Mark Turner, managing director, regulatory consulting, and Geoff Bouchier, managing director, restructuring advisory, at Duff & Phelps, explain how Covid-19 could upend the peer-to-peer industry, and why senior managers may need to revisit their wind-down plans
Last December, the Financial Conduct Authority (FCA) formally introduced a raft of new regulations for the peer-to-peer sector, alongside the Senior Managers and Certification Regime (SMCR) which makes executives more accountable for platform failures.
Many platforms spent months working closely with professional advisors like Duff & Phelps to come up with appropriate plans, in the unlikely event that their business follows some of the recent high-profile platform collapses.
Yet just a few months later, a new challenge has emerged in the form of Covid-19. Suddenly the entire economy is at risk, and platforms are being forced to reckon with the very real possibility that they may need to visit their wind-down plans sooner than expected.
“Coronavirus is causing significant and increasing disruption across all business sectors, including P2P platforms,” says Geoff Bouchier, managing director, restructuring advisory, at Duff & Phelps.
“Success for many platforms is dependent upon the attraction of retail investors to fund loans, principally to small- and medium-sized enterprises (SMEs). The question then becomes whether investors still have confidence in lending to SMEs in the present uncertain economic environment.
“If the investors retreat, then the platforms will lose revenue whilst still being faced with fixed overheads, eroding their capital reserves.”
In this scenario, and in accordance with the new rules, it will be essential that platforms hold sufficient ‘ring-fenced’ collateral to manage a possible wind-down. However, uncertainty remains as to how this collateral is to be held in practice. But collateral is not enough.
“Ideally, platforms should be periodically reviewing and reassessing the appropriateness of their wind-down plans in light of present trading conditions,” says Bouchier.
“Prolonged adverse market conditions could see numerous platforms needing to assess their ongoing viability.”
This is particularly important for senior managers. Under SMCR regulations, senior managers are ultimately accountable for their decisions and may be asked questions by the FCA as to why certain decisions were made.
“In the current climate, where decisions might be far reaching and need to be made quickly, senior managers need to ensure that they capture their rationale,” says Mark Turner, managing director, regulatory consulting at Duff & Phelps.
“It is possible, particularly where customer detriment occurs, which is more likely under current market conditions, that the FCA may ask questions of senior managers even after they are no longer in that role—for instance, where the platform goes into administration or where the senior manager resigns.
“FCA action can ultimately include fines and restrictions on future roles that can be held by individuals within the financial services industry.”
“What we are seeing here is a market shock,” Turner explains. “The market itself is being disrupted through the unexpected loan default and in many instances failure of borrowers, whilst at the same time investors are seeking the return of their investment, so this is not a straightforward scenario.”
The P2P sector is not going to be immune to the effects of Covid-19, but it can prepare for the worst. And the first step for any concerned manager is to seek expert advice.
This article originally appeared in the print issue of Peer2Peer Finance News, which is available through subscription.