The mere mention of such malpractice is enough to send shivers down the spines of established industry players – many of whom are acutely aware of the reputational damage that such stories can entail.
No surprise, then, that the P2P sector has been frantic to discover the impetus behind Anthony Hilton of the Evening Standard’s recent headline: “Peer-to-peer lending under pressure as rumours of a failure fly”. No news on that front yet, I’m afraid. Despite Hilton’s claims that the sector has been “buzzing” with rumours about a failure, our conversations with key industry figures have thrown up nothing but silence and hearsay.
But what would happen if a platform were to fail? The full authorisation phase for peer-to-peer lending is now looming into view. The FCA will require all fully licensed operators to ensure the segregation of client funds, to hold a certain level of reserve capital on their balance sheets at all times, and to plan for the transferral of outstanding loans in the event of failure.
Our case studies for platform failure in the UK are limited, but varied.
A P2P student lending offering by the name of GraduRates decided to close down operations in December 2014. The reasonably small loan book of the platform was then absorbed by RateSetter, in order to ensure that GraduRates’ customer base enjoyed an uninterrupted service.
Rather less rosy was thefoldingofBeTheLenderinAugust2014. Be The Lender was a peer-to-peer platform with a focus on lending to small businesses. The platform offered high returns to its investors, and claimed also to offer “market leading security to lenders providing strong protection from bad debts”. The firm operated under “Interim Permission”, granted by the FCA.
Be The Lender no longer exists. In August of 2014, the platform announced that it had suspended trading. Its investors received the following message:
“If you have received repayment notification emails, then there may be a balance owing to you. Please login to your account to see your dashboard and withdraw any available balance.”
Jennifer Lodge was one of the recipients of this email. She had invested £5k into a small business via the Be The Lender platform, lured by the promise of a 12% per annum yield. This product was sold to Jennifer as the platform’s “low risk” option. Jennifer signed up to a 3 year commitment, with monthly repayments. For 7 or 8 months, these repayments came like clockwork. And then they stopped.
Left in the lurch, Jennifer scrambled around for answers. She called the platform, but was unable to discover the whereabouts of her missing funds.
What had happened?
Be The Lender launched 14th August 2013. The platform was wholly owned by the People 2 People (P2P) Group, which offered introducers and customers a range of financial services products. Mark Butterwick was CEO of the People 2 People Group. The company was composed of 7 separate operations.
In March of 2014, People 2 People issued a notice via the High Court stating that it was likely to become unable to pay its debts. The organization went into administration, deciding that “it would be in the best interest of the company and its creditors for the director to file for administration”. At that time People 2 People employed upwards of 100 people – some of which would have undoubtedly worked for the peer-to-peer platform Be The Lender.
Jennifer had been working for a branch of the People 2 People Group by the name of Quickdox. It was her job to coordinate the movements of PPI compensation field agents, who would work door-to-door in an effort to sell reimbursement services. According to Jennifer, many of these field agents also had money invested in the Be The Lender platform.
To make matters all the more confusing, the business that Jennifer’s £5k had gone towards funding was none other than Quickdox, the very same company that she worked for, and which soon entered into administration along with the rest of the People 2 People Group. So to summarise the situation: Jennifer worked for Quickdox, which was part of the People 2 People Group. Jennifer lent money to a business via Be The Lender, which was also part of the People 2 People Group. The recipient of the loan was Quickdox. When it all went wrong, Jennifer lost a large chunk of her money.
The timing of the first missed repayment coincided with the folding of the People 2 People Group, which accounts for why Jennifer had, and continues to have, such a hard time getting answers. What ensued from there only deepened her confusion.
A company called Ideal Corporate Solution Ltd. was tasked with selling of the People 2 People business. But Jennifer says that when she reached out to the company, nobody seemed to know what was to become of Be The Lender’s existing loan contracts. And once the company was sold, Jennifer says that she was advised to look elsewhere for information, as the affair was no longer anything to do with Ideal Corporate Solution Ltd.
Then came a bolt from the blue in the form of an email which stated that a sum of £1,162.50 had been repaid to her via Quickdox. Since the Be The Lender platform no longer existed, there was no immediately obvious method of transferring the funds to Jennifer, but in time the money was successfully transferred to her account. Communication surrounding this recovery, which was presumably sourced through the sale of the assets of Quickdox, appeared to be poor at best. And where was the remaining £3,837.50?
Since then, Jennifer has explored multiple avenues for recovering the outstanding funds. She is currently a student, and cannot afford to employ a solicitor. She has phoned former members of the Be The Lender team, but they of course no longer work for the platform, and could do nothing to help. She has spoken with her original employer at Quickdox. She has tried and failed to get in touch with the Quickdox field agents, who had themselves invested money into the platform. No useful information was forthcoming.
Jennifer’s confidence in peer-to-peer platforms as an investment medium has been understandably shaken. But it’s crucially important that we here note the pronounced differences between her very unfortunate experience and the typical peer-to-peer lending process.
