Peer-to-peer and alternative lenders are emerging as pillars in the finance industry. This innovative sector has experienced rapid growth and provided investor classes with access to new financing opportunities, providing liquidity in sectors where traditional lenders have retracted.
Whilst the majority of these lenders have been successful, the breakneck pace of innovation, combined with competition and market share capture, has left the sector saddled with regulatory non-compliance.
Current market dynamics have created concerns within the Financial Conduct Authority (FCA), which recognises that the Covid-19 pandemic and Brexit (e.g. lockdown restrictions, cross-border supply chain bottlenecks) and broader macro pressures (e.g. price increases and inflationary pressures) have created something of a perfect storm for the sector.
Given these issues, the requirement that all P2P platforms and regulated lenders have an orderly wind-down plan (WDP) in place, is high on the FCA’s radar. These WDPs are designed to safeguard investors and lenders, when borrowers become unable to meet debt obligations. The FCA wrote to the boards of P2P lenders in May warning that none of the platforms reviewed had “adequately identified the triggers that might realistically allow for a solvent wind-down to be invoked”.
In reality, A WDP combined with broader liquidity management will help keep P2P lending platforms financially resilient and highlight potential future issues which may not be currently apparent.
With a high proportion of P2P secured lending focused on providing property and development finance, the impact of Covid-19 and Brexit has been colossal. From retail and commercial tenants being unable to meet rental obligations and the government’s moratorium on tenant evictions, to developers experiencing delays in supply chain disruption and the rising cost of materials and shortage of labour – all have caused development costs to spiral and increased risk exposure to lenders.
When borrowers are unable to meet debt obligations, the risk burden will fall to the lending platform and its investors.
A WDP involves identifying the ‘risk fault lines’ where failure would severely affect the business (e.g. sector-specific risks, the loss of a key revenue driver, ongoing market volatility) and setting a minimum level of liquid and capital resources which, if breached, will trigger a wind-down, as per the FCA’s requirements.
Liquidity planning and monitoring your financial health is also critical for lending platforms, through ongoing preparation of cash flow forecasts, conducting scenario modelling and stress testing. This extended period of market disruption underscores the need for liquidity monitoring. A WDP combined with broader liquidity management will help keep P2P lending platforms financially resilient and highlight potential future issues which may not be currently apparent.
BTG Advisory has wide-ranging experience in assisting lenders and can help construct a WDP and perform an overall health assessment of your business.
Sorca McGeown was fundamental in the running of Amicus Finance whilst it was in administration. Managing a loanbook of £600m, comprising property assets and development sites, McGeown oversaw the finance and liquidity function and provided secured creditors with substantial capital repayments. Amicus Finance was passed back to the directors in August 2021 via a landmark mid-market restructuring plan, the first to be given High Court approval.
If you would like assistance in developing a wind-down plan, discuss the impact of the FCA’s requirements or you would like an informal discussion on your future plans and financial resilience, please do not hesitate to contact Sorca McGeown at [email protected] or Gary Shankland at [email protected].