What happens to borrowers when a platform winds down?
In an unprecedented move, last week a borrower action group was established to protect Growth Street’s borrowers while the platform exits the peer-to-peer lending space.
This followed an announcement by the business lender, stating that it had decided to stop accepting retail investments and will focus only on institutional debt funding going forward.
Growth Street has recalled its loan book, and the platform is known to be working closely with its borrowers to develop bespoke solutions for each one.
However, this did not stop business finance specialist Rangewell from establishing a borrower action group on behalf of the platform’s borrower community.
According to Rangewell, more than half of Growth Street’s borrowers do not have a relationship with another lender, raising concerns that they could struggle to find new financing options.
But industry experts have weighed in, stating that it is not the platform’s responsibility to source new financing for borrowers after a wind-down.
“I don’t think there is any regulatory obligation,” said Frank Wessely, an insolvency and restructuring expert and partner at Quantuma.
“It would come down to any relevant contractual obligations with borrowers, and the platform’s own commitments to customer service.”
So where does that leave borrowers when a platform decides to wind down its loan book?
There is no one-size-fits-all answer.
Ideally, a borrower will be able to repay the remainder of their loan under the original terms of their agreement. Failing this, the platform should allow for any outstanding loan payments to be settled early, although this would be at the platform’s own discretion.
In order to protect retail investors, it may be in the platform’s best interests to offer some financial incentives to borrowers, to encourage full payment in a timely fashion, and to ensure that they do not contribute to a rising rate of defaults.
“Borrowers could regard this as an opportunity to avoid or delay making payments,” warned Wessely. “The platform would really have to be super-diligent on this point.”
Some borrowers could consider moving their loans to another P2P lending platform, or an alternative lender which offers bridging or invoice finance solutions.
In the worst-case scenario, borrowers could be unable to repay their loans in full, and unable to secure new financing. In this case, said Wessely, there would be little difference to any borrower/lender relationship.
“The platform might assist and show forbearance but the loans will be declared in default as per the borrowing terms, and collection and enforcement procedures will follow,” he added.
It is down to the borrower to ensure that they are fully familiar with the terms and conditions before signing up for a new loan. And it is the platform’s responsibility to choose only the most credit-worthy loans for their investor base – and to flag any potential risk factors accordingly.
Furthermore, every regulated P2P platform is now required to submit a comprehensive wind-down plan to the Financial Conduct Authority, which details how it will protect borrowers and investors in the event of a dissolution or restructuring of the business.
When done correctly, P2P borrowers should benefit from the robust systems in place to protect them from a financial shock. In the case of Growth Street, it is understood that the platform is working closely with borrowers on a case-by-case basis to ensure that they are not left at a disadvantage during the company’s restructuring.
Rangewell’s borrower action group may prove useful in raising awareness of the borrower conundrum, but ultimately, if the platform has been operating to the high regulatory standards that are required of the P2P sector, then there should be no need for third party intervention.
Read more: 5 ways P2P lenders have benefited from Covid-19
