P2P lending during a recession – What the FCA expects

Information and understanding has never been more critical to portfolio management writes Matthew Williamson, head of fintech at Thistle Initiatives.

What an interesting time for the P2P lending market. With the FCA changes introduced last year now having had time to take effect, there is a new challenge for the sector and one not foreseen quite in the way it manifested itself. There have been continuous calls over the last few years that the space will be able to cope with – and even prosper through – a recession. It would seem like now is the time to put such statements to the test. 

As we know, the UK is officially in a recession for the first time in 11 years, with very little need for narrative as to why. Following the initial economic impact of the virus, a number of institutions sought to forecast what impact Covid-19 could have on borrowing moving forward. Taking retail property initially, the Cass Business School comments on the potential impact and suggests the market could see write-offs and losses of between £8-10bn (Cass UK Commercial Property Lending Report). The same report published also cites the potential impact on the commercial development property space, which could see £22bn of outstanding loans at risk of delays or default, some of which has already been seen to date. For the SME space, there has been increased borrowing seen over the period, with more than a million SMEs borrowing £33bn in two months to July 2020. The FCA has also raised concerns regarding consumer credit lending, which has seen the regulator target lenders to ensure they provide “tailored support” for consumers who face repayment challenges and difficulties (FCA, 30 September 2020), something which should be considered closely by those with this model of lending.

The pandemic will undoubtedly have an effect on those who are currently borrowing, as well as those looking to borrow. The P2P lending market, with its range of borrowers, is no exception and will need to adapt in order to effectively manage its existing debt, as well as consider carefully any future debt extended. Following last year’s policy statement and subsequent developments, there are a few ways in which P2P lenders can do this but also, importantly, evidence it.

The policy statement outlined that P2P lenders must maintain an effective risk management framework, with appropriate governance measures in place in order to evidence proper oversight. Whilst for many firms this was done as part of the new rules being implemented, changes to market conditions will likely have had an impact on a firm’s current framework and lending appetite. Such changes, or consideration of such changes, will have likely been considered by a credit committee, management team or even the firm’s board, with any change or development outcomes being implemented. However, for some firms, this conversation with any relevant changes may not have been recorded appropriately, if at all, something which should be rectified to demonstrate to an auditor or the regulator effective governance over a firm’s risk management framework.

Coupled with the above, and perhaps more pertinent, is the need for comprehensive management information (MI) to be collated, processed, presented and then discussed in one or all of the forums detailed above. The MI should relate to both those loans in pipeline and their status, as well as the current book’s performance, including loans which are performing, non-performing and in collections/recovery. This information is critical when identifying trends, allowing firms to adjust their risk management framework. The MI itself should be frequent and encompassing in nature.

In relation to the firm’s debt management procedures, it has become increasingly important for P2P lenders to ensure that, wherever an exit is required, close and continuous monitoring is factored into the risk management framework. Of note, this includes an effective monitoring framework for loans that are ‘performing’, even if repayments made are being met. The frequency of this should be considered closely. Once again, all MI relating to debt management should be collated, processed, presented and then discussed through one of the aforementioned management meeting structures.

It is important for P2P lenders to be particularly vigilant in the current climate so that early warning signs and root causes are identified and discussed at an appropriate forum where decisions can be made, followed by effective implementation of any actions or measures agreed, in order to properly manage the portfolio. 

The last and most succinct summary I can leave you with is ‘if it isn’t written down, it didn’t happen’.

Thistle Initiatives

Thistle Initiatives is an award-winning compliance consultancy, offering expert advice and support across the financial services sector. For more information on the range of services we offer, visit thistleinitiatives.co.uk or call 0207 436 0630 to speak to a member of the team.