Last week’s FCA announcement about the regulation of peer-to-peer lending platforms is both timely and welcome.
However, I am concerned that even the regulator is having difficulty distinguishing between two entirely different industries, peer-to-peer lending and crowdfunding.
This is ultimately unhelpful and will cause confusion among industry participants and consumers.
P2P lending is a modern, friendly, fast process that enables consumers and businesses to borrow and lend money without going through a traditional intermediary like a bank.
Simplicity is key to all this. The lender can see the typical rate they can get along with the length of time they choose to lend. Borrowers have to complete a full credit check, in a similar way to a traditional bank loan.
Some crowdfunding investments expose some people to the likelihood of total capital loss.
As the FCA acknowledges P2P lending is “generally of lower risk” and “the market has the potential to develop new and innovative models in the future”. Why then does the FCA define consumers of P2P lending as ‘investors’ when they are providing funding for term loans and not investing in an investment product?
P2P lending may be relatively new, but it has had a huge and positive effect in recent years for consumers and small businesses.
Even in an age of the Government’s Funding for Lending Scheme, the most recent Bank of England data shows that SME lending in the UK fell in 25 of the last 28 months. Yet in our own industry, lending in the UK is doubling in value terms every six months.
The P2P Finance Assocation’s own data estimates that the size of the P2P lending market to both consumers and business stands at £600 million.
Companies such as Zopa and RateSetter are allowing consumers to borrow more cheaply and consumers receive inflation beating returns.
Why? As the industry is entirely online, it is able to provide smarter, quicker and more efficient delivery than the banks. Our digital infrastructure means we do not have the legacy issue of traditional lenders and we can therefore pass on the savings to our customers.
It goes to show how successful the model is working when British company Funding Circle announced last week that it would be expanding into the US.
From the regulator’s perspective, if the industry continues to grow at this rate, then naturally it is the correct decision to lay down some rules.
Within our own industry and trade body, we seek to ensure the innovative and rapidly growing P2P lending sector maintains high standards of protection for consumers and small business customers. Our members are required to meet robust rules and operating principles, as well having minimum capital requirements.
Regulators and consumers must be aware that P2P lending is distinctive in its own right and needs its own bespoke regulatory regime if it is to continue growing and benefit consumers.
We want to work with policymakers to help implement a regulatory regime that is proportionate and risk-based. A broad brush approach to regulation could simply slow down or stop the good work P2P lending is already doing for the UK economy.
Christine Farnish is chair of the Peer-to-Peer Finance Association