Kuflink In Trouble With The Financial Conduct Authority

I was hoping to do an update on Kuflink in November after getting sufficient answers to a number of outstanding queries, as well as corrected data. 

Unfortunately, those answers are not all in yet, but there’s more immediate news for me to update you on.

The UK’s financial regulator has closed Kuflink’s auto-lend accounts to further lending

The Financial Conduct Authority (FCA) has forced Kuflink to close its auto-lend accounts to further lending.

Kuflink has told lenders that it will wind down its auto-lend accounts. Lenders will get their money back, and interest, as borrowers make payments. The returns, as usual, depend on the performance of the loans.

The outstanding loans in the auto-lend accounts are already down by over £1.5 million.

Auto-lend lenders were unknowingly lending to Kuflink’s shareholders, directors and families without property security

One of the likely reasons for that FCA restriction is that Kuflink allowed loans to connected parties through its auto-lend accounts without notifying lenders.

I believe that most of that lending was not fully secured by real property that was owned by the borrowers.

The FCA has now banned any lending to parties connected to Kuflink.

I don’t yet know how many loans to non-connected parties were not fully covered by property security valued at substantially more than the lent amounts.

In any event, lenders using auto-lend accounts were not informed about some lending without appropriate security valued at substantially more than the lent amounts.

Based on limited data and my best guesses, perhaps 6% of total amounts in auto-lend are in loans to connected parties and/or in other loans that are not fully secured by property. Kuflink (or I) may uncover more.

Another possible reason the FCA restricted further lending in auto-lend accounts

I'm speculating here, but it’s possible that the FCA closed the auto-lend accounts at least in part because bad loans in those accounts were not sold on at a discounted rate to new lenders entering that pool of loans.

In other words, new lenders buy into the entire pool while paying for any outstanding bad debts as if they were healthy loans, i.e. they have received no discount to reflect the increased risk of any loan parts that they purchased that were suffering issues.

That often evens out – as lenders both buy into some bad debts that are being chased when you start lending and then you leave your bad debts that are in recovery for other lenders to hold when your lending term expires. And I should point out that losses over Kuflink's first 10 years were minimal. But such an arrangement might be in conflict with the FCA’s rulebook for P2P lending providers.

Loans remaining in auto-lend now face additional risks

As a consequence of the FCA restriction on auto-lend accounts and its wind down, property developments that were being funded in stages will no longer raise and receive future tranches through those lending accounts.

The developers will either need to secure future tranches of funds through Kuflink’s self-select lending account or from other sources.

If the developers are unable to raise additional funding quickly enough, it increases the chance of project failure. That in turn increases the risk that they will be unable to repay their loans to you in full.

Perhaps a third of lending through Kuflink is currently development loans.

There might also be a higher risk of bad debt from short-term property (“bridging”) loans that are not to be renewed through auto-lend. These form the bulk of Kuflink loans.

Such loans are named “reterms” in Kuflink’s language. (In banking terminology they are often called “internal refinances”.)

However, if Kuflink has continued to approve loans of high enough quality, and if Kuflink is now giving existing borrowers sufficient notice to start looking elsewhere for loans, most of them should be able to get the cash they need from other sources to pay auto-lend lenders off.

Kuflink has institutions and other wealthy individuals that it already works with. They might be able to take up some of the slack.

Kuflink may not take on any new lenders without the FCA’s permission

In another bombshell decision, the FCA has also told Kuflink that it must get the regulator’s written permission before it takes on any new lenders.

It’s best to assume, then, that Kuflink’s remaining lending account, the self-select account, is effectively restricted to lenders who have already fully signed up to Kuflink.

The one good sign from the FCA

The restrictions placed on Kuflink are severe and show grave mis-governance.

However, the fact the FCA hasn’t told Kuflink to stop all lending altogether is the one sign that suggests it could have been worse.

In my experience, the regulator normally tells providers that are beyond saving to stop all activities right away.

This suggests that Kuflink has a chance – if it reacts with energy to all the FCA’s findings.

Self-select lending has almost stopped

Anecdotally, lenders have reported to 4thWay that very few self-select loans have been approved for several months, with only the occasional small tranche appearing.

Corroborating information I have received, as well as Kuflink’s own data provided to 4thWay, supports those accounts.

