Neil Maurice, Chief Operating Officer of Loanpad gives an overview of wind-down plans and shares some views on Loanpad’s wind-down approach.
What’s central to any business?
As with any business, there is no guarantee that Loanpad or any peer-to-peer lender can or will choose to operate forever.
Since the financial crisis in 2008, we have seen a raft of corporate failures both within financial services and in other sectors. Whether it’s lenders in peer-to-peer platforms, counterparties in investment banks or holidaymakers in tour operators, all failures have one thing in common – customers.
Customers, or within peer-to-peer lending – investors, are and should always be the centre of any business throughout its lifecycle. Unfortunately, history has taught us that corporate failure has often caught firms unaware and customers or investors have been left with uncertainty over both whether and when they will get their money back.
What are wind-down plans?
At Loanpad, we see it as critical to have plans in place to both identify when our business is no longer viable and to implement plans to wind-down any outstanding investments or loanbook before an insolvency process is required.
The FCA has put increasing emphasis on the need for peer-to-peer lenders to have adequate and proportionate wind-down plans in place to avoid what it deems as “disorderly failure”. Within peer-to-peer lenders, one of the FCA’s concerns is that loans continue to be administered if the platform ceases to operate for any reason.
The overarching aim of a wind-down plan is to help ensure that existing loans continue to be managed, monies recovered from borrowers in a timely and efficient manner and then ultimately repaid to investors without the need or even consideration to enter any form of insolvency.
What are Loanpad’s wind-down plans?
We built our wind-down plan taking into account our business model and web-based platform and considered the best interest of investors in respects of efficiency and costs.
Our wind-down arrangements consist of a plan to manage the wind-down of the loanbook internally (alongside our lending partners). Staffing requirements and operating costs have been assessed and we have capital set aside (which will be increased proportionately with the size of the loanbook) to keep things running smoothly.
In addition, our lending partners take on contractual obligations to investors / Loanpad insofar as management and reporting are concerned and, combined with their “first loss / skin in the game”, this is unlikely to be treated lightly even in a wind-down scenario.
Loanpad believes its business model provides for an orderly and less resource-intensive wind-down due to the following factors:
- Loanpad earns money on a daily basis based via an “assets under management” margin, therefore Loanpad is not dependent on new business for its revenue;
- The lending partner approach means that the day-to-day management of the loans is undertaken by established and experienced lenders with our supervision and monitoring; and
- All investors are in the same pool of loans so there are no difficult or time-consuming allocations to be administered on a loan-by-loan basis.
What will the future hold?
As the industry works through a number of peer-to-peer platform failures, lessons continue to emerge to assist us and the rest of our sector in improving our wind-down plans.
We hope that new regulations coming into force will ensure that all peer-to-peer lending platforms have wind-down plans to cater for all reasonable eventualities. Whilst all platforms are competitors in one sense, we are first and foremost partners in the common aim of securing the continued growth and sustainability of the sector and ensuring good practice throughout.
The new FCA recommendations underline the importance of financial expertise in P2P lending, says Neil Maurice, chief finance and operations officer of Loanpad”
Proposals from the Financial Conduct Authority (FCA) will soon require all P2P platforms to introduce appropriateness tests and strengthen or reconfigure their wind-down plans.
As a chartered accountant, Neil Maurice understands this new regulatory universe better than most. Before becoming chief finance and operations officer at P2P platform Loanpad, he was a director at BDO and Duff & Phelps specialising in financial services.
“I spent a number of years undertaking some high-profile investigations on behalf of the FCA into specific areas such as client money, mis-selling, compliance, governance and systems and controls,” says Maurice. “What I learned was that a good financial services business focuses on three very fundamental items: policy, process and people. If you can get those three items right, then you should be a long way towards meeting regulatory expectations.”
Maurice joined Loanpad in January 2018, when the FCA was concluding its post-implementation review of the P2P and crowdfunding sector before its consultation on the proposed new rules in July 2018. “For me, joining Loanpad was about creating a simple and transparent platform that offers investors an innovative way to invest in P2P lending whilst being aware of and managing risk to the lowest extent possible,” he says. “I think we’re now entering a period where everyone is realising that regulation is critical if not core to a P2P business.”
However, Maurice adds that P2P is unique in the sense that some people came into the sector with “little or no experience in being part of or running a regulated business.” This may cause problems for some platforms as compliance and regulation continue to take centre stage. So how does Maurice feel about the new FCA regulations?
“I believe very strongly that they already reflect what is good practice in any regulated firm, and certainly in the P2P lending market,” he says. “The FCA had a difficult job in trying to strike a balance between protecting consumers on the one hand whilst also allowing the P2P sector to thrive.
