On 3rd February 2016 at the Hoxton Hotel, LCN Legal co-hosted, with Capita Mortgage Services, an informal workshop for marketplace lending platforms, financial institutions and the media on Putting in Place Back-up Servicing for P2P Platforms.
We would like to thank our attendees for contributing to an open and productive discussion on this topic. Our guests represented:
- Capita Asset Services
- Fintech Podcast
- Metro Bank
- Octopus Investments
- Wellesley & Co.
The event was co-chaired by Marsili Hale, Associate Director of LCN Legal and Godfrey Blight and Sarah Green of Capita Mortgage Services. We would like to extend a special thank you to Phil Reynolds, Director in the Restructuring Group at Deloitte for sharing his knowledge of what platform failure really could look like.
The round-table discussion tackled some tough questions including:
- Why is back-up servicing so expensive?
- Could a back-up servicer really do the job of a platform?
- Why does it take 90 days to invoke a back-up servicing arrangement?
- Will a back-up servicer disrupt operations when it comes to reviewing a platform’s operation?
- Is there any need for a 100 page contract to document back-up servicing?
The discussion was held under the “Chatham House Rule”, and the following key points came out of the discussion:
- The putting in place of back-up servicing by lending platforms is being driven by institutional investors and the FCA.
- Back-up servicing is perceived in the same way as insurance and no-one actually wants to pay the premiums.
- Discussion of the cost of back-up servicing should arguably be less focussed on investor returns, and more on recognising that having a back-up arrangement is the price for a platform to participate in the market at all.
- Back-up servicers need to be able to step-in quickly to preserve the value of the loan assets. However, the cost of doing so needs to be proportionate to the size of the platform and the risk the platform will fail.
- If a platform fails it may be difficult to get engage a reputable servicer at that point, unless suitable arrangements are already in place.
- The process of putting in place back-up servicing, if approached correctly by all parties, has the benefit of stress testing the platform’s operational functions. As part of this exercise, key platform staff should be identified as crucial to orderly run-off.
- If a platform were to enter liquidation or administration without robust back-up arrangements or contingency plans, directors may be exposed to claims that they failed in their fiduciary duties to the platform.The contract with a back-up servicer needs to be detailed from an operational perspective and backed up with a thorough understanding of how the platform works.
- Platforms and potential back-up servicers need to work together to educate themselves on how they can get the most value out of putting in place a back-up servicing arrangement. The old servicing systems and contracts need to be updated to be able to serve the platform market efficiently.