Capital Protection

Platform risk is an issue on EVERY P2P platform - not just Lendy. But the contingency plans are one of the things that come under the aegis of the FCA, so any platform that's operating under full approval has had those kicked and ticked. Interim approval means that they're in the process.

I leave it up to others to express their opinions of the FCA - but they're the only game in town, and the same regulator who cover every other investment firm...

Entirely speculation on my part, but...

If a platform fails I suspect it would most likely be put into administration to run off the remaining loans. Would it be bad? Yes, not least because it would likely trigger a "run" on the platform. But would it necessarily be an automatic disaster with no one there to manage the loans? No, because that's what the administrator has a duty to do. They might even pre-pack the whole thing so that it was only in administration for a matter of minutes, only to emerge with a new owner and a more robust capital structure which would be good for investors. Following the reform of the administration regime a few years back there's effectively an implied back up plan regardless of what the platform itself plans, with the administrator under a primary duty to save the business as a going concern rather than liquidate.

Also, as has happened for zombie PE funds, it wouldn't surprise me if someone doesn't pop up specialising in sorting out zombie P2P sites. It's bound to become an issue once the reality that risk-free 12% returns don't exist comes home to roost. Think of a structure where they would offer to buy investors out at a discount to give liquidity to those who want it despite the dire liquidity available on the SM. The discount would likely be heavy though as that's how the buyer would aim to make their money, so those who didn't want the upfront loss could continue to hold. The risk of that then being that the manager bought at pence on the pound so isn't quite as incentivised to push to recover at par as you might want. Yes they have a duty to sell security at maximum price possible but that misalignment is crucial in my opinion.

It would be a very complex beast. Especially as it's a retail asset class the press coverage would be very extensive. The FCA would likely be crucified. Mis-selling claims that it was "like savings" would pop up. Regardless of legal merit there might be public/regulatory pressure for settlements to be made (think of Italy, Spain, Portugal, Greece etc where retail depositors bought bank bonds thinking they were as secure as savings and then when the banks were being bailed in (ie bonds wiped out) it created a right stink so they are desperate to find a way to compensate retail while wiping out institutional). But who would be left with the pockets to pay?

Ok so maybe the bank analogy is a bit over the top because they are clearly more systemically important institutions, but in my opinion it's entirely unpredictable what would happen. So by all means factor it in as possible and monitor the platforms viability but don't try to predict how it would play out.

EDIT: sorry for cluttering your pages up with my essay!

Very good contributions here and I thank the authors.

This raises to a higher priority my concern that Lendy is still not fully FCA authorised and there would still seem to be a few hurdles in the way. The noises I am hearing are that nothing is going to change in that respect before the autumn.

Another thing to consider is how likely a platform is to go into administration, not just what happens if it does. If the platform is profitable this becomes a lot less likely. Part of my due diligence when investing in a new platform is to try to find out if the business is working. Lendy have accounts filed up until end of 2015 and show a good profit (you can look them up on Companies House beta.companieshouse.gov.uk/company/08244913/filing-history ). I suspect one of the many on-the-ball forumites will post here when their next set of accounts is up!

I guess that the downside here is that it takes 9 months before they have to file a year's accounts so the information is old. Lendy's profits might have taken a hit from PBL20 but with the lower rates and increased loan volume they are offering to investors on many of the new loans (while not necessarily reducing their borrower rates by the same amount) they might have boosted their bottom line considerably.

A risk to small companies is if something happens to one of the key people or the owners fall out, etc but I suspect as long as the company is making a profit and growing fast it would be snapped up by an investment fund. In fact there may even be a few big hitters on here that would buy the company to just to access some good loans off market without having to worry about prefund allocations

The purchaser would be a third party, not the administrator itself. While I was originally writing this as something that could be done outside of administration, it could be done inside too but in any event the person buying out investors would likely be a third party who would be looking to acquire control over Lendy itself as well as big capital positions in the loans so that they could control recoveries.

As to the point above by copacetic re platform viability, that is all well and good for so long as lots of loans can be written (i.e. borrowers and lenders can be found) but even if you assume the flow of borrowers is flat or increasing the ability to write loans could significantly decline if there are some capital write-offs and investors stop flooding to new loans.

This is exactly what I was suggesting above re zombie sites.