The COVID-19 crisis has exposed the risks of cross-lending platforms – there has been no shortage of fraud, embezzlement

The pandemic had a negative impact

The latter, like all companies, has not been easy for mutual loan platforms. Vytautas Plunksnis, chairman of the board of the Investors Association, assured that the impact of the pandemic was generally negative.

“Basically, if you look at who are the end customers of these platforms who borrow money, they are, in most cases, people who, for one reason or another, do not obtain loans from banks.

Their incomes are very likely to be lower, so it is only natural that the pandemic and associated economic recession, which was seen largely around the world, affected those people more. Without excluding a platform, if the end customer is having difficulty paying premiums, that means that those investors either have to wait longer for a refund, or in some cases incur losses, it depends on the platform. Therefore, it can be said that the impact of the pandemic was unequivocally negative, “he said.

When asked how the interest rates offered by such companies changed during the quarantine, he explained that the platforms that provide high-yield consumer loans had no money, so the interest rates could be seen on most such platforms. .

“Just because a lot of people saw that the economy was stopping and decided to withdraw that money, it meant that there were few investors and according to the laws of the market, interest in most platforms increased,” explained Plunksnis.

Risks exposed

The chairman of the board of the Investors Association also pointed out that during the pandemic, it was also possible to observe cases in which certain fraudulent platforms and even deceived their consumers.

“It turned out that those platforms were indeed a cover for illegal activities, people’s money was raised, the platform shows that they are being invested somewhere, but naturally many investors decided to get that money back when the recession hit and a large part pushed. the ‘recover’ button “. money ”, it turned out that some platforms did not really work and simply embezzled money.

It was so coincidental that a large number of these platforms were registered in Estonia, but did not necessarily operate in Estonia. In reality, on most platforms, the country of registration has little to do with it, as they work with clients and investors from all over Europe, ”he said.

Asked about whether these risks and frauds would also be possible in Lithuania, the expert assured that our country is a very advanced country in terms of risks, since it is one of the first to introduce clear regulation and people’s money is separated from the money from the platform operator.

“Even so, there were situations of this type abroad, in Lithuania we did not see anything similar. It is difficult to expect that this will also happen in our country, because the Lithuanian platforms operate on different principles, the same regulations for responsible lending apply when issue loans. Actually, what we saw during this pandemic is a plus for us, and when a person chooses a platform where they want to invest, one of the first questions is what licenses does that operator have, in which countries, what does maintenance look like? “, said.

Stagnant payments abroad, they lost with money

Darius Noreika, the head of mutual lending platform Finbee, said that in general it can be said that investors did not panic during the quarantine and pandemic at their company and followed a long-term investment strategy.

As explained, the drop in the number of new investors during the quarantine was around 30 percent, from 295 to 209, but increased more than 30 percent in July-August to 276.

“This year, the additional money deposited by investors before the quarantine exceeded the money withdrawn from the platform each month. However, during the quarantine, in March-May, the balance of deposits and withdrawals was negative. In other words, investors withdrew more money than they contributed.

This was due in part to a lower supply of loans during the quarantine and not nowhere to reinvest the premiums received. However, since June the situation has changed and investors continue to invest more than they withdraw, which shows that investors follow a long-term strategy and do not panic, thus ensuring the highest possible return, “he said, adding that Neither during nor after the quarantine did the company register customers in defaulting loan payments higher than usual.

“During the quarantine, we gave clients the opportunity to take advantage of the installment license by postponing loan repayments for up to 6 months. However, only 52 clients benefited from it, which represents less than 1%. of the active loan portfolio. Therefore, it can be assumed that our clients did not suffer financially from the quarantine, ”said D. Noreika.

The head of the company also assured that he warned of situations that occurred on platforms registered abroad during the quarantine and the pandemic.

“Investors in the public space and forums shared their experiences on the main P2P platforms in Latvia and Estonia, where cash disbursements to investors stalled because there were more people willing to withdraw money than those willing to invest. There have also been drastic cases, such as the disappearance of the Kuetzal and Envestio platforms with investors’ money. Envestio initially said that its page had been hacked by hackers.

