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What Do We Make Of The P2P Lending Companies’ Wind-Down Plans?

By Matthew Howard on 20th December, 2024 | Read more by this author

Sometimes P2P lending companies close down or shift away from being P2P businesses. When they do, you want to see loans repaid in an orderly fashion. That's why they have plans for this scenario in advance.

These plans are intended to make it highly probable that you'll continue to receive your lent money back, with at least most of the interest due, until all the loans have been repaid.

I've looked through many of the most recent versions of their wind-down plans, and consulted the P2P providers where necessary, and read through related their terms and conditions. You can scroll straight to my assessment of many of their plans by clicking here.

Firstly, here are four sections with a little more background information for you on these plans.

Most P2P lending companies have wind-down plans

Not all online lending platforms that 4thWay defines as peer-to-peer lending are required by the financial regulator to have funded wind-down plans.

However, all companies that arrange direct lending through what we might call a standard, article 36H P2P agreement are required to have wind-down plans. Most use 36H, but a few don't.

When you read 4thWay reviews into the providers, towards the end we mention if they don't use standard P2P agreements. We then describe the mechanism they use to effectively ensure that you're lending directly with the end borrowers.

About paying for wind downs

36H providers are required to set aside at least £50,000 for an orderly wind down. More if they are bigger. Often the costs will be higher than that, so the plans need to show how they'll pay the difference. Usually, this is through ongoing fees or exit fees paid from borrower repayments or interest.

When assessing wind-down plans, 4thWay usually doesn't get to see full costing and supporting information to find out whether any funds set aside in advance for the gentle closure of the online lending platforms are both real and sufficient.

However, the costs of winding down a loan book of reasonable quality are usually low compared to the costs of trying to operate and grow an ongoing platform – especially if the platform didn't go bust first.

This is because you can closely estimate the amount of work it will take to administer loans to the end and to recover any bad debts, and because all the sales and marketing budgets usually stop, along with assessing loan applications.

(That's not always the case though. If the business is not closing but rather shifting to a new, non-P2P market, its costs will remain higher and so potentially more fees from lenders will be needed to cover the wind-down costs.)

In many cases, one or two of the original founders of the P2P lending company will pretty much be able to run off the loans by themselves.

So if you find that the platform is well run and competent, you can generally be reasonably relaxed about your money coming in smoothly. Enough P2P lending businesses have closed either gently or with a crash to see the pattern here.

Segregating your money from others

All plans involve ringfencing lenders' money from the P2P lending company's own. This is a requirement at all times any way – not just during wind down.

Not only that, but, in the case of secured lending, anything used as security is segregated too – usually by holding the security “in trust”.

So, provided the P2P lending company has set everything up legally and correctly, and operated it in practice and not just on paper, you shouldn't have any issues with other people or businesses taking your share of loan repayments away from you.

You probably won't be able to sell loans early

The secondary markets for buying and selling existing loans will usually close in a wind down.

But, even where they don't close, you should assume you won't be able to find lenders willing to buy your loan parts. You're going to have to wait for borrowers to repay the money and interest naturally.

All that said, it's not at all unheard of for closing P2P lending companies to find partners to buy you out more quickly.

The plans are less important than the people

Anyone who's done a lot of business knows that confidentiality agreements, trade deals, service contracts or any other documents really aren't worth the paper they are written on, unless you believe the people you're dealing with are professional and will behave with a sufficient amount of integrity.

While I give my view of different P2P lending companies' actual wind-down plans below, I have kept something of an eye on the plausibility of the people behind the platforms, based on my colleagues and my collective experience of them. But do look into the bigger picture in more detail for yourselves.

Read about the bigger picture in 4thWay’s 10 P2P Investing Principles

Now, let's take a look at the plans I reviewed:

CapitalStackers

CapitalStackers' detailed wind-down plans are as thorough as I would expect from them.

It will encourage some borrowers to pay off their loans by borrowing elsewhere. This will be easier for loans on properties that are being rented out. The rest of the loans – mostly development loans – would close as repayments come in.