My best guess at present – just speculation – is that Kuflink wants to ensure that enough lenders still interested in funding loans retain sufficient cash to lend in follow-up development tranches and internal refinances.

If Kuflink were to approve a lot of brand new loans then there might not be enough cash available to provide further drawdowns to existing borrowers.

A lot of staff departures

I know of at least 18 Kuflink staff departures this year, many of them senior. That includes the CEO, who left in January (although he assisted with the handover until February or March).

I’m sure there will be more, so we’re probably talking about two-fifths of its workforce.

There were also at least two senior departures last year.

A new head of governance and compliance joined the board in February this year, but departed a few weeks after the FCA restricted new lenders in August.

The person in that role, in conjunction with the CEO and board of directors, has the overall responsibility for preventing the issues that have just come to light – or reporting them to the FCA immediately if they are found.

A solicitor joined Kuflink in September as Legal Counsel.

The most senior person on the team that goes after bad debts is still working at Kuflink. This is good, because it's in the nature of Kuflink’s loans to have a lot of bad debts that need pursuing through the courts in order to recover lenders’ money plus interest due. Continuity in those operations is important.

Previous governance problems

Kuflink has had serious issues before.

In 2020/21, its independent auditors, Ernst & Young, provided a strong warning about its governance and VAT-accounting practices, and resigned.

Kuflink had to work with the FCA and new auditors to address over 20 problems identified by Ernst & Young.

4thWay never received a full list of those problems, but Kuflink’s first set of published company accounts after sorting it all out indicated that it had brought connected-party loans into line with the other lending through its P2P lending platform.

The timing of that change suggests that connected-party loans were, back then, also one of the governance issues.

Kuflink set up several committees and rebuilt computer systems as part of its solution to fix the problems.

Although I am sure it could have – and should have – been even more open about what the issues were, Kuflink did still communicate quite a lot of details back then with 4thWay and with lenders.

For example, the CEO called up many of us personally and swiftly to discuss what happened and what Kuflink was doing about it.

This time, the response so far feels different.

Kuflink didn't reveal any of this to 4thWay or lenders until it seemingly had no choice

4thWay automatically tracks changes on the FCA’s public register, so we received an alert last week when the restrictions were put up. That is the first we knew of it.

We also received many emails from lenders using Kuflink who are looking for clarity and answers. Thanks for your emails and information, and I’m sorry if I was unable to respond to everybody personally.

The FCA was a little remiss, though. While it updated Kuflink’s entry with the new restrictions last week, it dates the restriction on new lenders as having gone into effect back in mid-August and the other restrictions in mid-November.

This means that Kuflink has been sitting on this until it had absolutely no choice.

Transparency: a real problem

In August, I noticed that almost no new lenders were signing up. I chased Kuflink for an explanation for six weeks.

The answer I eventually received was framed very positively as simply a commercial decision that involved a temporary pause to new lenders. Kuflink did not explain that the FCA had restricted new lenders.

That was a quick and easy way for it to lose my trust in what it tells me.

It has been more than a week already since I asked for a meeting with two of its directors. They have now told me they will not be able to find an hour for me until some time in the New Year.

I don’t mean to blow our own trumpet, but since 4thWay’s published research is consumed by lenders with over £100 million in wealth, and many of them lend through Kuflink, I expected a great deal more urgency.

Kuflink's directors might have a lot on their plates right now, but by January they will have had five months since the FCA's first restriction to get in touch.

Is every hour of their days since mid-August really filled with more important things than candidly addressing our audience?

So far, this has been the opposite of being up front.

Communication with lenders seems no better

I find Kuflink's communications with lenders on this to be deeply uninformative, creating far more questions than answers.

I mean a long, long list of unanswered questions, many of which it must by now be in a position to answer – and so it needs to address that very urgently.

What I consider to be its main communication on this subject to lenders doesn't even admit that the FCA has placed restrictions on it, which should have been just its starting point.

One lender has told me that Kuflink promised that more information is coming within weeks. Again, that will take it to around five months after the first restriction was imposed by the FCA for it to start providing some meaningful information to lenders directly.

What this means for Kuflink’s future

I don’t know yet whether Kuflink can retain, or regain, lender trust, or if it has already done enough in the background to convince the FCA not to restrict it any further.

With auto-lend closed, many lenders probably won’t be interested in selecting loans manually and would rather withdraw their funds.

