Insolvency and restructuring specialist Frank Wessely, partner at Quantuma, explains why there is still so much work to be done on platform wind-downs
In the weeks and months leading up to 9 December 2019, peer-to-peer lending platforms raced to implement a slew of regulatory changes – most notably, the requirement for a suitable wind-down plan to be in place in case the platform enters into an orderly wind-down, or becomes insolvent. But insolvency specialist Frank Wessely, partner at Quantuma, believes that the current rules are merely a starting point for a complex and constantly evolving issue which is often misunderstood.
“The industry has little precedent of how wind-downs play out in practice,” he says. “Even though we have only seen three platform failures to date, there are significant differences in each one.” According to Wessely, there is no ‘one-size-fits-all’ option when it comes to wind-down plans, and it doesn’t help that there is a lot of misinformation around the finer details of the wind-down process.
A platform might become insolvent, but that does not automatically mean it will go into administration, which is only one of the statutory procedures available to a distressed business. However, the choices made by the platform’s board at this stage can have very different consequences for investors.
“Insolvency is essentially the financial state of the business,” explains Wessely. “In simple terms that means it can’t afford to pay its bills as and when they fall due, or its liabilities exceed its assets. “Whereas administration is one of the statutory processes that is available to an insolvent company and it has a particular hierarchy of processes which initially are either to save the company so it gets back on its feet, achieving a better result than a liquidation, or to realise assets for the secured and preferential creditors.” In the world of alternative finance, the majority of wind-downs involve the sale of the business and the realisation of the assets.
But even within this administration process, there can be plenty of variation. “Administrators don’t just have an obligation to the client (the platform),” says Wessely. “They have a very broad set and scope of obligations to the complete range of stakeholders.” These stakeholders can include the platform’s directors and founders, as well as investors and creditors who are left out of pocket.
The recent Lendy administration has cast a spotlight on the confusion between the terms ‘investors’ and ‘creditors’ – under the current rules, creditors are repaid from the general pot of assets after any secured creditors have been satisfied, while investors could be reliant on the recovery proceeds from the specific loans which they have invested in.
Retail investors might be classified as either creditors or investors, depending on the type of loans they are funding, and the wording of their investor contracts. “It should be much clearer at the outset how an investor would be treated,” says Wessely. “On some platforms, you might have different types of loan contracts with different borrowers so you could have some investors being treated as investors and some investors being treated as creditors all under the same platform.”
This is just one area where more clarity is needed in order to protect P2P investors and ensure that all future platform wind-downs run smoothly. Quantuma is one of a small number of advisory firms which has Financial Conduct Authority approval to advise investors on P2P agreements, and Wessely says that while the new regulations will help improve the professionalism of the industry, wind-down plans need to be “a living, breathing document” which can be updated as platforms develop and refine their processes, and also when the regulations change.
The regulations may still be in their infancy, but there is clearly a long way to go before wind-down processes are fully understood.