What would happen if an Innovative Finance ISA provider were to collapse?
The Financial Conduct Authority (FCA), which governs the peer to peer lending sector in Britain, has clear rules for all peer to peer platform operators. Each FCA-regulated platform is vetted for compliance by the FCA on an annual basis.
Platforms are required by the FCA to have in place a contingency plan, to be deployed in the event that that platform were to come into financial or other trading difficulties. The rules around which the platform must build these plans are set by the FCA, and are intended primarily to protect the consumer (both individual borrower and individual lender).
Many platforms have back-up arrangements in place to ensure that, for existing/ongoing loans, continuous service could be provided by a third-party service provider in the event of platform failure. This contingency service provider would in effect step in with the sole purpose of managing all of the existing loan agreements through to their natural maturity. The contingency provider would also quite possibly act as debt collection agent, though this may equally be delegated to a third party organisation.
The backup service provider would thus be brought in to continue collecting payments from borrowers, and to continue passing those payments onto the lender in accordance with the original loan agreements. The backup service provider would fill the operational ‘void’ left by the failed platform, but the underlying loan agreement between lender and borrower may in fact remain almost entirely unaffected. Indeed, from both the borrower and lender’s perspective, the day-to-day operation of the loan repayment process itself may be materially identical under the operation of a backup service provider.
The agreement may not be entirely identical going forwards however. It may be that the backup service provider charges an additional (incremental) fee to the lender as part of their undertaking to handle the administration of the existing loan book. Therefore the effective interest received by the lender would be reduced to the extent that such a fee were taken (either incrementally over time or as a lump sum).
Unlent funds (funds which the individual lender has uploaded on to the peer to peer platform via the Innovative Finance ISA, but which the platform has not yet lent out to borrowers), should have been held in a segregated client money bank account away from the platform’s own trading bank account. This means that (theoretically at least) unlent funds could be returned to the original individual IFISA lender with relative ease.
It is recommended that prospective IFISA lenders review the individual platforms’ contingency plans and fail-safe process – because whilst the FCA regulations do to a large extent prescribe the processes and procedures which need to be put in place in order for a given peer to peer lending platform to operate under an Innovative Finance ISA banner, the exact interpretation and operational execution of those rules may vary from one peer to peer lending platform to another.
Updated: Friday, August 10th, 2018