The FCA, supported by the treasury select committee, are seeking to ensure that retail investors are protected, and specifically, that they adequately understand the risks related to this new form of investment. Meanwhile the Treasury has been keen to encourage adoption of the asset class, thanks to the healthy competition it introduces to the banking sector, as well as the fragmentation it allows which reduces the concentration of systemic risk around the banks. This seems to be creating a tension. Government is keen to encourage development of the asset class, for example by allowing marketplace derived loans to be protected from tax by an ISA wrapper. Meanwhile, those charged with protecting consumers, are more concerned with ensuring that investors do not participate unless they understand that they could face losses.
Mr Tyrie elegantly summarises the dynamic in his letter:
“Government policies to promote the crowdfunding sector may have the right intention – to increase competition in the small to medium enterprise lending market – but government tax incentives, in effect government subsidies, may be encouraging some consumers into the use of inappropriate products.”
He goes on to articulate his own concern that ‘The Financial Conduct Authority (FCA) needs to be alert to these risks. The government may need to reconsider these tax incentives.”
The problem of a perceived lack of understanding of risk by investing consumers has been a common sector theme of late. Much of the recent concern regarding contingency funds relates to the fear that they create a false impression in the eyes of the investing public that there is some form of guaranteed protection against losses. Indeed Tracey McDermott has revealed that she has stepped in a number of times to stop P2P loan adverts that could have given savers a misleading impression of the risks involved.
Analysis from AltFi Data illustrates that, to date, the lending performance of the largest UK platforms has delivered consistently positive net returns. Zopa,Funding Circle,Ratesetter and MarketInvoice together make up over 65% of the sector’s origination volume and lead the way when it comes to disclosure of their lending track record. 10 years of data representing that track record demonstrates that net returns have remained positive in a range of 5-6.5%. Bad debt performance has also been impressive, coming in at 5% for the worst ever annual cohort i.e. less than 1.7% annualized, and at no worse than 1.66%, i.e. less than 0.55% annualized, over the past 5 years.
returns index – 12 month trailing net return
Cumulative defaulted principal, net of recoveries, expressed as % of origination principal
Rhydian Lewis, CEO and co-founder at peer-to-peer lending platform RateSetter, commented:
“We completely agree that great care needs to be taken to ensure that people who consider peer-to-peer lending are fully aware of the risks. We work hard – with the guidance of the FCA, who oversee our industry – to ensure that’s the case.”
“However, the IF ISA shouldn’t be viewed as a Government endorsement or guarantee for peer-to-peer lending, any more than a stocks and share ISA is an endorsement of the shares of companies.”
“Peer-to-peer lending is a positive development and with appropriate regulation – which we and other platforms are working with the FCA to deliver – it can provide some much needed competition.”
