The new CEO of the FCA Andrew Bailey is concerned about the UK’s peer-to-peer lending sector, particularly in terms of the manner in which platforms are marketing themselves.
Under questioning from Chris Philp (MP for Croydon South), Bailey confessed that he is “pretty worried” about certain aspects of the UK's P2P market. Bailey says that peer-to-peer lending investments are at the asset management end of the investment spectrum, the opposite end to bank deposits. But Bailey believes that the platforms’ marketing efforts do not always reflect that positioning. “I am pretty worried about some of the things that are said about these funds when they’re sold to people,” he said. “Some of the things that you read is that they get very near, but not quite there, to promising capital certainty”.
Philp added that peer-to-peer lenders also come close to “promising a fixed return”. Philp’s concerns over the sector first emerged during a treasury select committee meeting in October, when he said that he was concerned that peer-to-peer lending “might be the next big regulatory or financial services scandal”.
At yesterday’s meeting, Philp said that peer-to-peer lenders have an incentivisation mismatch, in that their fees are tied to transactional volume, but without taking any balance sheet risk. Philp said that this is exactly what happened with the “origination and syndication of sub-prime loans in the US in the run up to 2008”. Philp later put a question to Bailey: “Why not require the platforms to co-invest let’s say 10% of the loan value on their own balance sheet, either pari-passu or even the first loss piece? If their own money was on the line, alongside that of consumers’, that would concentrate their minds when it came to making good credit decisions”.
To this, the new FCA boss – who only kicked off his tenure at the start of the month – said that the regulator had to be mindful of imposing rules that looked like bank capital requirements, as these might appear to investors to be some kind of guarantee that money will be returned. However, he added that co-investment is “certainly an idea that’s worth thinking about because it puts skin in the game”.
On Philp’s concerns about the fee structure of peer-to-peer platforms, Bailey referred to Northern Rock as a “case in point”. “You structure your lending and you take the fees up front,” said Bailey. “So you capitalise the fees into your return in the year in which you grant the loan or the investment, and that creates all sorts of uncertainties about how your churn the book and how you manage the book”.
Bailey’s comments come just a few weeks after the FCA published its post-implementation review of “crowdfunding”, which raised a wide range of concerns about the sector – headlined by the notion that peer-to-peer lenders benefit from a kind of regulatory arbitrage.
Bailey joins a string of senior regulatory figures to have cast a shadow over the peer-to-peer lending space. Former boss of the City regulator Lord Turner said in February that “the losses which will emerge from peer-to-peer lending over the next five to 10 years will make the worst bankers look like lending geniuses”. In June, Andrew Tyrie MP – Chairman of the Treasury Select Committee – wrote a pair of probing letters to the FCA and PRA on the subject of crowdfunding. Whether or not the platforms are sufficiently incentivised to assess investment opportunities was at the forefront of his questions.
Footage from the treasury select committee meeting is available here. Philp’s questioning about crowdfunding begins at around 15:27:00.
Now in its sixth year, the AltFi London Summit returns on 18th March 2019 to 155 Bishopsgate. Last year proved to be a crucial turning point for the key players building the future of finance. Leading platforms launched oversubscribed IPOs, digital banks proliferated and mainstream financial institutions started their own disruptive propositions. With 2019 certain to be another landmark year, more questions will be asked by regulators with investor interest in disruption also poised for more rapid growth.