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What happens when a P2P company ceases trading?
I was recently asked the following questions:
What happened to investors/lenders money when companies listed as ceased trading or suspended or went off line?
Do you think there may come a time soon when lenders money is covered by compensation scheme?
Firstly peer-to-peer lending, in virtually all cases, is a contract between a borrower and one or more lenders, which is managed by an intermediary (a peer-to-peer company). Unlent funds are segregated in a client account, separate from that of the peer-to-peer company. If the intermediary peer-to-peer company were to cease trading the contract is still valid and enforceable, but the difficulty that may occur is that in most cases, the lenders' and borrowers' identities are hidden from each other.
The FCA regulations required peer-to-peer companies to have a contingency fund which would pay for the administration of these loans after a company ceased trading, but there is no guarantee that this would be sufficient to run down a 5 year loan book and chase late payments. In the case of the collapse of Quakle, lenders were left out of pocket, but other companies did, and in most cases, still are performing a controlled return of lenders' funds when they are repaid from borrowers.
In the previous FCA consultation process I did argue for lenders funds to be covered by the FSCS in the unlikely event of a peer-to-peer company failing and where any contingency funds were insufficient for a controlled winding down. Unfortunately I believe the industry argued against this as they believed the costs for this would be prohibitive. I also suggested the members of the P2P Finance Association, who account for a very large percentage of the peer-to-peer loans arranged within the UK, should operate their own contingency scheme, in effect sharing the costs of one of the companies taking on the failed company's loan book.
Following the recent suspension of trading in Be The Lender, it is too early yet to ascertain what the impact to lenders will be, but I'm sure the FCA will be monitoring the situation, as will we.