Loanpad’s wind down plans explained
In January, the Financial Conduct Authority (FCA) issued a stern warning to peer-to-peer lending platforms: confirm your wind-down plans or risk losing regulatory status.
By law, every peer-to-peer lending platform must have a wind-down plan in place in order to be regulated. This rule was introduced following the high-profile failure of P2P platforms such as Lendy and Collateral, whose investors are still fighting to recoup their funds more than four years later.
Unlike savings accounts, P2P accounts are not a part of the Financial Services Compensation Scheme (FSCS), so there are no provisions available to investors who lose their money. Wind-down plans were introduced to provide reassurance to investors should their P2P platform fold. These plans can be reviewed by the FCA and act as a step-by-step guide to running down the loan book while minimising investor losses.
Loanpad has had a robust wind-down plan in place since 2019, and it is updated and reviewed regularly. The wind down plan details how Loanpad will protect investor money should the business cease trading, under a variety of possible scenarios. The plan was written by Neil Maurice, Loanpad’s Chief Operating and Finance Officer.
”It was all done in house together with external specialist advice and in line with regulation is reviewed and updated regularly, says Maurice.
“It goes through all the requirements of the wind down plan and the costs associated with it.”
What does Loanpad’s wind-down plan look like?
Under every wind-down scenario, Loanpad is projected to continue generating income for both the business and its investors. This is due to the unique structure of the platform. Unlike many other P2P lenders, Loanpad earns little money from fees at origination of a loan. Instead, it takes a percentage of the interest payments alongside the platform’s lenders. This means that Loanpad as a business should continue to generate revenue as long as its loans are active.
Furthermore, Loanpad does not work directly with borrowers, but with lending partners who themselves liaise with borrowers. This reduces the administrative burden on the platform in the event of a wind down.
There are three ways to run wind down plans, according to the FCA:
- Platforms can maintain a segregated amount of money which can be used to wind down the loanbook.
- A third-party can be appointed to take charge of the platform’s portfolio and manage the wind down of the loanbook.
- The platform winds down its own loanbook based on the resources that it has in-house.
Loanpad has opted for the third solution. The platform has built bespoke software that helps manage the wind down for Loanpad, ensuring that investors are aware of what is happening, and receive regular communication throughout the wind down process.
The company, in line with FCA requirements, has also set aside money to cover the cost of running the business through a wind down. This pool of cash is increased as the business grows.
Furthermore, Loanpad’s lending partners all manage the loans on a day-to-day basis and must report to Loanpad at set intervals. They also agree to take a first loss provision.
Every lending partner takes a stake of at least 25 per cent of each loan, which means that they agree to take responsibility for the first 25 per cent of losses incurred on any loan. This provision helps Loanpad to mitigate the risk of investor losses in any circumstances, including during a wind-down.
How likely is a wind down?
The economic volatility of the past few years has shown that there are no guarantees in finance. However, Loanpad has put a number of measures in place to ensure that investor funds are as protected as possible.
Loanpad as a company has been profitable on a monthly basis since 2021 and maintains financial resources significantly in excess of those required by the FCA. Loanpad expects to remain profitable on a monthly basis.
All loans are secured against property, with a maximum loan-to-value at origination of 50 per cent. This means that the underlying property would have to lose more than 50 per cent of its value before investor funds are at risk. Investor funds are also automatically diversified across a number of different loans, to reduce the possibility of large capital losses stemming from one or two unpaid loans. These processes are in place to protect investor capital, no matter what is happening with the company.
In the event of a Loanpad wind down, all loans will remain active and the loan book will be managed as usual, albeit without the addition of any further loans.
Loan management is all about balancing risk with reward, and at Loanpad that philosophy extends to its hypothetical wind-down.
“We regularly review our wind down plan, and make updates where necessary. We have built bespoke software to manage any potential wind down to make administering the loanbook far easier in run-off,” says Maurice.
“Should the company fall victim to macro-economic conditions, investors can be assured that there is a detailed plan in place to protect their money and help them sleep better at night.”
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