliance Limited (RCL) as its back-up service provider. RCL is authorised and regulated by the Financial Conduct Authority (No 574048). RCL are experienced in the provision of stand-by-services as well experienced in acting as a Principal firm for several P2P providers who are currently operational.

How Proplend Minimises Lending Risks

The aim of the risk management framework is to ensure Proplend pays due consideration to the associated risks when underwriting a new loan and the ongoing monitoring thereof to proactively minimise any potential risk of default. Should a loan encounter servicing issues, more frequent monitoring of the loan would be required, at the decision and discretion of the Credit Committee. Another aim of the model is to ensure the pricing of all loans is consistent after considering all the associated underlying potential known and perceived risks.

Proplend carries out due diligence on the Borrowing vehicle plus the sponsors behind that vehicle. This includes conducting Anti-Money Laundering (AML) and Know Your Customer (KYC) checks, reviewing Borrower property experience, credit checking and further financial information.

Direct loan contracts between the Borrower and each Lender are entered into for every loan. 

Proplend Security Limited (PSL), a separate wholly owned subsidiary of Proplend, enters into and holds the security documentation on trust on behalf of all of the Lenders with each Borrower.

Each and every loan will be supported by a security package including;

  • a First charge legal mortgage over the property, which will be registered with the Land Registry/Companies House;
  • a Debenture or Share Charge may also be taken and registered at Companies House; and
  • in addition the Borrower’s Directors / Shareholders may be required to offer a Personal Guarantee.

Proplend conducts our own internal due diligence on the property and the tenants.

A valuation is instructed and carried out by a RICS qualified valuer to ensure all facets of the property(s) and tenants are known and understood. 

A detailed Legal Report on Title is prepared by our legal counsel.

On a loan by loan basis, Proplend holds a minimum of 3 months interest reserve. This reserve would be used, should for what ever reason the Borrower fail to make their interest payment when it falls due, to make interest payments to Lenders whilst we engage with the Borrower. 

If the Loan is a Bridge or VAT loan, we hold a full interest sweep for the term of the loan and the interest reserve.

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