The failure of peer-to-peer platform, Lendy, gives other loan-based platforms and investors/lenders pause for thought, to ensure the risks are fully understood.
Lendy collapsed with more than £160 million of outstanding loans. This raises a number of fundamental questions, which need to be reflected on by the parties involved.
The responsibilities of the retail investor (or lender)
Investors need to properly assess and understand the risk of lending to particular borrowers and, given the absence of protection by the Financial Services Compensation Scheme (FSCS), the consequence of the failure of the platform.
A number of platforms act as an agent of the investor and the platform is not a direct counterparty to the loan with the investor or borrower. In this instance, investors need to understand that they are actually a lender.
This involves understanding the cash profile of repayments from the borrower and that capital and interest may only be available on redemption of the loan, which means they are at risk for non-performance of the borrower.
The investor also needs to ensure it has adequate rights and access to information on the status of borrowers, particularly where non-performance exists. They also need to ask if there is an ability to contribute to the resolution strategy given the lender bears the risk and rewards in respect of recovery actions.
Lenders should understand what and how the platform company, security holding company, provision reserve company and other service companies in the regulated group interact and provide services to investors and borrowers.
All these group companies need to be adequately funded and, even if there are increasing levels of non-performing loans, the operational structure should support continued servicing of borrowers and ensure that investors are repaid related principal and interest. This needs to be considered in light of your lending ie: being a small element of a larger loan with many other lenders.
The provision reserve is not a ‘get out of jail card’ for non-performance of borrowers and the platform company needs to be able to access that reserve for operational payments.
The responsibilities of the platform company
Considering recent events, legal and operating models of platform companies need to be resilient to non-performance of borrowers, ensuring the viability of the platform.
A practical wind down plan (resolution planning) should also be revisited at regular intervals.
Client monies should be closely managed, with appropriate procedures and reconciliations in place to prevent co-mingling with operational funds. A manager of sufficient skill and authority must ensure compliance of CASS Rules.
The platform needs to develop a robust approach towards diligence of borrowers with appropriate governance, oversight and monitoring. Importantly, information on borrower performance should be regularly updated and shared with investors/lenders to allow investors/lenders to understand at any point in time the risk associated with borrowing.
Good governance to control functions, director’s roles and common roles across the group will ensure suitability and independence, allowing for appropriate actions to be taken if viability or operational distress threatens failure of the platform.
Promotional material should also meet the standards required to be clear and not confusing to investors or borrowers.
In short now is the time to take stock and ensure that as an investor you are fully aware of the risk-reward proposition. For platform companies, your aim is towards longer-term sustainability, which is dependent on good viability controls, governance and communication. If in doubt seek the support of appropriate advisors and the regulator, or contact Chris Laverty for more information.
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