Some lenders already lending in individual loans may also consider the risks now to be higher and reduce the amount they lend.

Whatever plans Kuflink has for next year, I currently consider the most likely outcome is for lending through Kuflink’s group of companies to shrink dramatically – and especially the lending through its online P2P lending platform…

Could Kuflink’s P2P lending platform close?

Preventing its online lending platform from closing will take a huge amount of work and it might prove easier for Kuflink to look for other sources of funding for loans.

Possibly even winding down its remaining P2P lending.

Kuflink's latest published figure (that I know of) was that it has more than £700,000 in a segregated bank account to fund a wind down of its loan book, if necessary.

That number is now about 18 months old, so we need an update.

Even so, it's a pretty substantial sum. It would at least take the edge off any additional costs to lenders. Borrowers will continue to pay at the same time, including hefty additional fees from those in arrears, which might help to cover some of costs in a wind down.

How the outstanding loans are performing

I’m still waiting for corrected data and full answers on this, which is why my planned update for November is delayed.

Based on what I do have  – and on discussions with the person in charge of collecting bad debts – the loan book still seems sound enough.

We should expect a few write-offs, but apparently nothing too dramatic. I'll give you a proper update when I can.

What Kuflink needs to do now

You can probably tell I'm very disappointed with the speed and quality of Kuflink's response. It has shown the opposite of confidence.

What you want to see at this time is extreme, and immediate transparency about everything. Owning mistakes – all of them, not just the parts they are forced to by the regulator. Making good – or at least trying to. Proving how they are going to do better in future. And at least providing as much information, and as much of an assessment of the full situation and prospects, as they possibly can.

When you’ve made mistakes, and then doubled down by not immediately being clear about them in such detail that no possible questions are left unanswered, you now need to work even harder to win back trust.

To that end, Kuflink needs to do a lot of the following:

1. Come completely clean about all of the legal, regulatory, governance, accounting and loan-book issues that it, the regulator, its current auditors and any other parties have uncovered, how all that occurred, and the mistakes they made along the way. Even if they believe they could hide those mistakes.
2. Admit that they have been far too slow to disclose everything in full, while setting a new tone that shows they understand and acknowledge how absolutely severe these regulatory restrictions are.
3. Confidently get on with that transparency now; if any more issues instead come to light at a later date, Kuflink will permanently lose all trust.
4. Explain how it will keep its shareholders firmly out of any decision making at Kuflink. Setting up another internal committee (as it did four years ago) is not sufficient; Kuflink will need to provide actual evidence that the shareholders don’t have undue influence over their board, and that they have no access to staff or systems.
5. Share full details of any new systems and processes it will implement to prevent inappropriate lending, give a timetable for implementation, and then demonstrate it all when it is made live. (Merely providing a bullet list of what it has set up would not be sufficient.)
6. Share the safeguards it will put in place to prevent a steady degradation of those systems and processes, and to maintain independent management from shareholders. Enable lenders to regularly monitor that those safeguards are still working.
7. Share full details of any other steps it is taking to prevent any failures from occurring again.
8. Share accounts and other information showing the forecast lost revenue to its business as a result of the regulator’s new restrictions, as well as an estimate of the legal fees, fines and costs of implementing any remedies.
9. State its expectations on total lending volumes in 2026, outline how it intends to get those loans funded and whether contracts are already in place for it, and be honest about what its plans are now for its P2P lending arm.
10. Quickly share how it plans to pull in enough revenue or cut costs to balance its books, because its revenue will rapidly decline as the auto-lend loanbook winds down.
11. Reveal how much money is currently in its segregated account for a wind down, and explain whether it will reduce that amount as auto-lend lending shrinks.
12. Confirm the minimum standards it’s going to have for new loans in its self-select account from now on.
13. Answer a long list of outstanding questions, partly through interviews between me and senior management, and correct the data it provides to us.

Kuflink’s leadership needs to show real confidence by being completely candid very soon. Both full transparency and much stronger governance is the only way to rebuild trust.

What to do now?

For existing lenders wondering what to do now, it's never a good idea to make snap decisions or judgements when investing, including money lending.

It's still the time to await more information, collate facts and decide how to proceed after you have given yourself plenty of time to think about it calmly.

But we can't give Kuflink much more time.