Regulation is expensive, burdensome, and could put companies out of business. So are the UK’s peer-to-peer lenders just paying lip-service to the FCA by saying they’re happy about it?
This year, for the first time, my company will spend half a million pounds on regulation - and I’m happy about it. Half a million pounds might sound trivial if you’re running a big bank, but when you consider that it represents a few per cent of our annual turnover, it’s a significant sum of money.
Even just the word ‘regulation’ sends a shiver down the spine of bankers still reeling from huge fines for breaking the rules. But my peers and I have been asking the FCA to regulate our industry for several years now. We were delighted when the government agreed to an interim regulatory regime for peer-to-peer lending was introduced in April 2014 – and it remains in effect as I write – but our aim has always been for full regulation across the sector.
It’s certainly true that regulation costs money, time and effort and can get in the way of business. So why are we so keen to be regulated?
Well, compared to massive financial institutions, peer-to-peer platforms don’t actually have much to fear from regulation. Mindful of the need to establish positive reputations and build trust, most of us have been running our businesses as if they were regulated anyway, so we’re not a bunch of sharks that have suddenly been told to give up meat. There was an extremely high risk in our early days that if investors lost money, this would prompt complaints that could destroy our growing industry. While three large banks can handle 60,000 ombudsman complaints in six months without breaking their stride, for us even 60 complaints would have posed an existential threat in our first couple of years of trading. This teaches you to look after your customer.
Our businesses are focused on transforming specific elements of finance. RateSetter specialises in business and personal loans with the interest rates set by the investors and borrowers in our market – we call this the People’s Rate. Our systems are also efficient and streamlined, because we were in the fortunate position of being able to build our IT systems from scratch. What we do is fairly simple: in contrast with the example of a US bank, we won’t need 236 pages for our disclosure.
More importantly though, regulation makes it less likely that one bad apple will bring the whole industry down. Regulation doesn’t eliminate the possibility of making the wrong decisions and going out of business, nor will it change the motivations of those working in the business, but it does mean that consumers can rely on a degree of consistency and oversight and can therefore be more confident in the peer-to-peer industry as a whole. This is good news.
It’s also an opportunity for us to find new ways to enhance our offer, which in essence means going beyond the letter of the regulations and innovating to promote better outcomes. For example, RateSetter is launching a new infographic explaining our terms and conditions to our borrowers – we shouldn’t continue to kid ourselves that everyone diligently reads through all of the small print.
Between now and the end of October, our work with the FCA will cover the core issue of ensuring sound credit and affordability processes, plus a wide range of areas from controls on client money, through to the stability of IT systems and corporate governance. In short – all the key areas of best practice that will protect the interests of consumers.
The FCA authorisation process is a serious undertaking and we can’t afford to be complacent. We feel confident that our instincts are in the right place but as a result it is likely that the peer-to-peer lending industry will look very different in 12 months' time and it’s entirely possible that not all platforms will pass the FCA’s test, not least because of the financial cost involved.
So will we still be happy about regulation in ten years’ time? Ultimately, I think we will be. Full regulation won't in itself guarantee success for the peer-to-peer sector, nor will it make any one platform better than another. But it is an important step on the road to peer-to-peer lending becoming mainstream.