Retail investors have good understanding of P2P, says study

New study from economic consultancy Oxera gives boost to peer-to-peer lending sector.

Consultancy firm Oxera has published an independent assessment of the economics of the peer-to-peer lending sector. Focusing on the eight member platforms of the P2PFA, the study sought to analyse the risks, costs and benefits of peer-to-peer lending, with the hope of informing the FCA’s ongoing post implementation review.

Speaking at today’s LendIt Europe conference, Oxera Partner Reinder Van Dijk (pictured above) said that regulation “will need to continue to evolve” as the peer-to-peer sector develops.

The report itself was full of praise for the peer-to-peer lending industry – an industry which has been under fire from multiple angles over the past six months. Among other things, Oxera concluded that the peer-to-peer industry has generated additional competition in the market for loans and investment; offers a genuine alternative to yield-starved retail investors; and does not create systemic risk, because platforms are “well-placed” to weather a downturn in the credit cycle.

On the platforms themselves, Oxera deems credit-risk assessments to be in line with industry best practice, and says that it has delivered outcomes which are “consistent with those of traditional lenders”. Furthermore, Oxera believes that platforms are well-incentivised to manage credit risk, as borrower defaults would “result in the loss of ongoing servicing fees”. Interestingly transparency was not highlighted as an aligner of incentives, but was said to “empower investors to assess performance against expectations”.

Oxera concluded that the current regulatory framework is proportionate and targeted, while opportunities to strengthen the regime exist in certain areas.

Perhaps most crucially, the consultancy found that the majority of retail investors understand the risks of peer-to-peer lending, including capital and liquidity risk, while also having a sound grasp of the importance of diversification. The extent of customer comprehension of risk on the investor side was a key theme in the FCA’s recently launched post-implementation review, and the platforms will doubtless be heartened by Oxera’s findings.

“P2P lending has been a real innovation in the market for credit, bringing benefits to both borrowers and investors,” said Oxera’s van Dijk. “The existing regulatory regime in the UK has been successful in enabling the P2P market to develop to where it is today. As the sector continues to mature, regulation will need to evolve alongside it to ensure consumers continue to achieve the benefits made possible by this new model.”

Nick Harding, CEO of Lending Works, said: "We’re delighted this report recognises that peer-to-peer lending offers consumers a fair and transparent investment alternative, so they can make an informed decision about what they invest in."