Support would continue to be provided by an accountancy firm called Hallidays that's closely linked to CapitalStackers. Hallidays also holds the up-front funding set aside for this. One skilled person from the CapitalStackers* team would directly assist in winding down the loans.

Most importantly, CapitalStackers – and Hallidays – consider the costs of winding down each loan to be marginal and easily covered by the loan and lending fees.

The plan is for all loans to be repaid, with interest, inside 21 months.

CapitalStackers is run by people with great integrity and has a small loan book that could be run down with relatively little effort. I think there's no chance that this one will suffer issues in a wind down.

Folk2Folk

Folk2Folk has no segregated account to lock in cash solely for a wind-down. It does however keep a minimum daily cash buffer in its own bank account of £1 million, which was agreed with the financial regulator, which are reassessed with them once per year.

Folk2Folk's board of directors could theoretically approve the withdrawal or use of that cash prior to a wind down or for other purposes than a wind down, although its plans approved with the Financial Conduct Authority could be counter to that.

Since this is not a separate account, if Folk2Folk was to get into debt itself, funds in its account could be used to repay those debts. If it falls behind on its debt payments, companies it owes money to could theoretically force payment from that account, including from the £1 million buffer. I believe £1 million would be considerably more than is needed.

That said, Folk2Folk has been soundly profitable for some years, with profits of £1 million or more in each of the past three years. Plus, its cash and other assets have far outweighed any of its own debts in recent years.

Regardless of the reason for closing its online lending platform, Folk2Folk would first try to get its back-up provider to wind down the existing loans.

However, if Folk2Folk decided to continue in the lending business but switch to another (non-P2P) business model, it might instead decide to wind down the loans itself. Folk2Folk believes that this might be a more cost-effective wind down a more “consistent” lender experience. This does beg the question why this isn't its first choice.

Asked if it would look to charge higher fees to lenders if it chose to wind down its own loan book while shifting to another business model, it merely responded: “We don’t charge investors to invest in our loans.”

HNW Lending

HNW Lending will have a known firm of insolvency practitioners, called CRG Financial Recovery, run down the loans.

It's taken the interesting approach of having two people from an affiliate of CRG work some hours every week for HNW Lending, so that they are familiar with the existing loan book, if and when the time comes.

CRG would earn HNW Lending's fees. Much of those fees come at the end – when loans are repaid in full. This should encourage CRG to work hard to get all the lent money back, and on time.

Where HNW Lending could potentially make more effort in its plan is by looking for ways to make it more certain that full regulatory protection will continue for lenders after it closes.

(Note that a minority of HNW Lending's loans do not come with regulatory protection, as they are not standard article 36H P2P agreements.)

Update in August 2024: it's come to our attention that there might possibly be very close links between the main director of HNW Lending and the people at CRG and this could easily present a serious conflict of interest. I am no longer convinced that CRG would even be allowed to wind down HNW Lending.

Housemartin

Housemartin* plans to continue running the loan book during any scenario when it closes down. It will cut all sales, marketing and other costs related to growing the business. The ongoing fees it earns from existing loans will normally be sufficient to cover the costs of wind down up to the point the properties are sold and the loans repaid, or up till the time when another company buys the entire portfolio from Housemartin.

That's a sensible and realistic approach for Housemartin, as it is for many other providers. It's also my first choice for how I'd like to see it handle an ordinary wind down. However, Housemartin makes no specific plans in the event that it goes bankrupt, which I would prefer to see.

Housemartin doesn't have a segregated cash account with a protected cash pot reserved solely to support a wind-down scenario. That would have been preferable, as Housemartin is technically free to rack up massive debts of its own prior to closing, which would make it more difficult to keep going just with ongoing fees, even when cutting to a token staff.

I judge Housemartin to be highly unlikely to do what Assetz Capital did when it chose to close its P2P lending arm for strategic reasons: it is not likely to pass the additional costs of shifting strategy to the existing lenders.

Note that as of December 2024, the FCA has not yet approved the above plans, as they have recently changed.

Invest & Fund

Invest & Fund plans to wind down the existing loan book by itself. This is always preferable, as it's usually the cheapest way to wind down. But it does assume that it's able to hold onto its regulatory permissions.

