Since the 2008 financial crisis, record low interest rates have forced would-be depositors to look elsewhere to make a return on their capital and risk-averse mainstream lenders have withdrawn from the near prime market, driving a number of consumers and SMEs to look elsewhere for affordable credit.
The combined effect of the above (combined with technological advancements) has been a boom in the alternative finance market, with borrowers looking to raise funds directly from investors through investment schemes (such as minibonds or crowdfunding) or alternatively via a P2P lending platform.
However, these products are inherently risky for investors, as:
many of the borrowers are of lower credit quality;
the costs of any intermediary (for example, mini-bonds have historically paid a c.20% marketing fee) can make the required return (and therefore risk) on the underlying loans incongruent with investor risk appetite; and
for SMEs, the borrowers can be pre-revenue, have minimal assets to collateralise lending, and have inadequate governance and controls thus increasing the risk of fraud or misappropriation.
Many high-profile firms in the sector have failed in recent times (e.g. London Capital and Finance, Lendy, Blackmore Bonds, and Basset & Gold) and the FCA has therefore identified P2P as of high risk for customer harm and is taking an active interest in the adequacy of their solvent wind down plans.
The Group received loans from retail investors which is used to lend to sub-prime borrowers.
We were engaged by the regulator to review the solvency of the group.
Our work included a desktop review of the underlying business model, balance sheet and assets and considered whether there were any risks to the group not being able to repay the retail investment absent further lending.
Insolvency
Appointed administrators and liquidators of various UK and Channel Island companies engaged in raising money from retail investors via mini-bonds and other means. Although the UK mini-bond entities were unregulated, the CI funds were regulated by the GFSA.
Upon appointment the companies had minimal assets and our primary focus was to review the company records and bank accounts to identify how investor funds had been dispersed, and potential recovery actions that could be taken.
Legal claims remain on going.
Insolvency
Appointed as compulsory liquidator of this unregulated entity, which was used by its shareholder/director to borrow money from retail investors.
The director told investors that these funds were being on-lent to an electrical wholesaler, but investigations revealed that the company was part of a Ponzi scheme and the director was subsequently imprisoned.
At the time of our appointment, the company had minimal assets and our primary focus was to review the company’s records and bank accounts to identify potential claims. In total, c. 30% of investor losses were recovered from claims against the director and third parties.
