With historically low interest rates, a decreased appetite by high street lenders to lend to SMEs following the financial crisis and an opportunity to use technology to gain an advantage over traditional processes, the rise of peer-to-peer (P2P) platforms has not been surprising.
For retail investors, these platforms can offer handsome returns and transparency during the lifecycle of a loan and have provided an alternative way to put money to work.
However, the recent demise of P2P property platform Lendy has raised concerns about how the model operated in that case.
After the collapse of Lendy, it is understood that the Financial Conduct Authority (FCA) wrote to platforms warning them to fix poor practices or face a crackdown, the concern being that investors are taking on greater risk than they realise.
It is also understood that the FCA has started investigations, believing that some platforms are making changes to business models without notification, driven by the pressure to be profitable, with consequences for platform stability.
In May 2019, RSM was appointed as administrator of three Lendy companies. RSM’s proposals set out an interesting set of circumstances preceding the companies’ demise.
In June 2017, Lendy’s loan book peaked at £228m but by Q4 2017, as the level of non-performing loans steadily increased, confidence in the brand began to decrease along with investment in the platform.
This decrease led to Lendy reportedly being unable to fully finance many of its development loans, which in turn led to disputes with borrowers, a higher level of non-performing loans and a continued decline in investment and fees.
P2P investors will be paying attention to the Lendy administration, specifically the outcome of the investors’ claims in the estate for Lendy’s purported breach of obligations and duties. This will be especially relevant if the underlying secured assets are insufficient and investors face a shortfall.
The FCA also confirmed its intention earlier this year to introduce new rules to ensure platforms have adequate wind-down procedures if they fail.
Additional rules will also cover the corporate governance, systems and controls that platforms need to have in place; assessments of investors’ knowledge of and experience with P2P investments; and the minimum information that P2P platforms must provide to investors. These changes must be implemented by 9 December 2019.
For a market that has grown exponentially during relatively prosperous times, it may be that the P2P sector faces its first test in more challenging conditions.
The P2P platforms have yet to weather a turbulent economic cycle and further distress may emerge if the economy contracts again. The stakeholder management required to deal with a portfolio of separate loans in the event of further platform failure will be tricky to navigate in restructuring or insolvency scenarios, notwithstanding the FCA’s requirements.
Simon Thomas is a partner and Emily Lockhart is an associate in Goodwin’s financial restructuring practice