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How has the collapse of TrustBuddy, a peer-to-peer (P2P) platform lender, raised concerns about regulation in the P2P sector? Charles Leveque, partner at Harbottle & Lewis, explains that the collapse of TrustBuddy may encourage those in the sector to question the efficacy of the current regulation in the P2P sector.
Lenders’ money frozen following P2P lender collapse, LNB News 16/10/2015 10
Daily Telegraph, 16 October 2015: Peer-to-peer (P2P) platform lenders have had their money frozen this week following the collapse of TrustBuddy, the world’s first P2P lending platform. P2P lenders give money directly to borrowers in return for capital plus interest.
What is the status of the funds trapped in the platform?
TrustBuddy’s assets appear to be in the hands of Swedish administrators.
If the administration of TrustBuddy were governed by English law, the administrators would have an obligation to ensure that TrustBuddy’s creditors are satisfied by realising and distributing TrustBuddy’s assets.
What does this mean for investors?
Presumably, TrustBuddy’s assets are principally its debtors and, depending on the terms on which TrustBuddy has made loans, the administrators will probably need to wait for the loans to reach maturity before collection. Having collected the loans, the administrators would, under English law at least, have an obligation to use those funds, to the extent possible, to satisfy creditors in the order prescribed by law. Whether TrustBuddy’s lenders are treated in the same way as other unsecured creditors will depend on Swedish law and the way that lenders’ investments were structured.
It has been alleged that TrustBuddy used its lenders’ funds to satisfy its own debts rather than for the intended purpose of lending through the platform. If that is the case, we can speculate that there may be insufficient funds from the realisation of TrustBuddy’s loans to repay all of the lenders who have lent through the platform.
What is the significance of the TrustBuddy scandal for the P2P sector? Does this raise wider concerns about regulation?
Yes, it is a wake-up call for jurisdictions that have not introduced any regulation of P2P lending platforms. UK platforms will argue that, because they are now subject to regulation by the Financial Conduct Authority (FCA), there are safeguards in place to mitigate the risk of platform failure. The UK market for lending platforms is now well established and the companies operating the platforms are supervised by the FCA. These factors must reduce the risk of platform failure, but the risk cannot be discounted entirely. TrustBuddy’s demise will certainly not go unnoticed among the investor community. It will serve as a timely reminder for lenders of the risks involved in lending through platforms.
What is the current state of P2P regulation in the UK?
Prior to 2014, there was no requirement for a UK P2P lender to be authorised by the FCA. The rules were changed in 2014 and created a new regulated activity of ‘operating an electronic system in relation to lending’. This says that anyone who accepts monies from individual investors and lends them to third parties through a platform is carrying on an activity that requires it to be authorised by the FCA. The platform would then need to go through a rigorous process to become authorised. This involves the FCA carrying out due diligence on the business plan of the platform and the individuals managing it. The platform will need to demonstrate it has the finance in place to operate properly. Ultimately, anyone who wants to set up such an operation will have to be a fairly serious participant in the market and have the financial backing to do so.
In addition, once a platform has become authorised, it is subject to ongoing compliance and supervision by the FCA. In particular, it is worth noting that regulated platforms are subject to the FCA’s client money rules. These require, among other things, the platform to have a number of procedures and processes in place to protect investors’ money. These funds must be segregated and cannot be used other than for the purpose intended by the investor.
Regulation in the UK also requires a platform to hold in place a capital buffer at all times to reduce the risk of platform failure. Until 31 March 2017, a platform cannot have less than £20,000 as a capital buffer. This increases to £50,000 after this date. Additional amounts of capital are required for platforms depending on the volume of loans that they make.
With these safeguards, and the rigorous vetting process a new platform must go through to become authorised, the likelihood of platform failure is reduced, but cannot be discounted entirely.
How can existing and future P2P platforms ward against these sorts of issues?
By making sure that they have proper policies and procedures in place to ensure that:
• investor funds are employed as they are required to be, and
• the volume of bad debtors to the platform is proportionately small
Interviewed by Duncan Wood.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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