How ring fenced are lenders funds in P2P lending?

ChopperST

Having been an early adopter of P2P lending and now holding ISAs with two of the major players I am wondering how ring fenced lenders funds actually are if the platform went bust? I would like to increase my exposure as an alternative to bonds and gilts but am conscious there is no FSCS protection for P2P lenders.

I have also fallen victim to online bookmakers going bust and the adminsitrators viewing customer deposits as assets of the business even when the funds were supposedly ring fenced. Surely a P2P provider going into administration the administrator would apply the same logic?

badger09

ChopperST wrote: »

Having been an early adopter of P2P lending and now holding ISAs with two of the major players I am wondering how ring fenced lenders funds actually are if the platform went bust? I would like to increase my exposure as an alternative to bonds and gilts but am conscious there is no FSCS protection for P2P lenders.

I have also fallen victim to online bookmakers going bust and the adminsitrators viewing customer deposits as assets of the business even when the funds were supposedly ring fenced. Surely a P2P provider going into administration the administrator would apply the same logic?

I too was an early adopter (Zopa in 2006) but pulled out when P2P returns were no longer worth the risk (to me).

Surely the point about P2P loans is that your money is held by multiple individual borrowers, rather than by the P2P platform. Therefore, in the event of platform failure, some other platform/administrator would take over collection of repayment of those loans.

Or did you mean something else?

AlanP_2

ChopperST wrote: »

Having been an early adopter of P2P lending and now holding ISAs with two of the major players I am wondering how ring fenced lenders funds actually are if the platform went bust? I would like to increase my exposure as an alternative to bonds and gilts but am conscious there is no FSCS protection for P2P lenders.

I have also fallen victim to online bookmakers going bust and the adminsitrators viewing customer deposits as assets of the business even when the funds were supposedly ring fenced. Surely a P2P provider going into administration the administrator would apply the same logic?

An interesting question being played out for real with the Collateral situation (although specific permission details are muddying the water there).

Personally I wouldn't invest anything in P2P unless I was prepared to write it off in the event of something happening, hence very low amounts spread across a number of platforms.

I don't see it as an alternative to Bonds and Gilts, more like over and above equity level risk.

firestone

think you need to read the terms for each company i.e could be different for for foreign P2P but the terms on most large companies such as Landbay,RS,Octopus choice,Zopa etc seem to be the same in that if they hit trouble the loans are still valid and that they have a funded plan to run the business down(via 3rd party in most cases) and with any cash in the account already being ring fenced.
But guess its a wait and see on that!

ChopperST

AlanP wrote: »

An interesting question being played out for real with the Collateral situation (although specific permission details are muddying the water there).

Personally I wouldn't invest anything in P2P unless I was prepared to write it off in the event of something happening, hence very low amounts spread across a number of platforms.

I don't see it as an alternative to Bonds and Gilts, more like over and above equity level risk.

You are probably correct on the risk level which I am happy to take to try and achieve higher returns on, its more the platform risk that I am concerned with.

I make a reasonable income from matched betting and have been stung by a company going into administration where the administrators view the deposits as assets of the business and higher level debtors were paid off first. I do wonder despite what is said in a P2P platforms business plan that an administrator could apply the same logic? There would potentially two factors to consider - your individual loan book and whatever was in your holding account at the time the business failed. I wonder if the two income streams would be viewed differently with the loans protected but the cash effectively seen as an asset of the business?

firestone

ChopperST wrote: »

You are probably correct on the risk level which I am happy to take to try and achieve higher returns on, its more the platform risk that I am concerned with.

I make a reasonable income from matched betting and have been stung by a company going into administration where the administrators view the deposits as assets of the business and higher level debtors were paid off first. I do wonder despite what is said in a P2P platforms business plan that an administrator could apply the same logic? There would potentially two factors to consider - your individual loan book and whatever was in your holding account at the time the business failed. I wonder if the two income streams would be viewed differently with the loans protected but the cash effectively seen as an asset of the business?

all the sites i have seen say cash is ring fenced as client money in a bank account most companies such as Ratesetter deal with administration plans in their FAQ sections (guess it comes up a lot! )

ChopperST

firestone wrote: »

all the sites i have seen say cash is ring fenced as client money in a bank account most companies such as Ratesetter deal with administration plans in their FAQ sections (guess it comes up a lot! )

That's exactly what a lot of online bookmakers have said - it hasn't stopped the administrators viewing it differently...

firestone

ChopperST wrote: »

That's exactly what a lot of online bookmakers have said - it hasn't stopped the administrators viewing it differently...

Gambling firms may be may different as the gambling commission(.gov.uk) says each gambling company must set out how funds are treated with 3 levels of cover basic,medium and high and client money should be kept separate but with no guarantee .Ladbrokes for example are medium as per their terms

nrsql

I believe the administrators fees can be covered by any ring fenced funds before any distribution and the administrators objective is not to minimise there own fees.

When I was involved in winding up a company the administrator sent out a final letter saying how much was still owed to the company and any future recovery would not be distributed to the creditors - didn't say what would happen to it but I guess would be kept by the administrator or the new company owner.

For p2p loan companies I would guess that the cash is mostly loaned out so there isn't much in a cash account or ring fenced accounts. Not sure what the conditions of the loans are but I would guess it would be a problem if all the loans were suddenly called in and it might be costly for the administrator to deal with the result.
Not sure what would happen to loans if they had to run to term - I would guess at some point the books would have to be closed and they would be written off or sold cheaply.

masonic

ChopperST wrote: »

I make a reasonable income from matched betting and have been stung by a company going into administration where the administrators view the deposits as assets of the business and higher level debtors were paid off first. I do wonder despite what is said in a P2P platforms business plan that an administrator could apply the same logic? There would potentially two factors to consider - your individual loan book and whatever was in your holding account at the time the business failed. I wonder if the two income streams would be viewed differently with the loans protected but the cash effectively seen as an asset of the business?

Investors have a Trust claim over money that's held in a properly ring-fenced clients account. Firms with FCA Authorisation and Client Money permissions will adhere to this. Other firms may or may not (they may say that they do, but it is best not to take them at their word). Those Trust claims will take priority over unsecured creditor claims, but not fees and expenses of the administrator. It is normal practice for the administrator to apportion their time and expenses accordingly so that work that benefits all creditors would be shared among the larger pool of assets, whereas those specific to a particular group of creditor claims would be allocated against realisations from disposal of assets relevant to that claim.

If there is found to be a shortfall in the balance of the clients account vs. the amount owed to creditors then this loss would be shared between creditors, but they would have an opportunity to recover this as an ordinary unsecured creditor. In virtually every FCA regulated service other than P2P lending, the FSCS would kick in and absorb some or all of the damage. P2P firms are notably exempt from FSCS cover, so it is not advisable to keep uninvested cash on the platform.