There were comments that investors were shown on Latvia’s largest platform to receive payments on loan repayment programs, but no money was transferred to accounts.

The platform explained that this is because before the quarantine, when creditors selling loans on the platform were selling more new loans than needed to pay the installments of previous loan programs, the platform simply covered accounts receivable / pay and transferred less money to the creditor than was collected from the new investors to sold the loans and returned part to the investors in installments according to the schedule.

With the investment in newly sold loans falling, old loan schedules required more money to be returned to investors than was raised, so the platform could no longer reduce the money transferred to creditors and creditors had to transfer the money themselves. As a result, cash payments to investors began to stagnate, ”he said.

See the hooks

Dominykas Vanhara, lawyer and managing partner of the Vanhara Law Firm, evaluated the activities and regulation of mutual loan platforms in Lithuania from a legal point of view.

He assured that, in his opinion, the legal regulation and supervision of the Lithuanian mutual lending platform in general is good, as the Bank of Lithuania (LAC) immediately began to proactively regulate and supervise the provision of this service, and then, consequently, it joined the Law. editor, which complemented the Consumer Credit Law, the fifth chapter of which is intended to precisely regulate the activities of mutual loan platforms.

“In Lithuania, the activities of mutual loan platforms are legally regulated and supervised by the supervisory authority – the Bank of Lithuania. Therefore, I would consider the likelihood of the most serious infringements of investor rights, such as the disappearance of the operator of the mutual lending platform with investor money, to be very low. This circumstance is also confirmed by the fact that such events have taken place in other countries, but have not so far occurred in Lithuania. Hopefully that won’t happen in the future either, ”he commented.

However, as he emphasized, the fact that the Lithuanian legal framework and LAC supervision make it possible to prevent the most serious violations of investors’ rights or minimize their risk, does not mean that there are no legal risks in this area.

“The greatest risk in this regard would be that mutual lending platforms have not survived the full economic cycle, that is, they have emerged since the last crisis, when the economy is recovering, and have not experienced any other serious economic crisis.

And looking historically at all the protection of investors’ rights, this has evolved with each crisis: a crisis arrives that shows the deficiencies of the legal framework in this area, then they are corrected and eliminated. As mentioned, mutual lending platforms have yet to survive any crisis that has highlighted the weaknesses of these platforms. Where you would see a higher legal risk for investors is if the principle of separating the assets of the investors from the assets of the platform operator is implemented correctly. Because if the investors’ assets are not properly separated from the platform operator’s assets, then, in the event of the operator’s bankruptcy, there is a significant legal risk that the operator’s bankruptcy administrator will assign losses, ”he said.

According to the lawyer, even if the operator of the mutual lending platform had correctly implemented the principle of separating investors’ assets from their own assets, the question arises as to how the loans granted by investors would continue to be managed in the event of bankruptcy. of the platform operator.

“These and other risks are expected to be evaluated in advance by investors before making decisions to invest through mutual loan platforms,” ​​advised the lawyer.

Bank of Lithuania: no violations were recorded

Violeta Pilvelienė, Chief Specialist of the Credit and Payment Services Supervision Division of the Bank of Lithuania, confirmed that currently six mutual loan platforms are included in the public lists of mutual loan platform operators, but only three are active in Lithuania.

“By the end of June 2020, the number of borrowers on mutual loan platforms was 18.7 thousand, and the number of people willing to lend was almost double, about 37 thousand.

In the first half of this year, about 5 thousand. new consumer credit, for a total of about 15 million. EUR.

In comparison, the amount of consumer loans granted by other providers of consumer credit (credit and non-credit institutions) in the first half of this year amounted to around 215 million LTL. EUR. Thus, mutual platforms accounted for a small part of this new consumer credit, around 7%.

2020 Before the introduction of quarantine in Lithuania, the average maturity of consumer loans through mutual lending platforms was 3 years. Compared to 2019, it remained the same, but the average number of consumer credit loans increased just over 8.9 percent. – of 2.8 thousand. to just over 3,000. Eur. ”, – commented the specialist.

According to LB, during the quarantine and pandemic regarding mutual debt platforms, LB did not conduct inspections, no violations were recorded.