Transparency:
Jennifer’s experience with Be The Lender seemed to lack transparency. Were she to have lent money through a more established platform, quite the reverse would have been true. In fact, 6 of the UK’s biggest and best platforms have made their full loan books available to the public to download, giving individual lenders total clarity as to how each platform is performing. Those lenders are of course also issued with regular portfolio updates, and are kept fully in the loop as to the state of their loan portfolios.
Diversification:
Jennifer lent £5k through the Be The Lender platform, all of which was funneled into a single business loan. You might argue that the onus was on her to better diversify her funds, but the Quickdox deal was the only loan on offer. What’s more, Be The Lender did not appear to take adequate steps to explain to her the risks of over-exposure. The more established peer-to-peer players would have taken every opportunity to encourage Jennifer to spread her money across multiple lending opportunities. Funding Circle, for example, suggests lending to at least 100 different SMEs via the platform, in order to achieve sufficient diversification of funds.
Track record:
Be The Lender was a new platform when Jennifer lent money to Quickdox. Many of the UK’s best-known platforms have now been around for a reasonably long time, and boast impressive track records. Zopa, for instance, launched way back in 2005, and in its 10 years of lending holds one of the finest records of managing credit in financial services. Zopa proved its resilience during the 2008 downturn.
Investor protections:
Even the best P2P platforms have defaults, that’s part-and-parcel of running a lending business. But the existing crop of peer-to-peer platforms boast a wide array of mechanisms that are designed to protect investor money. RateSetter pioneered the concept of a provision fund, which is drawn upon to make lenders whole in the instance of a borrower default. Platforms like LendInvest, Assetz Capital, Thincats and Wellesley & Co. have tangible security (in the form of property or another asset) backing up every loan. Others, such as Lending Works and ArchOver, insure their loan books against the risk of default, giving individual lenders an added layer of security.
Regulation:
The vast majority of peer-to-peer lending platforms operate under “Interim Permission”, courtesy of the FCA. But November this year will usher in the era of full authorisation. Two particularly relevant features of full authorisation: platforms must have a back up servicer in place to step in and continue to administer all existing loans should they fail, and they must also keep a certain amount of capital in reserve at all times. Under such terms, it’s very difficult to envisage a repeat of the Be The Lender debacle. Members of the
(the industry trade body) have had back up servicers in place for a long time.
Commercial, arm's length transactions:
The very fact that Be The Lender was arranging a loan for a company within the People 2 People group should have sounded alarm bells. How could proper, objective due diligence have been carried out? How could the inherent conflicts of interest be managed?
The irregularity of the situation faced by Be The Lender’s private investors ought to be abundantly clear.
But what has become of Be The Lender? The assumption was that the platform had faded from existence. Indeed, a document filed with Companies House on 5th August 2014 stated that the company would be struck off the register and dissolved. 4 days later, the company’s registered office address changed, from Ribble House in Lancashire, to the offices of Refresh Recovery Ltd. in Skelmersdale. Refresh Recovery describes itself as “a leading corporate recovery and business turnaround firm with many years of combined experience”. It appears that Be The Lender may have found a second lease of life in Skelmersdale. On 27th November 2014, a document was filed with Companies House stating that the striking off of Be The Lender had been discontinued. As of 21st April this year, Mark Butterwick – who we have tried and failed to make contact with – still appeared to own the Be The Lender platform in its entirety, via “People to People Holdings Ltd.”.
And what do the FCA’s records say? We searched for Be The Lender on the FCA’s website, and discovered that the platform continues to hold an interim permission for “Peer to Peer Lending”. We also learnt that the platform’s status is listed as “Active”. The company’s address is listed as Ribble House, which is clearly outdated.
In short, the Be The Lender platform appears to exist, in at least some capacity, and our conversation with the FCA suggests that the regulator doesn’t appear to be aware of its current registered address. When we spoke to the FCA, they told us that it was up to the company to update them on any changes in circumstance. But if Be The Lender does indeed exist, and exists under interim permission from the FCA, then surely the regulator must have an obligation to discover information about the funds that are still owed to lenders like Jennifer. This then raises a question as to what kind of state Quickdox – the borrower of these missing funds – is in.
Some of the assets belonging to Quickdox Limited, the business which Jennifer lent money to, appear to have been purchased out of administration, and two new companies – Quickdox Solutions Limited and dox2you Limited – seem to have begun using those assets. The liabilities of Quickdox Limited, however, appear not to have been transferred over to the two new companies. Quickdox Limited is now in liquidation, according to Companies House, and it’s unclear what assets, if any, remain against the liabilities (which includes the loan within which Jennifer held a stake).
“Quickdox Solutions Limited” and dox2you were both incorporated in April 2014, are listed by Companies House as “Active”, and share an address in Ribble House, where once dwelt Be The Lender and the original Quickdox Limited.
To summarise, when Quickdox went under, its assets were sold and liabilities remained. The £1,162.50 that Jennifer managed to recoup may well have come from the sale of those assets. The fact that Be The Lender no longer exists means that the flow of information has been poor. It would appear, regrettably, that Jennifer now stands little chance of recovering her money.
Jennifer has endured a painful version of the peer-to-peer lending process. We believe that shining a light on the situation, such that the differences between this scenario and standard industry procedure are clearly elucidated, is the best method of ensuring that such an incident will not happen again.
