By Chris Hancock on Tuesday 14 August 2018
Crowd2Fund boss weighs the latest proposals on P2P marketing restrictions.
The growth of P2P lending and its positive effect on the UK economy cannot be disputed. Initially starting out as a curiosity during the depths of the financial crisis in 2008, P2P lending has grown from £300 million in funds being lent in 2011 to a huge £4.6 billion in 2016.
This has helped growing British businesses access growth capital and create new jobs, as well as being a remedy for savers looking for an asset class which has a relatively low risk profile (compared to equity) and generates higher returns than the meagre amounts currently offered by savings accounts and cash ISAs. Namely, the Innovative Finance ISA (which Crowd2Fund was the first platform to offer) has helped investors make impressive returns, tax-free.
Well-designed regulations are what has allowed the sector to blossom, so it’s encouraging that the FCA is undergoing a review in the face of a less than optimal economy. There is also the threat of a shock to the economy where, in the short term, the risk of defaults could potentially increase if there is a downturn anytime in the future.
As the industry matures, there is more opportunity to continue reviewing regulation to ensure an appropriate level of consumer protection is in place. It will also be possible to test the robustness of firms that have undergone significant growth since the last review of the sector in October 2016, particularly with regards to operational processes and loanbook performance.
The key concern highlighted by the FCA was the way that interest rates are often presented as ‘Target’ or ‘Estimated’ rates of return, rather than actual rates of return. Admittedly, the actual rate of return was much more difficult to estimate at the time, due to the early nature of the new sector.
Now, more and more loans will have undergone the full repayment cycle and the known defaults will be more calculable. This will allow platforms to calculate an actual APR and reduce the risk of misleading investors with target or estimated APR return. These returns are still likely to be significantly higher than those offered by a savings account due to the efficiencies and automated lending processes a platform adopts, where savings are passed on to investors.
It is also likely that additional onboarding steps may be required for investors to ensure that they are fully aware of the risks involved with the asset class. These processes could include a requirement to upload government identification in order to reduce the risk of fraud and money laundering, which is a challenge for the sector.
Some of the larger platforms, which have been operating long before the sector became formally regulated, will be scrutinised, specifically their operational processes and technology systems. This is because they are believed to have undergone more of an evolution, rather than having been specifically designed and built in line with regulatory requirements – as is the case for Crowd2Fund.
The security risk and threat of penetration to these platforms will also be carefully reviewed, given the amount of client funds and vast amounts of personal data held. It is suspected that GCHQ will be involved in assessing platforms’ robustness in handling a security attack.
The UK has the most sophisticated and well-developed alternative finance sector in the world. The regulator will want to protect the reputation of the sector internationally, especially with many Fintech bridges having kicked into effect, which subsequently defines the FCA and the global standard for Fintech regulation. The relevance of Fintech bridges and the ability for FinTech companies in markets that are linked via these bridges is crucial in the face of Brexit to maintain London’s position as the global Fintech hub.
It is likely that platforms will be required to model their loan book performance in the wake of a downturn to ensure that investors’ expectations are clearly set. This, in turn, could help bolster the sector over the longer term, building trust and transparency with peer-to-peer investors.