In all comparatively new sectors, especially those dependent on technology, there are winners and losers. Whereas some peer-to-peer (P2P) platforms will be tomorrow’s retail banks, others will fail, as we have already seen with Funding Secure, Collateral and Lendy.
The ones that succeed will be those able to attract both retail and institutional investment, and in turn, they will be the ones who can prove their operational resilience and regulatory compliance.
Against this backdrop, the Financial Conduct Authority's (FCA) requirement that all P2P lenders have a comprehensive wind-down plan (WDP) can be viewed as an opportunity. A WDP includes the need to reflect on the key risks to a business’s viability and sustainability, and consequently highlights where individual firms can to take steps to strengthen their business models and improve operational resilience. The very act of putting a plan in place can reduce the likelihood of needing to use it.
What is required?
All P2P firms are required to have an orderly WDP in place by 9 December, 2019, and detail how it would be funded. They must identify any issues that could be to consumer detriment or cause significant adverse impact to other third parties or financial markets. It should include an analysis of stakeholders (for example customers, investors and suppliers) and what each outcome would mean for them. It must include procedures for decision making and governance in any wind-down scenario (who will do what and when?) and contain an operational analysis and resource assessment, both financial and non-financial.
The FCA requires P2P firms to develop appropriate systems and controls for different wind-down scenarios, to ensure they have thought through how any wind-down process would be funded (whether in-house or out-sourced to a back-up service provider), and that those companies whose wind-down arrangements depend on other firms check that any third-party permissions required are in place.
What are the key elements to include in a WDP?
A comprehensive WDP should look at all aspects of the business. We have identified the following key work streams to help with a firm’s planning.
Both internal and external risks should be considered, identifying key triggers that can be built into any management reporting
Realistic balance sheet and cash flow forecasts for each statutory entity, including different scenarios, should be prepared, showing solvency and liquidity forecasts. It is important to include an analysis of any exit costs
Operations and estate
Supplier arrangements and long-term contracts should be reviewed. Could further outsourcing bring more flexibility? A firm should look at their ability to downscale estate costs in line with activity
Ensure that your plan responds directly to the concerns raised by the FCA. A P2P firm needs to detail who will retain regulated roles in a wind-down period. Management need to check that any third parties or service providers hold the correct FCA authorisations
Employees and resourcing
Consider alternative flexible approaches to deliver resourcing requirements, as staff retention can be challenging. Agree who the wind-down director will be and ensure they will remain in situ for the entire timeline
IT systems and data
Firms need to ensure continued access to critical systems. Consider whether to use existing systems or to migrate to a service providers system. If you are transferring data, are there any GDPR consequences to your wind-down plan?
Tax and legal
A firm should consider the tax implications, both in terms of VAT and corporate tax, and unwind any group tax issues. Ensure that relevant insurance remains in place. A WDP should also consider director responsibilities to both shareholders and creditors
Develop a communications strategy that supports the desired outcomes. Consider the timing and circumstances of when to engage with the FCA
The FCA emphasises that a WDP is different from a business continuity plan (BCP), with the WDP requiring a greater focus on viability and resources.
Practical issues to avoid
It can be challenging for companies to fully understand what a wind-down process might look like or to foresee all viability issues that could be faced. Our experience of working with businesses in wind-down shows us that ‘the devil is in the detail’ and management do not always focus attention in the right areas.
We have identified some common errors and pitfalls to avoid to help P2P firms produce plans that are as realistic as possible.
Management often does not fully consider all the strategic options available to a business
Firms often include unrealistic trading or cash flow assumptions, or do not fully appreciate the magnitude of any exit costs (for example, contract termination fees or professional fees)
Behavioural issues of key stakeholders are often not thought through. Employees might resign, or creditors might decide to enforce security on a loan
Group inter-dependencies are sometimes not considered. For example, a parent company may have a different view on a wind-down approach to the firm
A positive process
Rather than being considered a regulatory exercise, preparing a comprehensive WDP can be of huge value to a P2P firm. By reflecting on the key risks to viability and identifying early warning indicators, management inevitably improves their ability to implement recovery options. Taking time to assess and complete your WDP can therefore be a broad driver of change, highlighting where a new approach could be made to improve existing operational, financial and legal structures.
Enhanced operational resilience brings both increased investor confidence, and better protections and safeguards for customers. Ultimately, robust WDPs should improve the financial viability and long-term sustainability of the sector.
For more information or advice, please contact Chris Laverty, Head of Financial Services Restructuring.