Collateral closure puts living wills into question

THE COLLAPSE of peer-to-peer lender Collateral has shined a spotlight on the role of living wills in the event of a platform failure.

The Financial Conduct Authority (FCA) gained court approval last month to replace Collateral’s administrator Refresh Recovery with its own choice of BDO.

This was despite a leaked administration report by Refresh Recovery that said Collateral’s wind-down policy – or so-called living will – had been “tacitly approved” by the FCA in 2017, stipulating that the insolvency firm would take on the role of administrator if necessary.

Refresh Recovery was appointed after Collateral collapsed in February, when it emerged that the platform had been operating without the requisite regulatory permissions. However, the FCA stepped in a month later to call for its own appointment, claiming that Collateral failed to seek approval for its choice of practitioner.

Read more: FCA reveals it intervened in Collateral administration to protect investors

Trillion Fund chief executive Theresa Burton, who is in the process of selling off the platform’s infrastructure, argued that the Collateral issue has not questioned the strength of living wills as the lender was never fully authorised in the first place.

“It does show the transition challenges of moving a previously unregulated activity  into a regulated one,” Burton added.

“I think a better test of how living wills work will be with those firms who completed full authorisation.

“Anything pre-full authorisation or under interim would not be a reflection of whether the authorisation and ongoing compliance process under the FCA is working effectively. There were a lot of transition issues from interim to full authorisation. We won’t be seeing those again as any new platform cannot operate until fully authorised now.”

The FCA register suggests Collateral operated on interim permissions up until March 2016 and had, according to the Refresh Recovery administration document, applied for full permissions before taking legal advice that it was no longer necessary.

Jonathan Segal, partner at law firm Fox Williams, said the FCA currently provides quite a lot of leeway around living wills and back-up servicers.

“I wouldn’t be surprised if in the next iteration of rules they get tightened up and more prescriptive,” he said.

The FCA did not respond to queries regarding Collateral’s living will, but a statement on the regulator’s website said the firm did not have “any valid authorisation or permission to carry on regulated activities”.

This article featured in the June edition of Peer2Peer Finance News. Click here to read the magazine online.