It’s hard to believe that it has only been seven months since the introduction of new regulations requiring all peer-to-peer lenders to have detailed wind-down plans.
Few would have thought that just a few months later, the sector would be facing its toughest test to date – a test that may well result in a few unexpected wind-downs.
The coronavirus pandemic took everyone by surprise, and its impact will be felt for many years to come. Already, the pandemic and subsequent lockdown has taken its toll on small- and medium-sized enterprises (SMEs), property development, property investment, and the consumer credit market. And of course, these just happen to be four areas which are served by the P2P market.
Rising defaults are expected, as small business-owners are forced to shutter or restructure, and investor caution could result in a slowdown of investment into P2P platforms.
Each of these scenarios could result in real harm being done to P2P platforms. Luckily, most platforms have proven quick to adapt to the new normal of the post-pandemic world, and to date the P2P world has been doing an impressive job of protecting investor money while supporting beleaguered borrowers.
But in off-record calls with a number of advisers and administrators, Peer2Peer Finance News has learned that some platforms are weighing their options, and even considering some form of a managed wind-down.
This could involve a partial wind-down of an under-performing product, or a restructuring where the platform switches its focus towards a different income stream. Some borrowers may be moved to other platforms, and some investors may be asked to accept lower target returns, or longer term times.
Whatever happens in the P2P sector, it is extremely unlikely that we will see another Lendy-sized platform failure. In the year-and-a-bit since Lendy went under, there has been a regulatory overhaul of the P2P sector. The Financial Conduct Authority (FCA) has acted swiftly to safeguard any future P2P investors from financial harm, and this strategy included the introduction of stringent wind-down measures last year.
At the time, these regulations represented an enormous investment of time, energy, and money from the platforms. But in hindsight, the FCA’s insistence that each platform has a pre-determined wind-down plan makes perfect sense. With their ‘worst-case scenario’ already mapped out, struggling platforms can turn their attention towards alternative options, such as placing restrictions on borrowing and lending activity; or seeking institutional backing.
Read more: Coronavirus could lead to platform closures
But it is worth remembering that when it comes to regulation, there is no fixed end point. Regulations evolve to meet the challenges of the time, and the P2P sector has already shown itself to be capable of taking quick and meaningful action when needed. Last year’s regulations were implemented with relatively little fuss, in a relatively short period of time. The new challenge will be to update and expand on these wind-down plans as a recession looms on the horizon.
Hopefully, the very existence of the FCA-approved wind-down plans will help prevent a few unnecessary platform closures, and ensure that the P2P sector continues to thrive in 2020 and beyond.