A UK P2P platform, Collateral (UK) Limited, entered administration last week. Although this is not the first UK P2P platform to cease trading, with a loan book of £21 million it is the first with any real scale. Collateral presented a range of pawn and property related borrowers to investors who actively selected opportunities, offering rates of up to 15%.
As of the 28th of February, ‘The Company will not be facilitating any new loans or allowing the transfer of any loan portion’, as read from a statement issued by Gordon Craig of Refresh Recovery who has been appointed as the Administrator. The web platform is currently unavailable to current investors; however, the Administrator is looking for ways in which to open the platform. As technical changes to the platform to limit functionality will have to be made, it is unknown how feasible this will be in the short term.
A full statement can be read here.
For investors through the Collateral platform, the statement does give assurances to investors:
- Subject to the borrower continuing to make payments of interest and capital those will be returned to you in accordance with the Collateral terms and conditions.
- The Company has ring fenced the existing loan book and will look to wind this down over the life of the loans in an appropriate way.
- The Company is reviewing how it might best continue the business, a number of potential routes forward have been identified but these are still being assessed.
- The Company is not insolvent and the issue is stated as a compliance issue.
A member of the P2PIndependent Forum who received contact from the Administrator posted the email of the forum. Part of the email may provide comfort to investors:
- I can confirm however that any monies that are sat on the platform and are not invested are ring fenced in a separate client account and the intention is for these to be returned to all investors after the Administrator has obtained control of the bank account and carried out a reconciliation.’
- Your investment is secured against either an item or property as detailed in your agreement, consequently when the item is disposed of, your investment would be settled.
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This situation has, however, surfaced a number of additional risks, inconveniences and concerns for investors:
- Investors are unable
- to sell their holding on the secondary market
- access un-invested cash
- access the website to view their position
- They are unsure if the run-down of the loan book will be effective
- borrowers may act differently
- it’s unclear how the Administrator will operate the payments, defaults and recoveries
- It’s unclear how the Administrator will be paid and whether this will affect investors
- The Administrator has to reconcile all investor balances and investments. A potential mismatch may exist.
Regulatory requirements stipulate that platforms must have an orderly wind down plan in place in the event of insolvency. All authorised platforms have these plans but how they actually work has never actually been tested. Certainly, if a platform enters administration, investors are due to experience concern and turbulence, but whether significant capital is lost is unknown. Wind down plans should ensure a third party can easily step in and manage borrower payments to investors. However, we’ll have to wait and see how effective this process is. Perhaps there is an opportunity for another P2P platform to acquire the assets and manage the loan book? This would be a good result for the industry as this situation has the potential for wider detrimental effects.
What actually happened?
The administration statement pointed at regulation as the underlying issue:
‘The Company was operating in the belief that it was authorised and regulated by the Financial Conduct Authority under interim permission. It has transpired that this is not the case and consequently the Company has ceased lending ‘.
It’s a bizarre case. If the platform ran out of money or if they couldn’t reach scale this could be understood but a regulation oversight seems difficult to comprehend. It would appear that the platform was not operating under the appropriate permissions and the FCA stepped in to stop the operation. Perhaps this is a signal that the FCA is becoming more active in the sector.
It will be an interesting case study for P2P and hopefully no one will lose significant amounts of money. Investors moving forward can protect themselves in a number of ways:
- Perform in-depth due diligence on the platforms as well as the underlying loans. This includes reviewing the management team and the regulatory permissions of the platforms.
- Reducing the exposure to particular platforms, borrowers and lending sectors through diversification.
- Keeping details of investment records, including balances, payment transfers, loan details and security information offline is good practice. This will help add comfort if a website goes down or in the event of a platform entering administration.
One of the principles of the Orca investment product is that of diversification and a reduction of risk. Investments are not made on smaller, higher risk operators which offer double digit returns. Orca only works with platforms that we know and have performed due diligence on. They are also all fully authorised and regulated by the FCA.