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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 Regulatory Assurance team. He is our AI Assurance, Internet Regulation and Global Algorithm Assurance Leader with 20 years of experience across financial services audit and assurance, regulatory compliance, regulatory investigations and disputes. He has led the development of our assurance practice as it relates to our approach to assisting firms gain confidence over their algorithmic and AI systems and processes. He has a particular sub-sector specialism in the area of algorithmic trading with varied experience supporting firms enhance their governance and control environments, as well as investigate and validate such systems. More recently he has supported and led our work across a number of emerging AI assurance related engagements.
Steve is the Head of ESG Assurance in our Audit and Assurance practice for our UK and North and South Europe partnership. Steve is a chartered accountant and has extensive experience in audit, internal audit and regulatory implementation programs. He has worked with a wide range of companies across all major industries, having developed a thorough technical understanding of products and control practices for non-financial risk management. Steve has significant experience in partnering engagements for the provision of ISAE 3000 / 3410 independent assurance over sustainability information and in relation to the sufficiency of design and operating effectiveness of processes and controls to report on non-financial information.
Gaby is a Senior Manager within Deloitte's Banking & Capital Markets Group, holding over 15 years’ experience spread across investment banks in the Front Office and more recently in professional practice. A senior member of our Algorithm Assurance team, she has dedicated significant time over recent years to understanding and evaluating the evolving algorithmic trading regulatory landscape. Gaby has developed a detailed Point of View around industry expectations for best practice and how to apply these beyond minimum requirements. She uses her experience and deep knowledge in governance, risk management and algorithmic trading controls to support firms with testing of their control framework design and operating effectiveness.