As insolvency risks grow, Frank Wessely, partner at Quantuma, explains why platforms have to take a proactive approach to their theoretical wind-down processes…
NOBODY WANTS TO THINK about what would happen if their business failed. Yet every day, multiple UK businesses file for insolvency. This trend has even reached the peer-to-peer lending space, the latest example being the collapse of Collateral last year.
Business advisory firm Quantuma has witnessed countless business insolvencies, and partner Frank Wessely has one piece of advice for all firms, no matter how well they may be doing: be proactive.
“Platforms generally fall into two camps, the proactive and reactive,” says Wessely. “Proactive processes start with the quality of the credit underwriting and due diligence that platforms undertake when they are considering a new loan application from a borrower, whether that’s an individual or a business.
“If the credit underwriting or the due diligence is sloppy, further on down the line the likelihood of financial distress or an insolvency event occurring is much greater.”
By contrast, reactive processes can only really begin after the platform has experienced a ‘worstcase scenario’ such as a significant loan becoming distressed, at which point it may be too late to take restorative action.
Fortunately, Wessely has noticed a shift in attitudes. Although seeking advice from an insolvency specialist still carries a degree of stigma in the eyes of some, many P2P lenders are becoming more aware of the benefits of engaging an insolvency practitioner for specific projects, such as building a practical winddown plan (WDP), even if they never need to use it.
“I’m starting to see that platforms are engaging more with taking a proactive approach to addressing the regulatory and commercial aspects associated with insolvency issues both in relation to borrower distressed debt and potential platform insolvency,” says Wessely.
“There is a continuing evolution and developing professionalism among platforms that I’m seeing. Part of that is driven by the acceptance or willingness to get to grip with formulating practical WDPs.”
From a practical point of view, platform wind-downs should be relatively straightforward, at least according to Wessely. Any P2P WDP should include provisions which protect creditors’ interests before shareholders, as well as creating an administrative system that facilitates the transfer of executive control and can be easily handed over to the insolvency practitioner, with minimal disruption to the platform’s operations. In an insolvency scenario, the sooner this can be done, the easier it will be to manage a wind-down, no matter how chaotic things may become.
And there is another reason why P2P platforms should embrace the proactive approach. Late last year, the Financial Conduct Authority (FCA) published a consultation paper which outlined some views on the future regulation of the P2P sector. One of the most widely-discussed points was the suggestion that all P2P platforms should be able to show evidence of a practical WDP.
In fact, the review envisages it as a requirement that a platform has obtained advice from an insolvency practitioner in formulating its WDP.
“Our skillset is such that there is a natural complement supporting the interests of platforms,” he says. “I’m sure one will see differing degrees of progress among some platforms who might think that insolvency represents the end of their business, but that shouldn’t be the case at all.
“The culture at the heart of insolvency specialists is one of business rescue. That’s the primary concern.”