P2P lenders' wind-down plans are in the FCA cross hairs
The UK’s regulators are changing their focus around peer-to-peer lenders, with a number of collapses having highlighted their risk to investors. Frank Ofonagoro, a partner at Opus Business Advisory Group, explains what this means for the sector, and for insolvency practitioners.
On 25 May 2021, the Financial Conduct Authority (FCA) wrote to all of the UK’s authorised loan-based peer-to-peer (P2P) crowding platforms, to express its concern about areas of potential harm for investors (i.e. lenders). Amongst the four areas listed was the adequacy of current wind-down plans (WDPs), their triggers, and liquidity monitoring.
In its latest communication to the P2P sector on 15 January 2024, the FCA made it clear that it continues to be hyper-focused on seeing better prepared and realistic WDPs and will take appropriate action to limit the ability of P2P firms to continue to operate where this is not the case.
The detailed tenets of what the FCA would deem a compliant WDP are listed in its thematic review on wind-down planning (TR22/1) published in April 2022. In this review, the FCA highlighted the following three focus areas:
Liquidity
Insufficient cash resources will undermine the credibility and adequacy of a WDP and significantly impact successful implementation should the need arise. Firms must ensure that they are able to accurately forecast their cashflow during the wind-down period, including what happens should base assumptions underpinning the WDP change from plan. This is the focus of this article.
Triggers
WDP triggers are an important corner stone of the preparation of a WDP. The decision as to the choice of triggers will be specific to the nature of a given firm’s business activity and will be closely linked to its risk management framework. This area will be covered in my next article in this series.
Group interdependencies
Firms should factor the implications of being part of a corporate group in their WDP. Any intra-group reliance operationally or financially must be reflected in any planning. I will take a closer look at this in the final article on this topic. When I am supporting clients in winding-down their business operations, the preparation and monitoring of realistic cashflow forecast models, borne out of 25 years of situational experience, is the key financial information underpinning the WDP.
So, what are the key elements of a realistic wind-down cashflow forecast model?
- Stressed scenario - assume a stressed business scenario at the outset of the cash flow forecast (including the inclusion of a contingency cash buffer amount), which adds additional prudence to the forecast.
- Granular detail – the construction of the cash inflows and outflows should be as granular as the firm’s management information will allow. For each week or month in your cash flow forecast, list all the cash you’ve got coming in and going out. Have one column for each week or month, and one row for each type of income or expenditure.
- Written detailed assumptions – the assumptions driving the amounts and timings of cash inflows and outflows should be documented and agreed with the Board of Directors and the WDP implementation / project management team.
- Scenario modelling with sensitivity analysis – perform sensitivity analysis on the base cashflow forecast, modelling potential worst-case scenarios and downsides to the WDP rolling net cash position, which may reasonably occur should there be material variations in assumed cash inflow and outflow items. Modelled variations should include cashflow timing mismatches that may lead to firms having to fund any temporary shortfalls during the wind-down period.
- Business as usual cashflow forecast comparison – it is essential for firms to analyse their Business-as-Usual and wind-down cash inflows and outflows over a hypothetical implementation period to identify cash mismatches, which may represent a key liquidity risk to be managed.
Founded in 2013, London headquartered Opus Business Advisory Group offers up restructuring, corporate finance, forensic accounting, turnaround, investment and rescue planning services to clients across the UK. The firm has extensive experience in developing wind-down plans with firms of all types and have a substantial insight of the FCA’s expectations in this area.
