It may seem counter-intuitive for a firm that is in a good trading position, and which intends to continue trading for the foreseeable future to make plans for a wind-down of their business. However, in the loan crowdfunding sector, that is exactly what the Financial Conduct Authority says all firms must do, as to fail to address this would lead to serious issues about the extent to which the firm’s customers are protected from harm.

Wind-down planning is the central issue in the FCA’s portfolio letter to loan-based Peer-to-Peer (P2P) crowdfunding platforms. Frequently, the regulator highlights the concerns it has identified at a handful of rogue firms who are not complying with its requirements. However, in this case, the failings identified are widespread, with the letter saying that:

“Our recent supervisory work leaves us generally dissatisfied with the WDPs that we have reviewed. All had assumed a voluntary wind-down, and none had adequately identified the triggers that might realistically allow for a solvent wind-down to be invoked. Coupled with a lack of liquidity monitoring and capital adequacy planning, we found little evidence of firms’ ability to identify when an invocation of their wind-down plan would realistically ensure an orderly winddown.”

The central issues regarding wind-down planning, according to the letter, are:

  • All firms should identify their ‘risk fault lines’ – the circumstances that might necessitate a wind-down, such as “the loss of a key revenue driver, the loss of critical infrastructure, or market volatility in exposed business lines”
  • Firms must also consider what the levels of liquid and capital resources are that they must maintain to avoid having to trigger a wind-down, and they must continuously monitor the health of their firm via cash flow forecasts and other tools

The FCA asks all firms in the sector to reply with details of the wind-down plan funding assessments they have carried out.

Other issues relating to the P2P sector highlighted in the letter include:

  • The risk that firms might be unable to accurately price loans in its secondary markets, or incentivised to transfer loans from one client to another at prices that do not reflect the risk profile of the loan
  • The fact that many firms are failing to transparently disclose fees and charges