Retail investors who made online investments through Lendy, the P2P lending platform that went into administration last night, are waiting nervously on news around how much of their losses they can expect to see returned. Enforcement action initiated by the FCA last month forced Lendy into administration, making it by far the largest P2P lending investment platform so far to fail. Its administrators are now taking legal advice in an attempt to determine how much of the funds invested through the platform will be returned.
22,000 individuals, mainly from the UK, made investments through Lendy. RSM, the administrators now in charge, are trying to establish if these investors should be treated as creditors. The case is being closely watched as the test case for any future failures in the P2P lending industry which has sprung up since the 2007/08 financial crisis, plugging the gap left by traditional lenders tightening loan criteria.
The UK government even launched an ‘innovative finance ISA’ to allow investors to take advantage of ISA tax breaks when investing through P2P lending platform. It will also be keeping a close eye on the market and can expect to be accused of encouraging a risky alternative investment approach by legitimising it through an ISA in the event of any further high profile collapses of P2P platforms.
Experts have already warned investors to expect more collapses of companies with a similar profile to Lendy’s and the FCA is preparing to introduce tougher rules in an attempt to protect retail investors. FCA data suggests a total of 275,000 people have made investments through P2P lending platforms, who have lent borrowers £22.3 billion since 2005.
The P2P lending model matches investors with businesses unable to secure financing through traditional lenders such as high street banks. Investors receive an interest rate that varies based on the perceived risk of the borrower but would most frequently be around 7%. In the low interest rate environment of the past decade, that has proven an attractive proposition for investors unwilling to leave their cash in savings accounts offering rates running below inflation.
However, many observers and investment industry experts have warned that retail investors fail to fully appreciate the level of risk their investments involve. Those include not only increasing rates of borrower defaults in times when the business environment is tougher but also the risk of the platform itself failing, as in the Lendy case.
Theoretically, investments made via Lendy are between the investor and borrower, with Lendy itself simply the agent and trustee. That would mean the principal capital and interest paid back by borrowers would go to investors and the administrators would have no claim on it, minus fees. But the company’s accounts are said to show a less clean cut structure with the company’s loan book listed under debtors and investor holdings under creditors. That would suggest loans were actually made from Lendy’s balance sheet and investor funds not ring-fenced in separate accounts with the balance transferred to borrowers minus Lendy’s fee.
If that is the case then investors would legally be creditors of Lendy, hitting their hopes of recovering their money. The likelihood is investors would then be grouped with other creditors and get what’s left after what can be expected to be an expensive administration process. It has been reported that Lendy changed its structure to one that better protected investors from 2016 onwards. That might mean that investors whose lending took place after the change manage to recover more of their money than those who entered into P2P loan agreements pre-2016.