Written by Simon Rogerson
On the whole companies like to talk about how well they’re doing.
Press releases, presentations and general updates tend to celebrate successes rather than explain failures. All of which creates a slightly one-sided, rose-tinted view of an organisation.
I’m not sure this approach is right. I think everyone understands that in business (as in life) things don’t always go to plan. And just as you can with people, you can learn a lot about a company’s character and its values by seeing how it responds when things go wrong.
Are you the kind of company which says ‘sorry, but’? Or which releases bad news on days when all hell has broken loose, in the hope that no one will see? Or are you the kind of company which takes ownership of the problem and explains what you’re going to do about it?
To me, the last one is the only viable option. The world is now so connected and so transparent that customers can see straight through you – both what you do and, as importantly, how you do it. Thanks to technology (particularly social media) the power is shifting back to its rightful owner – the customer.
In 20 or 30-years’ time when I look back on what Octopus has built, I hope that people will recognise that we always tried to do the right thing, even when no one was watching. If the last two decades have taught me anything it’s that the secret to success in business is simply about how you make your customers feel (particularly when things go wrong). It’s with this in mind that I wanted to write today’s blog.
The importance of action
I wanted to write about our two biggest product failures over the last 21 years – Octopus Choice and a few tranches of the Octopus Enterprise Investment Scheme (EIS). Both these products went wrong, causing a lot of pain to hundreds of clients and their financial advisers, for which we’re very sorry. And while an apology is important, actions are as well. I hope that the way we’ve chosen to respond will give you some insight into the kind of company we’re building.
The impact of Covid on our peer-to-peer lending platform
I’ll start with Octopus Choice. Octopus Choice was an award-winning Peer to Peer (P2P) lending platform. It matched investors (our clients) with borrowers (in our case, buy-to-let property developers). The product was performing well, delivering exactly what it said it would (to both borrowers and] investors). Unfortunately, when Covid hit, liquidity in the P2P market dried up almost overnight. This wasn’t something we could have predicted or modelled but it clearly happened. Within a few weeks we had to stop trading on the platform which meant that investors were unable to access the £270m they had invested in the product. We learned very quickly about the problems this caused these investors and their financial advisers.
We took a few actions. First, we communicated as clearly and as frequently as we could. We pulled people in from around the business so we could run webinars, call clients proactively and send out monthly emails to advisers and their clients explaining the situation. Secondly, we used our balance sheet to create a hardship fund for any severe situations where client needed to access funding quickly. Thirdly, we worked hard to return capital back to these investors, without compromising their returns. So far, we’ve returned £200m of the £270m and we’re confident that the other £70m will follow over the next year or so. We’ve achieved this with no loss of interest or capital for any investor.
Most importantly, though, we immediately removed the Octopus platform fee (our source of revenue) from the product. This fee, equivalent to a bit less than 2 percent per year, went directly to our investors, boosting their returns. We did this not because we had to but because we thought it was the right thing to do. This gesture of goodwill – in recognition of the extreme situation and the fact that investors have had to wait to get their money back – will cost Octopus about £5m. I’d make the same decision again in a heartbeat.
Exceptional circumstances and the gesture of goodwill
Octopus EIS was even more painful for investors. Those of you who know Octopus will know that we are one of the largest and most active investors in energy projects in the UK. Over the last decade we’ve successfully invested billions of pounds into hundreds of projects. Up until about five years ago (before the legislation was changed) we were able to make some of these investments using the EIS legislation.
In fact, we managed 26 tranches of Octopus EIS focused on energy investments, raising more than £500m. 22 of these tranches performed broadly as expected. Where things went wrong, however, were the other four tranches which we invested into reserve power and Italian solar.
Performance was undeniably poor. This was down to two main factors. The first was an industry consultation which led to a change in the legislation around reserve power, causing a significant shortfall in the expected revenues from these assets. The second was a deterioration in the market for Italian solar assets.
These two factors meant that even after factoring in the tax benefits associated with EIS investments clients lost a meaningful portion of their investment. While our interests were aligned with our clients (we structured the product so that we were only entitled to our annual management charge if we generated a positive return for our clients), we thought it right to go one step further and so we made a goodwill payment of £3m to the worst affected investors.
This goodwill payment wasn’t about the performance of these tranches but rather the exceptional circumstances that led to the underperformance. A bit like Covid impacting Octopus Choice, no one foresaw the legislative or market changes that impacted performance so severely. But it still happened and it felt right that Octopus shared in the pain felt by these investors.
Doing the right thing
The experience for both sets of investors, particularly those in our EIS tranches, is bitterly disappointing. Advisers, and their clients, entrusted us with their money and things went wrong. I hope (and believe) that Octopus has behaved in a way that we can be proud of. Our goodwill payments across these two products – totalling £8m – felt like the right thing to do. It wasn’t a regulatory decision or obligation, it’s a choice we made. It was effectively a human decision based off how we think businesses should behave.
If you have any comments, feedback or if you think there’s something you think we should have done differently, you can reach me at [email protected].