When peer-to-peer lenders fail, who takes the hit?

January 5, 2022
Jeremy Goldring


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Several peer-to-peer (P2P) lenders entered administration over the past 24 months including Lendy Limited, Collateral, MoneyThing and FundingSecure.

It’s a stark reminder to investors about the financial risks involved despite the industry becoming progressively more regulated.

gunnercooke Restructuring & Insolvency partner, Jeremy Goldring, who acted on the Lendy Limited case, takes a closer look at the considerations, issues and complexities that arise when peer-to-peer lenders fail.

“When the P2P model unravels it creates a complex practical and legal situation that can take years to unwind.

At its core P2P lending poses a higher risk than more traditional investments. The system turns individuals into either secured or unsecured lenders to organisations or individuals that have found it hard to meet banks’ strict credit control requirements.

“In the case of loan defaults, it’s often the case that the P2P platform has no contractual obligation to take steps which might improve the prospects of recovery for the lenders and action is taken solely for reputational purposes.

“While this is often made abundantly clear that the risk sits squarely with investors, not the platform, it may not be universally appreciated by lenders.

“However, even less well understood is what happens when the number of loan defaults grows rapidly within a single platform.

“The costs of managing loan default processes can mount substantially, particularly if guarantors need to be pursued and litigation is required to overcome legal obstacles that may be put up by the borrower.

“As most platforms carry little working capital beyond what is required to run the service, if one bad debt becomes many then the mounting overhead of pursuing them can create financial strain.

“This is exacerbated further by the platform’s diminishing reputation, which means that it’s harder to generate income by attracting new loan and lending opportunities.

“When the cash runs out and a platform fails, the administration period can take several years, with both FundingSecure and Lendy Limited’s each being extended by three years due to the complexities involved.

“Chief among the challenges is how an insolvent organisation with no inflow of new fees can fund the tasks required to unwind it’s business by recovering unimpaired loans, administering the rest of the loan book, distributing monies to investors and managing ongoing regulatory compliance.“In the absence of legal certainty, these matters fall to the insolvency practitioners, the lawyers and judges involved to find pragmatic and fair solutions that balance the requirements of all stakeholders involved.      

“It’s why innovative propositions like P2P must be scrutinised and stress tested to determine that appropriate levels of protection and governance are in place should worse case scenarios arise.

“FundingSecure Action Group, who represent investors that lost millions when the FundingSecure site went into administration, has recently joined growing numbers of voices calling on the FCA to provide greater regulation and protection and the Financial Services Compensation Scheme (FSCS) to provide greater compensation for P2P platform users.

“Ultimately if P2P is to recover its reputation and continue moving into the financial mainstream then there will need to be much more clarity and certainty around operating models and investor rights.”

If you have any queries relating to restructuring and insolvency, then contact Jeremy Goldring here.

You can also view a previous article that covers how Jeremy and the team has represented investors during the Lendy Lease case here: https://gunnercooke.com/gunnercooke-advises-on-application-to-distribute-recovered-assets-from-lendy-limited-administration/