Collateral Peer To Peer Closes Its Doors – My Thoughts

collateral p2p shutdown

Collateral Peer To Peer Closes Its Doors

** Updated April 12th, 2018 **
Collateral has announced that it has entered administration due to an FCA regulation permissions lapse assumption.

Collateral has ceased trading less than two years of opening its peer to peer lending doors in May 2016. Collateral received strong lender support from its beginnings as a jewellery pawn-broking style lender lending to its maturity as a property development and bridging loan facilitator. I had high hopes for Collateral and was ultimately shocked to hear about its shutdown.

For full disclosure, I have 5% of my net peer to peer lending invested in Collateral’s loans.  After some communication with the owner of Collateral and through my research, I did believe the management was competent and the company was built to succeed. I studied Collateral for some time before I invested. I also knew the risks of investing through Collateral, being that it was a smaller peer to peer lending company with no operating history. However the returns I was receiving more than outweighed the risks.

Who Is Administering Collaterals Affairs And Loan Book?

Refresh Recovery:
Jessica Hogson: 01695 711200

UPDATE: I have access to a Creditors report which details the Collateral situation. You can download this report here.

Currently, the FCA is pushing to replace Refresh Recovery with an alternative administrator of its choosing arguing that Collateral didn’t have the authorisation to appoint Refresh Recovery. If the FCA succeeds, I believe that the new administrator will be highly expensive and their fees could come from investors’ pockets.

What The Heck Happened To Collateral??

I recently called Refresh Recovery (Collateral’s current Administrators), for an update and here’s the information I can share.

Collateral was forced into administration by the Financial Conduct Authority for operating without FCA permissions. I have further learned that Collateral believed they were operating under FCA permission when in fact they were not. Collateral’s closure had nothing to do with any financial issues, it was purely operational. Refresh informed me there is no possibility of Collateral becoming operational again. In other words, the company won’t be reopening. Whether or not this is true only Collateral’s management knows. It is certainly an unusual turn of events which makes me question the competency of the people in charge.

Refresh Recovery is working in the best interests of the creditors (lenders) to achieve full repayment of capital and interest owed.

Collateral was operating profitably and had an excess of funds. I asked how Refresh would be paid for its services. It is Refresh’s intention to the excess funds to pay its fees rather than have these fees come from creditors pockets. Time will tell.

Refresh will attempt to wind down Collateral’s loan book. This means contacting each loan borrower to discuss refinancing options. Ideally, all loans would be financed and paid off in full.

A written update is being compiled and should be emailed to lenders in early April 2018.

Collateral’s third-party administrator, Refresh Recovery, released an official statement about the situation:

“The Company was operating in the belief that it was authorised and regulated by the Financial Conduct Authority under interim permission. It has transpired that this is not the case and consequently the Company has ceased lending.”

Statements don’t mean much to hundreds of investors with millions of pounds tied up into Collateral’s loan book. The question remains, will investors see the return of their money? I’m hopeful but not certain.

Are Lenders Considered Collateral Creditors?

I have received several emails from readers asking if they should or could be listed as Creditors to Collateral. My immediate was no because Collateral doesn’t owe lenders, the borrowers do but this could be argued either way. Refresh Recovery sent out a letter stating they view all investors / lenders to be creditors. I always stress the importance of investing through companies that have direct lender to borrower agreements. Companies such as Lendinvest don’t have such arrangements so if they were to fail, lenders would become creditors.

What Happens Next?

There are several different outcomes. If Collateral structured their loan book correctly, the loans were ringfenced to be taken over by the third party administrator who should collect and distribute loan repayments. Now we wait and see if the loan book was in fact structured correctly.

The best case scenario for Collateral’s lenders is that the loans were legally structured and ringfenced correctly between lenders and borrower and that and payments continue to be made by borrowers until all loans mature.

Collateral could also sell their loan book to another peer to peer lending company although this would be complicated and legally costly.