“I very much welcome the heightened focus on wind-down plans,” he adds. “As a sector we are trusted to hold and protect client money so we have to plan appropriately for the worst-case scenario. We have to be able to wind down a loan book in a calm and efficient manner.”
Maurice says that over the coming months, Loanpad will be reviewing the platform’s systems and processes to ensure that they meet regulatory expectations, and he is sure that other P2P lenders will be doing the same.
“If done properly, the implementation of these rules will allow investors to properly compare the risk levels for each P2P lending firm so they can choose the products that are appropriate for them,” says Maurice. “Our focus is on compliance and transparency with investors. We certainly want to feel that our investor base understands what they’re putting our money into.
“Ultimately, I think the new rules will be a positive for platforms as investors will understand the products offered and can adequately compare and contrast different platforms.”
P2P INSIDERSupercharge your understanding of Peer to Peer investing today
We are excited to let you know that we’ve launched Auto Lend and Auto Withdraw.
We wanted to make our platform even easier for you to use, so we have created options to allow you to either automatically lend your interest, or automatically withdraw it. These exciting new features are available in both your Standard and ISA accounts. Simply go to the ‘Preferences’ section of your dashboard/s and adjust your settings as you would like.
You can find more information on these preferences in our FAQs but here are some of the main points:
- Transfers your cash balance from your standard cash account into your chosen lending account every day at midday.
- Transfers are currently in £10 multiples only but this will soon be reduced to £1.
- Works the same way in both Standard and ISA accounts but with independent settings for each.
Please note: In order to prevent withdrawals being re-lent, Auto Lend will be turned off if you do a manual transfer from any lending account to your cash account. You’ll simply need to turn it back on as required.
- Withdraws your cash balance from your standard cash account to your bank account at midday on your chosen day each month.
- Withdraws your cash balance from your ISA cash account to your standard cash account at midday on your chosen day each month.
We are always striving to improve your experience with Loanpad and welcome any feedback/suggestions. Equally, if you have any questions about this feature or any other matter, please contact Loanpad support at firstname.lastname@example.org.
Louis Schwartz, chief executive of Loanpad, explains why the provision fund model isn’t always the most effective way to protect retail investors…
DEFAULT RATES ARE beginning to loom large for the peer-to-peer lending community, as platforms start to see large tranches of loans reach maturity. As a result, the ways that platforms protect their investors from capital losses have been under scrutiny, with two methods proving to be the most popular: provision funds or ‘skin in the game’. For Louis Schwartz, chief executive of recently-launched P2P platform Loanpad, ‘skin in the game’ could be a more viable option.
“Provision funds can provide a somewhat false sense of security, or at least an unknowable level of security,” he says. “They are often funded by reducing lender returns, so basically these funds are built with money that may otherwise have been paid to investors, and the overall value of the provision fund represents a very nominal amount when compared to the total size of the loanbook – often just one or two per cent.
“If the rate of defaults is higher than that, the provision fund would essentially get wiped out. And then you have to make the decision, what investors are going to be covered, and at what point in time are they going to be covered? And can the platform even continue without the provision fund?”
Schwartz, unsurprisingly, is an advocate for the ‘skin in the game’ model, and Loanpad has devised a system whereby all of its retail investors will see a sizable part of any loan being funded by lending partners.
These carefully-selected lending partners invest at least 25 per cent alongside retail lenders on every single loan on the Loanpad platform on a first-loss basis. Schwartz says that this 25 per cent acts like a provision on each specific loan, as opposed to a provision fund that is aggregated across all loans.
“Provision funds can hide the level of risk when everything’s good and everyone’s getting their returns as expected, until a time when the provision fund may no longer be able to keep up,” says Schwartz. “At that point, the underlying loans and their risk profile would become more noticeable and relevant to investors, as will the duration of the underlying loans and thereby liquidity.
“We feel that the ‘skin in the game’ model provides a more sustainable and transparent approach to risk management.” The other undeniable benefit of the ‘skin in the game’ model is that retail investors have the peace of mind that comes with investing alongside established large-scale investors who have already done in-depth due diligence on each loan. This adds another layer of quality control, says Schwartz, and should help reassure retail investors.
However, communicating this message presents a challenge. Schwartz believes that more needs to be done to educate investors, as there is a huge difference between the two methods of mitigating risk.
He adds: “In the current environment and with Brexit uncertainty, investors should assess what they are investing in carefully, to ensure they fully understand the features, risks and benefits of each platform and its risk management methods.”