Invest & Fund* has a lot of costs that it can cut swiftly, so that it is much more lean when running down the loans.

Developers using Invest & Fund raise the money they need at each stage in different tranches. Invest & Fund's plan is to continue to allow existing developers to raise money for the remaining phases. That might not necessarily work, even though it would likely be in lenders' collective interest.

If it doesn't work, some existing developers might not be able to complete their building projects. That could potentially make it harder for lenders to get all of their money back on some development loans.

Unusually, Invest & Fund allows lenders to continue to buy and sell existing loan parts, although you shouldn't necessarily expect too many buyers.

Ideally, Invest & Fund would have a back-up provider in place in case it's unable to wind-down smoothly, and this provider's fees would be fully costed.

Kuflink

Kuflink has become the first P2P lending company to provide every single piece of information and data that we have requested regarding winding down (and we are working on the rest).

Kuflink would wind down its loans itself, with a streamlined staff. This is usually going to be the most effective way to do it, although it relies on the Financial Conduct Authority continuing to allow it to use its existing regulatory permissions.

Kuflink has predicted and planned for costs to cover two years of winding down. Unusually, it has fully funded a segregated account in advance with all those costs. It reviews those amounts every month and shares them with the regulator. As of May 2023, the amount is £900,000.

Kuflink is not allowed to access this cash for other reasons and the account has multiple authorisation checks. Kuflink's bank is not allowed to use this cash to offset any debts owed to it by Kuflink itself. The bank account itself has no debts directly attached to it (charges or debentures).

Asked whether it would hypothetically ever charge higher fees to lenders during a wind-down that it initiated because it wanted to change business strategy, Kuflink responded:

“Charging higher fees to investors is not something we want to do, but we cannot give a guarantee to our investors. This will be purely dependent on the circumstances of any wind-down triggers. Please revert to the track record of Kuflink and how transparent we are as a business to our investors and any third parties and this will give an idea of our actions in a situation like this.”

Kuflink* has a stake in many loans, but it will always receive its stake last, after all other lenders have got their money back.

Lendwise

A few key people at Lendwise will be responsible for winding down loans. Based on its size, this should certainly be doable and it's probably preferable to an outside company doing it, which would be more expensive for lenders. Those third parties might end up taking larger fees than Lendwise's relatively small cut compared to other P2P lending providers.

Lendwise is keeping an open mind as to whether it might be better for borrowers and lenders to wind down in a different way.

I would rather that it had specific back-up plans in place in advance in the event that it is not best placed to conduct the wind-down. This might include an agreement with a third party to take over if it became necessary, with some training provided in advance.

That said, Lendwise in its current form is not especially likely to shift away from P2P lending into another business model. It's more likely to wind down to a close. That's a good thing, as it means it will be able to completely expunge its marketing costs and some other costs. It will therefore find it a lot easier to cover the costs of winding down the loanbook from its existing fees.

By electing to do the wind down by itself, it does assume that it's able to hold onto its regulatory permissions.

Loanpad

Loanpad would wind down the loan book itself, but each and every Loanpad loan has a highly experienced lending-partner company that has a huge amount of skin in the game.

Those lending partners would continue to do their bit in managing the loans. So the backup that Loanpad is likely to keep receiving from them is very substantial and Loanpad's workload lower than elsewhere.

Loanpad* makes a good case for claiming it will have low costs in wind down. In particular, since loans are pooled together and shared out proportionally to each lender's share, administering repayments correctly is easier. And the day-to-day management of the loans is carried out by the lending partners.

I'm convinced that ongoing fees on loans as they are wound down should easily cover any costs.

Rebuildingsociety

Rebuildingsociety has helped three P2P lending providers wind down their platforms, so it's got experience. It is able to wind down its loan book itself.

If necessary, it would pass its own ongoing loan fees on to a third-party to do it. This would likely be a restructuring and insolvency service. If another company does take over, it might not be able to offer the same regulatory protections that you get now. Since no backup agreement like this is already in place, the fees might also be higher and would eat into lenders' returns.