Insolvent P2P firms warned against using Scheme of Arrangement
Regulated firms – including peer-to-peer lending platforms – have been warned not to abuse insolvency law to avoid going into administration.
The Financial Conduct Authority (FCA) said it has seen an increase in the number of firms developing proposals, such as Scheme of Arrangements, to manage their liabilities. It has told firms they could face “assertive action” if their proposals unfairly benefit them at the expense of their customers.
A Scheme of Arrangement is a process used by a company in financial difficulty to reach a binding agreement with its creditors to pay back all, or part, of its debts over an agreed period, instead of entering into administration.
Mark Turner, managing director in Kroll’s financial services compliance and regulation practice, said entering a Scheme of Arrangement means customers are likely repaid less than what they are owed, but the process can prove a good alternative to administration because it cuts down on costs. However, he highlighted that the FCA wants to stop people using a Scheme for Arrangement for their own interests.
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“A Scheme of Arrangement can be positive, it can avoid the costs of administration and get investors back more than they would in a full administration, but the FCA doesn’t want people abusing that,” he said.
“P2P platforms can go into a Scheme of Arrangement, but the FCA is saying if you try and go down this route don’t think you can run away with liabilities and act in unreasonable manner and get away with paying less than you should to consumers where harm has been done.
“If they think the firm’s management is not acting with integrity and in the best interests of customers, they might come after you.”
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Damian Webb, restructuring partner at RSM, the administrator of collapsed P2P platform Lendy, said that the FCA is effectively stating regulated investors have to be treated as a “super priority of creditor”.
“This guidance has been drafted by the FCA in response to the historic and anticipated Company Voluntary Arrangements and Scheme of Arrangements which materially impact on retail investors,” he said.
“Fundamentally the FCA do not want to see a transfer of value from the retail investors (regulated by the FCA) to shareholders. They are effectively stating regulated investors have to be treated as a super priority of creditor.”