Have the seeds of a new alternative lending industry body been sown?
The headlines will rightly go to yesterday’s terrific AltFi Europe Summit, but on Monday evening AltFi also quietly hosted a get-together for SME lending platforms that fund loans off balance sheet. The purpose of the meeting was to discuss the idea of forming an industry association – a kind of P2PFA for balance sheet lenders. The roundtable discussion featured chief executives from 10 alternative lending platforms, and was sponsored by Just Cash Flow PLC. Chatham House rules applied, but I’ve summarised the key talking points below.
I’ll begin by stating that nobody at the table was fundamentally opposed to the notion of forming an association, but the purpose and mechanics of such an entity were the subject of spirited debate.
The potential for centralising data – specifically data relating to the prevention of fraud – appeared to pique the interest of the platform bosses. It was suggested that an association could play a role in delivering a centralised data repository for fraudulent borrowers. The idea is that members of the association would be required to commit data on fraudulent applicants to the repository, allowing other members to avoid those borrowers in the future. Here the platform bosses see the potential for some level of Credit Reference Agency (CRA) involvement. Intra-association disclosure could also help to stamp out the process of “stacking”, whereby one business takes on debt from a number of different lenders, thus negatively effecting its chances of keeping up with repayment schedules.
If the goal is simply to create a shared data pool, then perhaps there’s no need for a trade body. That was the thinking of one of our guests, and his peers agreed that the organisation would need to deliver a far broader set of outcomes to be worth undertaking.
The subject of APRs – which has been cropping up a lot in the news recently – was raised. The platform bosses identified a number of issues with the usage of APRs. “We are not an APR business,” said one of the guests, before explaining that the short-term nature of his product means that APRs are in fact a poor reflection of price. The difficulty of calculating APRs was also pointed out. A number of the lenders that were represented at the dinner specialise in credit facilities, that are drawn down by the customer as and when required – with the cost of funds varying depending on when the customer chooses to draw down and repay the money. For some of the platforms, there in fact appears to be legal issues with the publication of APRs.
Membership criteria was a hotly contested point. How broad should such an organisation be? Should peer-to-peer lenders be included? Should the banks be involved? Are we resolved on limiting the association to SME lenders only? The final point received a clear answer: yes. The preceding points proved a touch more difficult to resolve. One contributor – who had played a crucial role in the formation of a similar entity in the US – suggested that broader is better when it comes to membership, so long as the bad eggs are sifted out effectively. To my mind, the problem with mixing P2P and direct lenders within one association is that the two groups will inevitably come under fire for different things (see, for example, the balance sheet risk vs. transparency debate) – making a coordinated defensive strategy tricky to implement. After all, the formation of a unified alternative SME lending front was often pointed to during the discussion as a powerful incentive for forming an association.
Membership of this organisation – were it to form – would clearly come with a certain amount of credibility (provided that the membership criteria are sufficiently stringent). The idea of having an association “Kitemark” – a symbol of trust – was a strong lure, as well as a potential PR angle. What’s more, the voice of the organisation (which everybody agreed would have to belong to an independent chair-person of some description) would probably stand a far better chance of being heard by the national press and by government than the individual platforms.
Questions were raised as to whether the session participants should be regulated. Small business lending is generally speaking an unregulated space. The platforms that were present at the meet-up do not raise money from the public through a peer-to-peer exchange, meaning that there are no 36H rules to consider. The overriding sentiment among our guests appeared to be that a formalised style of self-regulation – in which an industry body could play a vital role – would be preferable to FCA oversight. One guest suggested that peer-to-peer lenders were able to actively seek regulation because they don’t risk any of their own capital when lending, and thus needn’t be as fearful of regulatory restriction.
John Davies (CEO of Just Cash Flow PLC) and Paul Mildenstein (CEO of Liberis) will be working together to advance the idea of an industry body, with some practical next steps expected to emerge over the next few months. Leadership duties will of course be passed to an independent chair should the idea gain traction.
At the moment, there’s an association “grey area” for the UK's direct lending platforms. They’re too small or not quite right for organisations like the Asset Backed Finance Association, and they don’t fit the bill for the P2PFA or UKCFA. Could a direct lending body be the answer?