Isn’t Having An Administrator In Charge A Good Thing?

Not always as it depends on the administrator. Administrators are put in place by companies to oversee failure or insolvency. The issue here is that the administrator is chosen by the company that failed, possibly meaning the company has some connections to the administrator. The question then becomes, does the administrator have the companies or lenders best interests at heart? In some cases, administrators are know how to dissolve a company with the least amount of damage to the company while racking up administration fees. In my opinion, I believe that Refresh Recovery is operating in the best interest of the lenders.

Speaking of fees, administration costs could be a major issue especially if the FCA is allowed to replace the current administrator with an expensive £1,000 an hour London firm. How expensive will the legal and administration fees be in order to manage the loan book and continue the payment collections? Things could become markedly worse if additional defaults occur.

Is There Any Money Left In Collateral And What Happens To This Money?

According to Refresh Recoveries report, Collateral had funds totalling £395,404 which included deposits totalling £370,553 from 777 people. when it closed its doors. Collateral collected a full loan terms interest in advance so that may bode well for lenders if Collateral acted honestly and correctly. This and any other uninvested money should be held aside and used to pay the administrators fees and to repay lenders.

What About The Loan Book?

Collateral has outstanding loans of £15,624,628 secured by property valued at £23,552,400.

What About Other Assets?

Collateral has outstanding loans of £1,678,071 secured by assets valued at £2,478,336 These assets include jewellery, vehicles, antiques and art. These assets are being held by the administrator.

Could Another Peer To Peer Company Step In?

Possibly and in an interesting move, Bondmason has offered to assist Collateral. You can read more about this here.

According to Refresh Recovery, it has received more than 15 expressions of interest in buying all or part of Collateral’s loan book.

It would be expected for other peer to peer lending companies to step in and help. It’s in the sectors best interest for the Collateral situation to be handled correctly to provide investor confidence in the wind-up process. If not, lenders investing through other peer to peer companies might run for the exits, creating a panic.

It may not be in the best interests of the administrator or Collateral to accept this help as this becomes a financial matter.

Should I Be Concerned?

Anytime a company closes its doors is a cause for concern. What is troubling to me about this situation is Collateral’s website stated the shutdown was an IT technical issue and that the site would be back up “shortly”. This was an obvious untruth and one that really annoys me.

While Collateral’s position is frustrating for lenders, including myself, it will also be an interesting case study on peer to peer lending wind-up effectiveness of a loan book managed by a third party administrator. This situation is unknown territory for UK peer to peer lending.

What is more concerning is how the FCA appears to interfering in the administrative process while trying to impose their choice of administrator while claiming to be protecting the interests of investors. While I understand why the FCA is doing this, I don’t trust that a government regulatory body has my interests as an investor at heart. If they did, they would shop around and find a cost-effective administrator who won’t drain all of Collateral’s assets to pay for their administration fees. It also seems as if the FCA has an axe to grind here, possible to make an example of Collateral.

As much as it pains me to see a peer to peer company go out of business, I knew it would happen one day. I think it will trigger other companies into cleaning up their acts and making sure all their legal, regulatory and financial obligations are in order.

Diversify Diversify Diversify!

Collateral’s closure is a good reminder of how important diversification is within any investment sector. This is the reason I invest through multiple different peer to peer and crowdlending companies. If one fails, it doesn’t have a hugely detrimental impact on my overall portfolio.

Collateral’s situation is extremely complicated and will take time to be settled. I hope this update provides some comfort. In my opinion, I think this situation is being handled professionally and I have a positive outlook on the outcome.

I have removed my Collateral review because it’s no longer relevant but I will update this page as I receive more information about Collateral’s shutdown.


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** This page is for information purposes only and should not be considered investment advice. Opinions expressed on this page are based upon my investing experiences. All information was deemed to be correct at the time of writing. Peer to peer lending contains risks so never invest more than you can afford to lose. **