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Is it all over for P2P - Autumn Webinar 2020: Bitesize

News article topics: Receivership

Date: 05 April 2021

Is it all over for P2P - Autumn Webinar 2020: Bitesize

Tarrant Parsons

Lendy was among several P2Ps to enjoy a rapid rise then a dramatic fall within about 10 years. Speaking at our popular Autumn Webinar 2020, Damian Webb, partner at RSM Restructuring Advisory LLP and joint administrator for the failed lender, talked us through challengers past, present and future.
 

The rise of P2P

  • Peer to Peer (P2P) lending – which uses the internet to crowd-source and distribute funding – emerged from 2008 after the financial crisis. The Cameron-Osborne partnership wanted to encourage new lending and end the dominance of mainstream lenders. Regulation of the sector was very light touch and operated on interim permissions.
  • From 2012, P2P saw exponential growth, principally due to significant liquidity driven by investment from retail investors attracted to the P2P sector by the headline rates of 8% to 15%, as compared to 0.5% returns from the banks.  In addition, due to mainstream lenders withdrawing from the market borrowers focused on the sector. In 2016, deployment through P2P topped £1bn, which doubled in 2018.
 

The fall 

  • At the same time, from 2016 to 2017, the overall funding landscape was changing because institutional investors had begun to focus on the alternative finance sector (as distinct from P2P), deploying significant institutional capital. 
  • Clear winners and losers began to emerge, with larger P2P operators accessing institutional capital and offering lower rates to borrowers. Others remained dependent on retail capital and increasingly became uncompetitive.
  • 2017 saw the start of a gradual deterioration in loan books and well publicised defaults. Significantly the  Financial Conduct Authority (FCA) began tightening regulation with the major changes being implemented from December 2019. 

From 2019 there followed a raft of fintech fails and sales:

  • London Capital & Finance – £230m (actually mini-bonds so not P2P) 
  • Lendy – £154m 
  • Funding Secure  – £80m 

2020: 

  • RateSetter sale to Metro Bank 

  • Wellesley Company Voluntary Agreement 
 

Looking at Lendy 

  • The administration has been extended to 2023 due to complexity.
  • The loan book on appointment in May 2019 had a book value of some £152m, split between property bridging loans (29) of £36m and development finance loans (25) of £116m. 
  • Of these loans, 35 were in default and had either administrators appointed over the company or receivers appointed over the property.
  • It is anticipated only 3 cases will not have an LPA/Administrator appointed. Hence about 95% of cases have been subject to insolvency processes.
  • Lendy’s retail investors and creditors are expected to suffer significant losses, with returns being lower than 50p in the £.
  • The nature of recoveries is hard to assess, as the recovery is dependent on various actions including asset recovery, personal guarantee claims and professional indeminity claims against the various advisors who advised Lendy.
 

Why failure

  • There were many reasons for the fall of P2P, in what could be described as a perfect storm:
  • Many P2Ps were run by people with little experience in lending, issuing the sort of loans experienced lenders would not have leant against.
  • They allowed borrowers to appoint their own valuers and put pressure on those valuers to provide valuations to secure the loans.
  • Many players in “fintech” were more “tech” than “finance”. The automation through technology was in some cases at the expense of standard credit processes, lacking the normal checks and balances of standard institutions.
  • In addition, when they started between 2012 and 2014, many P2Ps benefited from excess liquidity which required rapid deployment. Platforms were receiving £10m to £20m per month and needed to act fast to prevent investors moving to competitors. Hence, lending processes were accelerated to deploy funds rapidly.
Furthermore, the priority of shareholders was to enhance equity value in the platform, hence  it appears credit processes in P2P lenders lacked the integrity you would expect from a standard institution. 
  • “Key stakeholders in many peer to peer lenders  were often young, inexperienced individuals making key decisions in businesses with an absence of corporate governance. In some cases they ran roughshod over the credit checks and standard banking processes, to focus on creating significant value for themselves and the business.” 
 

The future 

“There will be more failures in P2P. In my view, P2P is dead, because they  are no longer able to be competitive, they have been regulated out of existence in a kind of natural selection for the benefit of the market.”
  • There are a number of well-run operators remaining with a good client base benefiting institutional funding.
  • Mainstream lenders still dominate the UK lending market but alternative lenders are emerging as the future. 
  • Although the sector initially attracted inexperienced people, we are now seeing a significant amount of grey hair stepping in. 
  • The winners in the sector will have good corporate governance and access to institutional capital so they can remain competitive.

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