Access denied

Why borrowing short and lending long was always going to end in tears for Assetz Capital and their Access Account holders

Stuart Law of Assetz Capital has predicted in a recent Peer2Peer Finance News article that “development funding will get severely restricted or cancelled [by the FCA] as a valid form of lending for P2P”.

If – and it’s a big if – the prediction comes true, it could be said that Mr. Law’s company, Assetz Capital, will be among the key reasons why – particularly if you hear their investors’ complaints. Mr. Law’s criticisms of the retail lending market from which he is now withdrawing don’t just smack of the pot calling the kettle black, but the pot calling the whole kitchen black. Don’t forget, just two weeks before announcing Assetz’ ditching of retail investors, Mr. Law assured us all that “institutional demand will always be in addition to retail investment origination.” i.e. we’ll only let the financial big boys in once the ordinary investors have had their fill. So, in the space of the average skiing holiday, Assetz went from undying love for Mrs. Miggins to pushing her out into the snow.

Because, with Assetz having bailed out of the property crowdfunding arena, Mr. Law seems to be trying to draw the whole industry under suspicion as he leaves – questioning “how many [platforms] can be certain of funding all their future developments?”. He suggests that it’s the other platforms whose practices fell short, and blames Assetz’ exit on retail investors turning lukewarm, when the reality is that they were left out in the cold, under-informed and under-rewarded, before finally turning their backs in despair.

And yet, just a cursory glance at Assetz Capital’s reviews will give you a good idea why retail investors lost their appetite for the platform’s offering.

Reviews that say things like:

“Assetz Capital has now (as of 15th Dec ’22), without warning and with no vote about how it is to be done, closed down the retail investing side of their business. They have locked people into their loans (i.e. removed the ability to trade out), introduced a lender fee with immediate effect, and have denied all responsibility for the financial burden they have placed upon all retail investors. AC should be taking the hit for such a shift, not the lenders – no customer asked to have the rug pulled out from under them like this.”

And

“It seems that Assetz made the cardinal mistake of borrowing short and lending long and now we, not Assetz, take the hit.”

To outsiders, Assetz always put forward an image of the clean cut, user friendly operator in the P2P space. But presenting yourself as a bank and telling investors their capital will be returned on demand doesn’t mean their money has the same protection as it would in a bank. To all intents and purposes, Assetz Capital has looked like a bank, walked like a bank and quacked like a bank. But it wasn’t a bank – it was a crowdfunding platform. And the crowd is unpredictable – so to use volatile quick access account funds to finance property development (where there’s a steady and predictable need for cash to fund future construction costs) is, well, irresponsible at best.

Simon Atkinson, Head of Capital Markets at Assetz, responded to a question from 4thWay’s Neil Faulkner by verifying that they use short term investors’ money as an ongoing fund to finance their long term developments:

“To the extent where we have facilities to fund drawdowns,” confirmed Mr. Atkinson, “they’re covered by cash within the Access Accounts. So we’re using funds from the investors where possible. We use the money lent or cash in the Access Accounts: a rolling cash balance from what was new investment and loan redemptions.”

So when can Access Account holders actually get their money out (bearing in mind that when they put it in, they were given a choice of “Quick”, “30 Day” or “90 Day” access)?

The information provided by Assetz makes it clear that some of them will not be able to access all of their money until 2027 – maybe longer. And while they’re waiting, Assetz will actually charge them a fee “to cover costs of the running off of the loan book without the benefit of any new lending income from retail funds”. Even though it was neither the fault, nor the choice of the investors that no new lending is coming in, they’re still picking up the tab for as long as it takes to get their money back.

An interesting take on ‘Quick Access’, n’est ce pas? You have ‘access’ to your money in the same way that you have ‘access’ to World Cup Final tickets – that is, in four years’ time, if you’re lucky.

If there were any doubt that this is the wrong way to treat investors, the Financial Ombudsman has recently found that Assetz treated an investor unfairly by charging them a fee for handling their money, whilst refusing to let them withdraw it. Yes, you read that right: after experiencing a drop in its income, Assetz decided to make a few extra quid by locking customers in and charging them for a service they had expressly stated they did not want. You’ll be pleased to know the Ombudsman said the fee should be refunded.  

So Mr. Law’s questioning whether other “platforms fund development without having all of the future tranches that a developer needs covered by funding?” is just casting shade on the other operators with no evidence whatsoever. And yet Assetz is clearly hoist by its own petard here.

Saying that all ongoing development is “covered by funding” is simply not good enough when you’re relying on cheap and volatile Access Account money to cover what must be a significant long term liability. Particularly when all of that money is coming from ordinary investors like you and me. That’s right: not a penny of the cash to fund future tranches is coming from any of Assetz’ institutional investors – they’re not that generous!

But let’s be clear here. Developers will largely know at the outset how much cash is required to complete construction. So to protect everyone’s investment (including the borrower, the contractors, and everyone down the line), that money needs to be raised and ringfenced until construction is complete. In CapitalStackers’ case, the funding for each specific, discrete development is locked in, closed off and predetermined before a single penny is drawn down by the borrower and a single trowel is lifted. Other reputable platforms have their own way of assuring this, but fundamentally, there needs to be a robust and reliable alternative funding channel that’s appropriately priced.

