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Following the collapse of two major Peer-to-peer (P2P) lending platforms in the last year, Lendy and FundingSecure, with a combined loan book of £240 million, the sector has found itself in the midst of increased scrutiny and regulatory change. With institutions such as Funding Circle cutting expected returns after reporting sharp rises in loan defaults,¹ the industry as a whole is under pressure. Despite the numerous disturbances the P2P sector has experienced in the past year, we highlight the collapse of Lendy as it stressed several wider issues in the P2P market.
What happened with Lendy?
Lendy originally introduced themselves into the P2P market in 2012 by providing bridging loans before moving into lending for property development. Lendy quickly saw their market share grow through soaring demand for their high, targeted rates of return and they thrived on the wider development of the market.
Following increasing rates of default, retail lenders began to face losses, eroding the value of Lendy’s loan book and creating liquidity issues for the business. Lendy appealed to the FCA for help after one of its biggest borrowers threatened to sue the company, before going into administration in May 2019 with a loan book of £152 million. At the time of publication, administrators stated that £130 million is still outstanding.²
Wider issues within the P2P market
As Deloitte have previously demonstrated, P2P lending has vast potential to disrupt traditional banking. We highlighted however, that banks hold a powerful competitive advantage, which would only grow if base rates rise.³ With rates rising after record lows, banks’ low-cost funding models have led to the developing P2P lending market, continuing to take greater risks to retain a foothold. This has raised a number of regulatory considerations.
The lack of transparency of P2P platforms has been highlighted by retail lenders who are largely unaware of the idiosyncratic credit risks of the agreements they have entered into. Advertisements promised lenders high rates of return that are only realistic under specific financial circumstances, without clear acknowledgement that the return rates stipulated are merely targets, and not guaranteed. This is particularly important as a recent survey highlighted that approximately half of P2P investors had invested more than double their annual income in such investments.⁴
In the event of loan default, frustrations have been expressed by lenders over the lack of information they receive over the recovery of their loan. Following the collapse of Lendy, concerns regarding the firms’ wind down arrangements were raised, with the administrator forecasting that investors may only receive half of their initial investments, with many losing most, if not all of their capital.⁵
These transparency concerns were covered by the FCA in a recent policy statement, which laid down new rules surrounding loan-based P2P platforms⁶ as well as through a “Dear CEO letter” which emphasises wind down arrangements.
The FCA’s policy statement, released in June 2019, highlighted regulatory changes that all P2P lenders must adhere to before December 2019, prompted by a series of concerns in light of Lendy’s collapse.⁹ The review highlighted scope for increased regulatory scrutiny, where platforms were criticised for not being transparent about the true nature of the risk that lenders faced. This created a belief that the highly marketable high return rates were fixed and guaranteed. The FCA also called on P2P platforms to improve how they provide information on the services that they provide, in order to increase overall transparency of the industry. P2P platforms must state the expected and actual default rates of all P2P agreements, the risk categorisation of loans, and the levels of actual return achieved when a target return rate was stipulated. Platforms must also appropriately disclose that there is no protection of funds under Financial Services Compensation Scheme (FSCS).
As well as the marketing restrictions placed on P2P firms, the policy also introduced a requirement for platforms to assess investors’ knowledge and experience of P2P investments. This involves introducing a requirement that an appropriateness assessment, to assess an investor’s knowledge and experience of P2P investments, be undertaken, where the investor has not received any external advice.
Additionally, through a ‘Dear CEO Letter’ issued in March 2019 and aimed at P2P platforms, the FCA expressed concern that P2P platforms’ wind-down plans were insufficiently adequate and could cause potential harm to consumers. The FCA stated that a review of the viability of their safeguards must be carried out.⁷ In the event of platform collapse, the firms’ must keep an up-to-date resolution manual that would inform lenders about the situation of their funds should a platform become insolvent.⁸ Wind-down plans are important safeguards for platforms, and the FCA policy states that P2P firms must be able to explain to each lender the firm to which the arrangements have been made, and how the lenders’ money will be held. In addition, they found that many platforms did not have appropriate governance in place to develop their wind-down plans.
The policy statement attempts to strike a balance between restricting an emerging part of the lending market, and the need to protect inexperienced retail investors and lenders. These regulations will attempt to create a transparency whereby all parties are aware of the risks that are taken, and how the platforms will deal with collapse.
The previous impetus of the market has further slowed down by regulatory changes and the exit of Landbay and Zopa, two of the most prominent P2P lenders who have both announced changes to their business models and withdrawal from the market.⁹ Landbay will transition towards institutional lending whilst Zopa has just received a £140million capital injection to become a challenger bank in the retail banking space.¹⁰ ¹¹
How Deloitte Can help
Market disturbances, such as that of Lendy and FundingSecure, have highlighted the collection of risks involved in P2P platforms’ strategies, operations and governance models. Amidst the turbulence in this space, Deloitte is well positioned to bring our collective experience together to support market participants in ensuring compliance with new regulatory requirements, outline and manage collective risks according to these requirements, and where necessary, bring our experience with litigation protocols and regulatory investigations to support firms through challenging times.
Mark is a Partner in our Banking & Capital Markets Audit Group in London. He is a leading member of our Benchmarks Assurance & Advisory team and a co-Chair of Deloitte’s Global IBOR Reform Steering Committee. Mark has 16 years’ experience across financial services audit and assurance, regulatory compliance, regulatory investigations and financial services disputes. This experience has provided him with a strong technical understanding of wholesale markets, financial benchmarks and related risk and control frameworks. His experience across the industry with respect to IBOR reform has provided him with a unique perspective on the regulatory reform agenda and he is actively assisting clients in this space at present.
Stephen is a Partner in our Banking & Capital Markets Audit and Assurance Group and has a leadership role in the Firm’s financial benchmark assurance and advisory engagements. He has extensive experience in financial services audit, internal audit, and regulatory projects. He has worked with a range of banking institutions, having developed a thorough technical understanding of banking products and treasury control practices. He sits on a committee of the FICC Markets Standards Board, the Bank of England SONIA Sub Working Group focusing on Communications & Outreach, and Co-Chairs the Deloitte Global LIBOR Transition Steering Committee.
Gabriela is a Senior Manager in the Banking and Capital Markets Audit & Assurance Group and a member of the FS Disputes team. Gabriela joined Deloitte in 2012, following a career in Investment Banking, and has since applied her broad experience and knowledge of derivatives and structured products to a wide range of projects, such as market misconducts, remediation and disputes. Her disputes work includes providing litigation support in a variety of complex expert witness engagements.