Frank Wessely, partner at business advisory firm Quantuma, explains why the peer-to-peer lending industry should be thinking more seriously about platform closures in the wake of Collateral’s collapse
The outcome for investors in Collateral loans remains uncertain. BDO will be reporting as to their findings and strategy for working out or selling the loanbook but there is currently no indication as to how long that will take. A further issue for investors concerns how the fees of BDO and their lawyers will be paid. Whilst it is possible that costs of the court hearing have been awarded against the directors of Collateral, their capacity to pay these costs is not known.
Additionally, the recent developments in the separate insolvency of Beaufort Securities (not a P2P platform but it is a regulated company) may also be a cause of worry. In that case, which is ongoing as we speak, the administrators, PwC, have suggested that due to the paucity of available assets, they should be able to utilise client monies towards the professional costs of the administration. There could be a risk of similar circumstances arising here. Hopefully the Collateral case will begin to set down ground rules and reliable precedents for the sector regarding the insolvent close-down of a distressed P2P platform.
It is still early days in the Collateral collapse but a further worry for investors has been the announcement from replacement administrators BDO that investors will be treated as creditors rather than lenders with ring-fenced investments and/or uninvested cash balances. This is potentially the worst news possible as the consequences are that they will rank equally with all other unsecured creditors of the insolvent platform. This is likely to include HMRC, utilities, trade suppliers, landlords and others such as banks. The prospects for recovery will depend entirely on the success of the administrators in realising the outstanding loans and that is likely to be a protracted affair.
Contrast this with the recent collapse of the securities firm Beaufort Securities which failed in March. Whilst it is not a P2P platform, the issue of the safety of client funds in the regulated sectors has been thrust even more into the spotlight with some 16,000 investors unable to withdraw their cash. In that case the administrators, PwC, initially predicted that the bill for sorting out the financial mess would be as high as £100m. Subsequently, this figure was reviewed by PwC and reduced to £55m but the fuss centres around the ability of PwC to part-utilise client monies towards their bill and those of lawyers. This also brings into question the issue that savings and investments are not as safe as first thought. The ability to use client monies towards the payment of administration costs stems from Rule 135 of the Investment Bank Special Administration (England and Wales) Rules 2011 which were introduced after the collapse of Lehman Brothers.
In that instance investors whose individual balances exceeded the £50,000 limit of the Financial Services Compensation Scheme (FSCS) are most at risk. Getting back to P2P platforms, the position of investors is of course not protected by the FSCS, but the future collapse of even a properly regulated platform could mean that client monies could be similarly at risk. This raises the wider backdrop of failure within the P2P sector which up to know has not received much publicity given that very few platforms have actually failed.
Now with the high-profile insolvency of Collateral, the topic is necessarily on the industry agenda. The Cambridge Centre for Alternative Finance has for the first time included questions in its annual survey around the risk of defaults and platform collapse. The sector is therefore having to take the issue much more seriously, as opposed to a risk that might only arise in the throes of a recession. This in turn might lead to the Financial Conduct Authority deciding to review the whole concept of wind down plans which up to now have only catered for the closure of a platform on a solvent basis managed strategically with management all pulling in the same direction. In an insolvent scenario, this just does not happen and the stresses on all involved are intense.