WHEN Collateral collapsed at the end of February 2018, it quickly emerged that the peer-to-peer lender had been operating without the correct regulatory permissions.
“The company was operating in the belief that it was authorised and regulated by the Financial Conduct Authority (FCA) under interim permission,” said a letter from then-administrator Refresh Recovery. “It has transpired that this is not the case and consequently the company has ceased lending.”
As Collateral was unregulated, it did not necessarily adhere to the FCA’s requirements, which naturally had an impact on the administration process when considering aspects such as wind-down plans.
Un-picking Collateral’s loanbook and attempting to recover investors’ funds has been an arduous process that has taken over a year.
In contrast, when Lendy collapsed last month, it was fully authorised by the FCA. So should this mean better news for the property platform’s investors?
“I think there is scope for investors to be reassured by FCA authorisation as there are black and white rules that Lendy had to follow,” Frank Wessely, partner at Quantuma, told Peer2Peer Finance News.
“It appears that Collateral was to a large degree ‘smoke and mirrors’ – whether that was intentional remains to be seen.”
However, Wessely noted that investors might have unrealistic expectations of the protection that FCA approval provides.
“I expect that investors are looking for reassurance and leadership from the FCA in the area of regulation, after the collapse of [mini-bond provider] London Capital & Finance, Collateral and Lendy,” he said.
“However, what investors expect and want and what the FCA can provide might be two different things.
“I think non-sophisticated investors place too high a regard on FCA authorisation, expecting benefits and a level of protection that just aren’t there.
“We need clear messages on what FCA authorisation actually covers and what it means for investors, so that there is a greater appreciation of associated risks.”
Lendy’s administrator RSM will be working to recover investors’ funds, but it has a challenge on its hands despite FCA approval. Incomplete property development projects are tricky to value and require a new developer to come on board to bring them to fruition.
“It’s about the quality of the security and the underlying asset,” added Wessely. “With incomplete development projects, the value only really comes through at the end and when it’s sold.
“Another developer could come in to finish an incomplete project, but that adds on an extra tranche of costs.
“I think it’s going to take some considerable time until RSM can give clarity to investors. It’s too early to say in terms of recovery of investors’ funds.”
The FCA released its updated rules for the sector earlier this week, after a lengthy post-implementation review. It is requiring platforms to introduce categorisation and appropriateness tests for investors. Some industry sources have suggested that Lendy’s recent collapse invited a more stringent approach from the watchdog.