Strengthening wind-down plans for loan-based crowdfunders

RSM's Damian Webb explains the importance of back-up plans in the event of a failure among p2p and other alternative finance platforms for the industry's future maturation. 

A supportive regulatory environment, coupled with innovation and a surplus of liquidity has led to the strong growth of the alternative finance sector. Over £3bn has been cumulatively lent by the sector in the UK since its inception. But what happens if a platform fails?  In December 2016, the FCA announced proposals to strengthen the rules on wind-down plans in Q1 17 in order to ensure that loan books can be successfully run off in the event of a failure.

This increased focus and oversight has to be welcomed. Noting the current and forecast scale of peer to peer institutions it is only right that the FCA looks to bring the sector in line with existing regulations and best practice. There is a real risk that in the absence of the FCA regularising the sector, practices could emerge which undermine the position of investors. Any fall-out could fundamentally undermine our growing FinTech sector and undermine the UK’s reputation for financial probity.

In light of this forthcoming review, we look at the importance of back-up plans in the event of a failure.

Regulation – a brief history

The sector’s growth has benefitted from a supportive political and regulatory regime which has seen the sector being treated with a light touch approach by the FCA, who took responsibility for regulating firms that operate loan-based crowdfunding platforms in April 2014. This has been reflected in the ease with which the FCA provided “interim” permission to trade to the initial Fintech applicants. However, with the sector maturing the FCA has taken a “proportionate approach to regulation”. Consequently, all firms wishing to operate P2P platforms are required to apply for formal FCA approval.

This process is on-going, with a number of smaller platforms securing formal permissions ahead of many of the larger more established platforms. By 30 March 2016, 8 firms were fully authorised to operate P2P platforms and a further 86 had decision pending. The FCA appear to be conducting more in-depth diligence on the established platforms with many of the platforms currently awaiting the outcome of their visits and application. Significantly, major institutional investors are currently reviewing the outcome of these reviews as a condition of their investment in the sector. Potentially the regularising of the sector in line with FCA guidance and approval will provide the re-assurance to institutional investors to invest in a sector in which to date their investment has been limited.

The back-up plan

A key FCA requirement is having “resolution plans in place so that should the firm operating the platform collapse, loan repayments under P2P agreements will continue to be collected and those lending money should not lose out”. This back-up solution in place would run down the business’s loan book or financial positions to protect customers in the event of a platform failure.

RSM have created a financial institution/ platform contingency service for this sector, which encompasses the key elements of a back-up service including:

• Rapid response: supported by technical infrastructure, our skilled and trained staff are capable of quickly stepping in if a platform fails;
• Seamless transfer: our technical consulting team are able to identify existing issues in a platform’s IT systems and review the back-up processes and operations; and
• Minimal disruption: standby systems capable of mirroring existing operating systems.

What can cause firms to collapse?

Recent financial failures in the sector highlight the importance of these standby services.  RSM’s experience of winding down a range of financial institutions has informed the tailoring of our standby service and enabled us to identify common causes of failure in the sector. These include:

• loan book impairment;
• withdrawal of liquidity;
• failure to raise new funds;
• suspected fraud; and
• regulatory changes.

Why RSM?

A key benefit of our standby service is that it looks to utilize platforms’ existing systems and procedures, hence there is no invasive off site data collection and reconciliation. This also enables us to react quickly; ensuring invocation is a matter of days rather than months.

The simplicity of our non-invasive system allows you to continue to run and develop your business with minimum interruption strengthened with the knowledge that a secure standby service is in place in the event of any issues.

In addition, we have access to transaction and turnaround professionals who can further minimise the disruption associated with a potential platform failure:

• Corporate Finance – In similar scenarios of platform failure we have managed an accelerated sale process which has provided on-going services via the seamless transition of services to a new operator. Our good relationships with key investors and businesses in the sector mean we have the capability to perform an accelerated sale of either the platform or the loan book.

• Restructuring Advisory – We have prior experience of unwinding loan books in an insolvency process, utilising the available tools to maintain continuity of service to investors and borrowers to ensure an orderly wind-down.

Having a standby solution in place is a welcomed and important development in the industry, The form that this will take will depend on the FCA’s ongoing research, expected in early in 2017.

This article is a paid-for placement by RSM UK.