Collateral Review: P2P Lender Now In Administration

Summary of Collateral Review: The Collateral P2P platform collapsed a year ago, and investors are still waiting for a definitive resolution regarding to what is happening with their cash. This serves as a useful sobering experience to anyone considering investing in P2P, and it is important that lessons are learned from this. Thankfully, the platform has long been taken offline and new investors are unable to register, although that will be scant consolation to anyone with money tied up here. An page from the administrators here details the latest information on Collateral.

Background Story: The Collateral website simply disappeared in March 2018 without any warning, leaving a holding page saying that an upgrade was underway. Investors grew restless as the page stayed up longer and longer, and it became obvious that something had gone wrong.

Confirmation was soon to arrive a while later. It had emerged that the platform had fallen foul of FCA rules, simply not having the necessary authorisations to operate and had to cease operations immediately. This was not the end of the saga, however. The appointed administrator was disputed by the FCA, and legalities had to commence in order to get this changed. This was duly delivered and BDO came on board.

This was just the beginning of an ongoing saga. There have been further irregularities such as missing monies from client accounts, and customer databases going missing and having to be reconstituted. Communications from the administrator have been irregular, and the news has almost all been bad since: their fees incurred so far have been large, not a great deal of the loan book has been recovered, and what were thought to be previously solid loans (secured by chattels) now look less solid as the valuations are downgraded.

It should be stressed at this stage that it looks like at present there is little in common with the Lendy collapse aside from that it was most likely to be initiated by the FCA. Lendy differ in that they are seemingly following a pre-arranged run-down process and there are no signs of any wrong-doing by the owners although it would not be a surprise if some were to emerge.

Here are some key lessons to take from this Collateral review:

Collapse can come without warning

There are often few warnings to the collapse, even though platforms themselves may know the writing is on the wall. Collateral was a well-regarded platform within the P2P investing community at least up to 2016. It offered a decent range of loans from property to possessions, often in lower size at good interest rates. Yet the site disappeared virtually overnight.

Administration takes a long time

If we are unhappy about the length of time for a property loan to seemingly progress, this is little compared to the administration process. Updates are irregular at best, often because there is nothing to report. The status of loans vary immensely. Some may become distressed straightaway. Development loans need further tranches of funding, and P2P lenders are generally those of last resort. Under these circumstances, developments grind to a halt. Other loans are simpler bridging or asset-backed and simply continue to make the payments as if nothing has changed.

Administrator fees are high

The administrator report invariably reference fees incurred, and in later reports a more detailed report showing the costs incurred so far. It goes without saying that these fees are large, with hourly fees of hundreds of pounds for even the most junior staff. Given this, there would appear to be some conflict of interest for the administrators, as stringing the process out maximises their fees at the expense of investors, and it is not the case that investors can choose anyone else to do the job. Supposedly balancing this out is the existence of a creditors committee but this will not prevent a significant amount of funds disappearing into fees.

Communications are infrequent

As investors we are used to hearing regular updates on loan investments even if there is nothing much to report. Administrators only update investors at important junctures, and there may be gaps of several months between communications.

Repayments come at the end of the process, not during

The administrator fees rank ahead of those of investors. It is the case that the loan book at Collateral will be fully reconciled first before the final payouts are done. This translates into a very long wait for investors. It has been one year so far with not even a hint of a repayment date, and none seems to be on the horizon either. It may be the case that getting any money back will take another year or more.

The situation may be a bit different for Lendy, as the wind-down procedure will operate the company in its current state which would mean payments being returned to investors as they come in, but this is far from definite as there has not really been a similar case of this size.

Loan assets become impaired

Getting borrowers to pay up seems quite a tough job for P2P platforms at the best of times. Under distress, it seems to be the case that borrowers can become even more tricky to sort out. In any case, the value of the asset becomes impaired, and it is likely that a capital discount is needed to redeem the loan. Combined with administrator fees, this can result in a large haircut for investors.

Platform interests can become misaligned from investors

When times are good, investor interests are aligned with that in the platform, as both make more money when the business expands. Once in trouble these interests can diverge significantly. Platforms will always have several months notice over the likely direction of the company, and actions can be taken to preserve wealth – in effect pulling some of the similar stunts that borrowers do.

Further legal action is difficult

There have been rumours of legal action being taken against companies and individuals, but in practice this is difficult to imagine. Even if an action was successful it would likely be the case that there would be no assets to pay it out with.

Collateral Review: How to mitigate against these risks

In truth, it is very difficult to do so, apart from limiting your exposure to any particular platform that you may think will run into difficulties. Accounts are available on the Companies House website and may give some particular insights, although this can be far from conclusive. Many P2P platforms are loss-making due to the early stage of life they are in. Other larger ones can also sell off their equity to raise cash (as we have seen with Ablrate and Seedrs recently).

However, platform risk in my view ranks at least or above borrower risk. High interest rates do not equate at all to actual interest rates (and I do believe that regulation should force platforms to disclose a more accurate standardised figure, perhaps separating out real returns and fees instead of allowing some to game the figures.

If you have many platforms on the go at one time it may be easy to lose track of how much you have invested, so it would be advisable to keep track of your total exposure to the industry, especially with regard to the smaller, weaker platforms.

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