Furthermore, any investor whose cash is going to be used to fund property development needs to be kept fully and transparently informed of what’s happening to that money, at every stage of construction – every supply chain delay, every weather hiatus, every cost overrun. At CapitalStackers, we provide this for each specific building development, so that it’s not obfuscated by other projects or top-up funds from new investors. Original investors need to be able to fully understand exactly what’s being built; the track record of the borrower and the contractor; the prospects of selling all the properties being built and the timescales; with thorough base case and downside sensitivity modelling. If any one of these things is not done – or is not shared with investors – it smacks of irresponsibility. Okay, things can and do go wrong post mobilisation – but that’s very different from not getting it right on day one. Why add unnecessary risk to what the FCA already classes as a higher risk investment? At CapitalStackers, we strive to mitigate the risk and always seek to price it correctly.

Irrespective of what Assetz told investors in the small print, it’s no defence that what they’ve gone through could, and should, have been foreseen – in fact we, at CapitalStackers, foresaw it many years ago even before we launched, decided it was definitely not the way we should operate and structured our business model accordingly.

We can categorically say that this would never have happened at CapitalStackers and never will. For one thing, your funds aren’t held in an account we can simply dip into to fund any future projects – they’re held in your own personal FCA regulated eWallet, separate from the developer’s and CapitalStackers’ accounts; meaning your cash can only be drawn down after completion of external due diligence to fund a deal that you have chosen to fund – or returned to you. And for another, we simply wouldn’t have put investors into deals that didn’t have committed ongoing finance. That’s the main reason we work alongside a bank in almost every deal – so that the bank covers the primary liquidity risk (as they should), and not the ordinary investors. Relying on short term, low return funds to finance cash hungry, higher risk property development was always going to end in tears.

But at least, if you were going to do such a thing, you should be paying investors a return commensurate with the risk. Assetz Capital’s Quick Access Account – clearly used as a hedge against that liquidity problem – was simply not paying a return appropriate to the risk investors were taking. For those investors trapped for the medium to long term, Access Accounts now pay just 4.0% – similar to what you could earn nowadays from the highest paying bank deposit accounts which are covered by the FSCS.

Similarly, a platform taking its margin before investor capital is redeemed is a complete no-no. A platform should get paid after investors have been repaid. That’s what they get paid for – to make sure everyone involved gets what’s due to them.

Mr Law further pontificated, “The FCA is most definitely interested in whether P2P should be involved in development funding”. Asked why he thought this was the case, he said: “If I had to hazard a guess, I’d say they would be interested in the risk and whether investors fully understand the risk of development funding”.

Well, quite.

If you’re an Assetz Capital Access Account investor, it’s highly likely that you didn’t understand the risk, given that the company to which you entrusted your money, in the words of another of their incandescent investors, “shifts the goalposts to the disadvantage of lenders”. Given that you signed up for an Access Account and without warning found that you had no access at all. Or given that, in the words of yet another Assetz investor, “loans… were advertised as low-medium risk initially before being ‘re-evaluated’ into high risk/default status”.

So yes, it’s likely that Assetz’ practices have rekindled the FCA’s interest in the industry. Their concern might centre around platforms where underwhelmed investors have been underinformed and under remunerated for the risk. Platforms that put growth ahead of professionalism. Swelling their loan books ahead of ensuring those already invested get repaid. Those that think retail investors aren’t worth bothering with, and can be treated with contempt.

But those platforms (while they seem to have a disproportionately loud voice), are not representative of the maturing P2P industry.

Other, more responsible platforms continue to encourage retail investors to help crowdfund property development without indulging in any of the shenanigans Assetz resorted to. It’s no surprise that, of the top eight ‘Best of the Best’ Peer-to-Peer lending platforms identified by the independent comparator 4thWay, no less than six specialise in real estate development finance. They don’t all do things the way we do at CapitalStackers to manage the liquidity risk, but – largely through critical mass, a good track record and, most importantly, a return that fairly reflects the risk – they’ve each found and proved their own workable and admirable solutions.

The key questions to be asked of any P2P platform are:

1. Is it transparent?
2. Have the investors been given a clear picture of what they are getting into?
3. Is the reward commensurate with the risk?

All the platforms in 4thWay’s Top 7 can answer ‘yes’ loud and clear to all three questions. Assetz couldn’t – as evidenced by the views of their investors.

Because, while Assetz Capital failed to fully appreciate the true long term value of retail investors, the Top 7 look after each investor like a golden goose. They know that without retail investors, a huge number of developments simply wouldn’t happen nowadays – cutting off vital funding to developers building homes during a time of acute accommodation shortage, and unfairly denying higher returns to retail investors at a time of universal low interest rates.

So they run transparent operations, stick to their own well thought out rules and reward investors fairly and proportionately for the risk level they’ve chosen. Because those investors aren’t just crucial to our industry, they’re a vital cog in the economy as a whole.

Without retail investors, there would be no Peer2Peer investment industry.

Even if the FCA said tomorrow that crowdfunding development finance is dead and platforms should wind down their loan books, the traditional lenders simply do not have the capacity or the capability to fill what has been a massive funding void since 2008. Such a course of action could not be deemed to meet the FCA’s own objectives of striving “to ensure that these markets work well for individuals, for businesses and for the economy as a whole”. The FCA cannot fulfil those three objectives by turning off a tap that gives crucial support to the building industry and is an essential element of the savings portfolios of a large number of people.

So, to be clear, the majority of platforms are not being regulated out of the retail market. We at CapitalStackers don’t have a problem with the current regulatory environment, since our own internal standards are just as high, so it’s a good thing for the industry that any bad actors who feel existing regulations are too strict are weeded out of the industry, and good riddance to them.

Peer2Peer might be losing its appeal to those operators who don’t fully understand it and find toeing the regulatory line too much of a burden. And it’s their prerogative to close their shutters and move on. But be under no illusions – they will not be missed, and the lights will continue to burn brightly for those of us who’ve made it our business to do it well.