PEER-TO-PEER lenders have been warned to choose their wind-down options carefully so they don’t get caught out by Financial Conduct Authority (FCA) guidance.
Under the new FCA regulations, firms must notify investors of their wind-down arrangements and inform them if it will be managed by themselves or by a named third party.
Another option suggested by the new rules is that platforms could hold sufficient collateral to manage a
wind-down that is “ringfenced in the event of the firm’s insolvency.”
But legal experts and insolvency practitioners warn this approach could be tricky.
Dena Chadderton, partner at compliance consultancy Adempi, said the most obvious method to follow that guidance prior to the rule change would have been to put the funds in a separate bank account from the main business bank account.
“But the key is that account would still belong to the firm so would not be ringfenced in insolvency,” she said.
Before the new rules were introduced in December the guidance suggested firms hold collateral in a segregated account but Chadderton said adding the line about ensuring it is ring-fenced from insolvency has made it harder to follow.
Frank Wessely, partner at insolvency firm Quantuma, suggested firms would need to create a separate trust, legal structure or company if they wanted to ring-fence funds but said issues remain with this approach.
“The source of the collateral funds and timing of the transaction will require careful consideration,” he said.
“In the event that such funds were set aside from company resources and then within a relatively short period, up to two years, the platform failed, was placed into insolvency and the company’s creditors suffered financially as a result, the insolvency practitioner would have the ability to potentially challenge the arrangement as a possible voidable transaction.
“Additionally, the conduct of the directors would be reviewed which could possibly expose them to some risk.”
Mark Turner, managing director of compliance for consultants Duff & Phelps, said firms using this approach would have to ensure the failure of the platform doesn’t result in whoever is holding the ring-fenced account failing.
“It is important to remember there is a difference between guidance and rules, this is just a suggestion,” he said.
“This approach is expensive as it involves stripping capital out of the firm.”
P2P lenders appear to have adopted different approaches to their winddown plans. Funding Circle, Zopa and
Lending Works all say they would transfer operation of the platform and loans to a third party – Target Servicing – in the event of a wind-down, which could charge an additional fee to cover its costs.
Assetz Capital said it has a standby plan to repay lenders and close the platform, which would be managed by RSM Restructuring Advisory in the event of a wind-down. It said the income it receives under the loan agreements is “more than sufficient to cover the expected costs of winding down the loanbook”.
Meanwhile, RateSetter has said it will manage a wind-down itself but investors may have to pay a fee to fund the costs of closing the business.