What is / was Collateral UK?
Collateral UK is a British P2P lender. It started by providing loans secured against pawnbroking assets such as jewellery. Over the last year, it shifted its attention to loans secured on real estate projects. Some of the loans offered good returns relative to risk.
Collateral UK was quite small (approximately £18 million of investments were made through the site). However, it had developed a loyal following amongst its investors, and a solid reputation. It was known for providing a good quality of information about loans, sensible structures, and a good lending record. A minority of investors raised some concerns about the platform increasing its focus on real estate loans, and the site found some of the larger loans difficult to fully fund.
Collateral UK has closed down. It will take time to fully understand the situation but the following facts seem to be clear:
- The Collateral UK website was closed without notice on February 26
- The interim approval Collateral UK had received from the regulator (The FCA in the UK) was withdrawn on January 31.
- The site continued to operate after losing the FCA interim approval status, and did not inform its investors of the situation
- An administrator has been appointed to wind down the company and recover assets for investors. It appears that the FCA directed this to take place
- The appointment of the administrator appears to have been due to FCA enforcement actions, rather than due to an insolvency of the business
What next for Collateral UK's investors?
The administrators recently provided each Collateral UK investor with an update on the situation. In our view, the most critical statement made was confirmation that all loan investments are ring-fenced. All payments made by borrowers will be passed onto each investor with a participation in the loan. The administrator is also looking at options to potentially continue the business. However we think the chances of this taking place are very slim. More likely, the loans will be transferred across to another P2P platform, who may be able to service the loans efficiently. This would also help to grow the investor base of another platform.
One outstanding question remains about the cash that was held on behalf of investors by the platform. Will this be repatriated to each investor, or form part of the estate of the company to be allocated to creditors? We understand that the administrators have provided some assurances that this cash will be repatriated to investors, as the funds sit in a separate ring-fenced account. This is positive news. We would have expected such funds to be ring-fenced properly.
One concern we have, however is that during February, Collateral UK changed its terms and conditions to say that “if Collateral was to become insolvent then any money held by it would not be held in accordance with the FCA’s client money rules, which require in particular that client money is held separately from a firm’s own money, and it is likely you would rank as an ordinary unsecured creditor. Ordinary unsecured creditors rarely make any recovery on insolvency.” We hope that these changes to the terms and conditions have no impact on the legal position of Collateral UK’s investors. Particularly as the changes to the wording were made without any consultation or explicit notification.
A lot of questions remain unanswered...
- Why didn’t the FCA provide full authorisation to a P2P platform that appeared to be performing well and was popular with the investment community?
- Why did Collateral UK continue to operate for a month after losing authorisation to operate?
- Was there no alternative other than to close down the company without prior notice? What issues were identified? Why hasn’t the FCA made any statements about the matter?
- How long will it take to close down the company and return funds to investors?
- Will there be sufficient funds available to pay the fees of the administrators without incurring any losses for the investors?
- Will any other platforms seek to take over the business?
Lessons to be learned...
When an event like this takes place, it’s human nature to try and learn from it and find ways to minimise risk for the future. We need to get a lot more details from the administrator, the FCA and the company to understand the full picture. However, we feel that some potential lessons and insights are already evident:
- The UK is one of the few European markets that fully regulates P2P sites. Up to now, it has appeared to have taken an extremely relaxed approach, and placed P2P low on its priority list. Those days appear to be over
- Receiving full authorisation to operate from the FCA is an important milestone for a P2P platform, and appears more difficult to achieve than it did prior to these events. This should generate more confidence in the sites that have full authorisation, and will create increased pressure for sites operating on interim approval licences to get full approval ASAP
- It is still not 100% certain what will happen to cash held on deposit by investors in the Collateral UK platform. We expect the funds to be returned in full. However, minimising funds that are not invested on any platform remains a very good idea, and reduces potential risks if a platform runs into difficulties
- It is important to spread P2P investments across several platforms, and be selective about which ones to invest with