Terry Bell, chair of debt advisory firm Bell & Company, talks to Marc Shoffman about the outlook for defaults in the peer-to-peer lending sector…
The coronavirus pandemic has raised concerns of a rise in loan arrears and defaults as businesses and consumers struggle to repay their debts due to lost income.
The peer-to-peer lending sector is not immune to these risks and platforms have been putting plans in place to support borrowers, through forbearance or by signposting struggling borrowers to government support. Debt advisers such as Bell & Company have been seeing an increasing number of cases even before the coronavirus outbreak hit and its chair Terry Bell explains why the P2P lending sector could be particularly vulnerable.
Marc Shoffman: What does Bell & Company do?
Terry Bell: The Bell & Company team is made up of legal professionals, accountants, finance specialists and insolvency experts. We are debt strategists. Our role is to develop a strategy for borrowers specific to the client’s issues. Every case is different. We will work with firms in bankruptcy right up to those with multi-million-pound debts.
We are Financial Conduct Authority regulated. By trade I am an accountant, which is an important function to understand a company’s finances. Then we need legal input. We try to avoid litigation if we can, the world is a bit too litigious but sometimes it is necessary. We have had cases that have taken eight years to resolve.
MS: What is the difference between insolvency practitioners and debt strategist?
TB: We are not insolvency practitioners. There is an important distinction as they are appointed by the court when looking at liquidations or individual voluntary arrangements. It is a formal statute led process and they can be pretty rigid in their approach. Our role is to look at every facet of the company and see how we can help.
MS: What work do you do in the P2P sector?
TB: P2P has come in slowly on stream. We were seeing more cases coming onto the radar even before the coronavirus outbreak. P2P lenders did an excellent job filing the gap for small- and medium-sized enterprises (SMEs) when banks hid during the financial crisis. But as it has evolved, problems have started to come out and that has been exacerbated by Covid-19.
MS: How do you get paid?
TB: We always give independent insolvency advice. We typically work on retainer and success fee and never take a case we wouldn’t have a chance on. The bulk of the fee is in how much success we get.
MS: What trends are you seeing in P2P loan insolvencies?
TB: The economy wasn’t that great even before the outbreak. The world was awash with cash and low interest rates but the outbreak has shown many businesses never really recovered from the 2008 crash and even steady professions are getting hit. Very few seem to have had cash put away to tide them over.
P2P has certain criteria. That is fine when everything is going swimmingly. There has been a strong reliance on personal guarantees. The model is starting to struggle as you need the cash inflow from investors. There are remedies, they need to rewrite their books with the government. A lot of these loans are a maximum of five years long and a meaty amount, while in comparison a bank would give you longer to repay such as 10 or 15 years. This creates a lot of risk in a P2P platform’s loanbook. The government should help turn P2P loans into coronavirus business interruption scheme loans or bounce back loans. If you have a loanbook that worked in a certain economy that is ok but this is a totally different situation and the government should help underwrite some of these.
P2P lenders need to take a view on this as going through the legal process of recovering bad loans doesn’t always get them their money back.
MS: Are there common mistakes being made in P2P loan due diligence?
TB: The due diligence wasn’t as strong as it should be in a lot of the earlier cases. Platforms had the ability to shovel the money out the door and it was more that they were brokers rather than lenders. That will come back to bite them. A lot of lenders need to revisit their due diligence, which is a huge task especially if there is a massive reliance on personal guarantees. A lot haven’t geared up for these cases and just rely on chasing the debt.
MS: How are P2P platforms treating borrowers?
TB: At the moment, a lot of P2P lenders are going straight for litigation if you don’t adhere with what they want to do. Sometimes their position isn’t correct. I am not a lover of the legal profession but when they get a grip on the cases the agenda changes, up go the fees and away we go. Each lender is different.
The FCA has asked all loan providers to provide payment holidays but suddenly if you can’t repay some will want a charge on your house. This may end up costing a P2P lender more as if a borrower goes bankrupt a bankruptcy trustee could unravel a transaction such as stopping the P2P lender taking a security on a house, so all creditors instead have an equal share. That takes more management time and resources.
What platforms need is a period of reflection. We are telling clients to make sure their financials are up to speed. There has to be a dialogue. P2P lenders and borrowers need to get their affairs in order. It needs to be a human interaction, not just tearing straight to litigation.
MS: How can P2P borrowers deal with lenders chasing loans?
TB: As a businessperson you should check the validity of your business in a new environment. If you think it is valid going forward, then work out what you can and can’t do. A lot don’t know where they are in terms of finances. We had one borrower with six P2P loans secured by a personal guarantee, they had legal demands flying in, and their home life wasn’t great. They were really struggling and feared bankruptcy but sometimes that is the best option as it turns several problems into one.
There is only one trustee to negotiate with compared with a swathe of proceedings from P2P lenders. Most are very aggressive, and they will get worse as they try to protect their position. We will also try to work on debt repayment plans and ask for any leeway. Borrowers need to work out what they have got financially, what is at risk and how they are going to deal with it. You have to work out what is the right price for your financial survival.
MS: Are P2P lenders mis-selling loans?
TB: There was an element of mis-selling in a minority of cases. Unfortunately, standards drop when it is such a frothy market and some borrowers abuse that. It is not just the platform’s fault as borrowers aren’t always what they are cracked up to be. Some P2P lenders were too quick to do personal guarantees in the early days that end up not being worth as much as initially thought. Many tried to get money out as fast as they could so were a soft touch in the beginnings of this sector. There are always arguments that clients shouldn’t have borrowed and also that platforms should not have lent.
The new FCA regulations have improved things. There is more stringent lending going on. However, a lot of the early problems are only coming through now though due to when the early loans were first taken and are now maturing. Furthermore, the Covid-19 backdrop brings everything into play and creates more risks.