The Financial Conduct Authority (FCA) chairman Andrew Bailey has written to the CEO, or equivalent, of every authorised firm that conducts peer-to-peer (P2P) lending. The main purpose of the letter is to request that all of these firms review the effectiveness of their wind-down arrangements. Thinking about possible business failure is not a pleasant prospect for any firm, however the FCA requires P2P firms to have wind-down arrangements in place to prevent customer harm. In any case, owners of P2P firms may on occasion simply decide to exit the industry in search of pastures new.
The FCA has been prompted to send this letter after its recent review of some firms’ arrangements found that some were not meeting existing regulatory requirements concerning wind-down provisions.
Some of the most important things to consider are:
- Has the firm identified the situations in which a wind-down may be necessary, e.g. the loss of a key revenue driver, the loss of critical infrastructure or the impact of market volatility
- Does the firm have sufficient funding to cover the cost of managing and administering the wind-down? Consider here that some P2P platforms are mainly funded via upfront fees, and there is little or no residual income throughout the lifetime of the loan, which may make it difficult to sell the firm to a buyer
- If a third party is engaged to assist with the wind-down, do they have the appropriate regulatory permissions?
- Is it appropriate to enter into an arrangement with another firm, either for them to take over the management and administration of P2P agreements; or to act as guarantor for the P2P agreements
- Has the P2P firm undertaken sufficient due diligence on back-up service providers – do these providers have the capability, relevant permissions, expertise and capacity to support wind-down arrangements?
- Have the tax implications of a wind-down been considered, for example customers who hold a peer-to-peer ISA may be at risk of losing the associated tax benefits
The risks of not having appropriate wind-down arrangements in place include:
- Investors may not receive some or all of the loan repayments for loans made through the platform
- Investors may need to recover repayments directly from borrowers
P2P firms must notify their lenders of the wind-down arrangements they have in place.
At a later date, the FCA will ask certain firms to provide details of their wind-down arrangements. The letter concludes with a warning that all firms must notify the FCA immediately if the ongoing viability of their business is threatened.
The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article