Maitland has assisted a client to set up a peer-to-peer (P2P) lending platform. P2P finance is just one of the ways the internet has disrupted traditional funding models. Nitzan Olsha, the Partner who led on the matter, talks about the client’s business in the context of the fintech revolution.
The Financial Times recently reported that Britain has become a hotbed of fintech innovation and investment.
This hotbed is much broader than one might think given the outsized attention being given to cryptocurrencies, which is just one part of the ongoing fintech evolution. New ideas are being tested, and capital and other resources are being committed to each and every area of finance.
Sources of capital around the world are yield-starved as a result of prevailing low interest rates, which for some currencies have even become negative. In other words, you have to pay the bank to keep your money safe, which raises a related question. How safe is your money in a bank?
Although concerns about bank safety arising from the 2008 global financial crisis have largely slipped from headlines, they have not been forgotten. Lessons have been learned, and the focus on risk/return remains critical to all deployments of capital.
Whilst retail individuals may be protected by deposit insurance schemes, companies, institutions and high-net worth individuals do not have this crutch to rely on. Consequently, counterparty risk must always be a consideration whenever and wherever capital is placed to earn interest income.
It is these two points – earning a competitive yield and managing counterparty risk – that are the fundamental building blocks of peer-to-peer lending, commonly known as P2P.
P2P finance works by connecting investors – either individuals or institutions – directly to borrowers (also individual or institutional) usually through an online platform or marketplace with a view to ensuring that borrowers get direct access to capital without needing to go to commercial or investment banks.
Maitland client, Lend & Borrow Trust Company Ltd (“LBT”), launched its P2P offering earlier this year. Maitland assisted LBT to design and implement the legal structure of its P2P platform and prepared all the necessary platform and user contracts.
Focus on safety
All loans arranged through LBT and its online platform are secured, which is the keystone of safe lending. But again, the lessons of 2008 demonstrated that many forms of security did not provide the safety that was expected. For example, falling real estate prices put some deals ‘underwater’, where banks and other lenders took losses because the value of the property fell below the amount they had loaned.
This focus on safety has been the key to successful banks throughout the ages. It is the traditional way banks have been managed. LBT aims for this level of safety through the loans it arranges, all of which are secured by the borrower’s physical gold and silver pledged to LBT as agent for the lender and stored in professionally managed and insured vaults under LBT’s control.
At commencement, loans are made up to 65% of the value of the collateral. Margin calls to the borrower are made if the loan-to-value of the collateral reaches 75%. With control of liquid assets like gold and silver that are traded globally throughout the day, LBT can sell any or all of the collateral within minutes if the borrower does not meet a margin call or defaults by missing an interest payment or the repayment of the principal.
James Turk, the Chairman of LBT and the Founder and Lead Director of Goldmoney Inc, reports that: “LBT has made loans totalling the equivalent of GBP 8.5 million in three different currencies: CAD, GBP and USD. LBT also supports borrowing and lending in CHF and EUR. We have made a credible start since receiving regulatory approval from the UK’s Financial Conduct Authority in March 2017, with interest being shown by people all over the world, which is one of fintech’s most important achievements – delivering a global product.”
LBT is not the first fintech company that James Turk has developed with Maitland. Rupert Worsdale and Colin Bird assisted him nearly 20 years ago from the first beginnings of Goldmoney Inc, which is now listed on the Toronto Stock Exchange (symbol: XAU) and an investor in LBT.
Important Note: This is not an invitation to invest in or conduct business with LBT. Please seek independent financial advice.