Platforms are turning to appropriateness tests as an alternative to the regulator’s proposed marketing restrictions.
High street banks are quietly pressing regulators to tighten their grip on the peer-to-peer lending sector. It’s a rumour AltFi has heard before, albeit one we’ve struggled to verify.
Over the weekend, the banks broke cover. A senior source told The Sunday Telegraph that high street banks have pressed the Financial Conduct Authority (FCA) and Lending Standards Board (LSB) to speed up their efforts to scrutinise the P2P sector.
The LSB is a not-for-profit, independent membership organisation which sets standards for its members. The body has said that it is ‘engaging’ with lenders, including P2P platforms.
The timing of The Sunday Telegraph story seems deliberate. Secured peer-to-peer lender Lendy has been hit by a wave of negative press in the Financial Times and elsewhere in the past few weeks. The stories began with news that the firm had reached out to the regulator for help with a borrower that was planning to sue it for £10m. It is now said to be investigating the sale of its loanbook (a claim its representatives contest).
Meanwhile, the FCA is drawing to the close of its consultation on new rules for peer-to-peer lenders. The most controversial of its proposals is to subject peer-to-peer lenders to new marketing restrictions which would limit retail investors to investing just 10 per cent of their net investible portfolios through P2P platforms.
The key demand of the banks, as reported by the Telegraph, was voiced by Kevin Hollinrake MP, chairman of the all-party group for fairer banking. He urged regulators to ensure that peer-to-peer lenders are ‘robust and held to the same standards as conventional lenders’.
AltFi can reveal, however, that the briefing being given by the banks goes beyond that. A source, who wished to remain anonymous, said that banks have also raised concerns about platforms not having turnaround units and about platforms acting to protect investors when borrowers are in distress, rather than helping the company. Neither of these claims found their way into The Sunday Telegraph article.
“As FinTech has grown in size and prominence, we have seen a significant increase in bank lobbying which is hardly surprising for an industry that has faced very little competition in recent decades. Banks are acting to protect their monopoly and regulators and policy makers must be alert to these vested interests. We must ensure competition is not stifled and consumers can continue to benefit from greater choice in the market,” he told AltFi.
The Peer-to-Peer Finance Association (P2PFA), which was initially formed to lobby for sector-specific regulation, currently boasts nine members, including the sector’s two biggest platforms by lending volumes Funding Circle and Zopa. Speaking to AltFi, P2PFA director Robert Pettigrew pointed to the body’s operating principles, which are designed to ensure high levels of transparency for both lenders and borrowers.
“The P2PFA’s Operating Principles are a commitment by P2PFA platforms to exceed the minimum requirements specified by the regulator,” he said.
Asked about anti-P2P lobbying by the banks, David Pickering, chief executive of the LSB, offered a similar comment.
“Our Standards would seek to complement statutory regulation and present an opportunity for firms to hold themselves to higher standards. We believe that working with the LSB will help firms in meeting their statutory obligations,” he said.
Given the clear overlap between these statements, some have stressed the need to investigate how much overlap also exists between the two groups' operating principles before pushing P2P firms to sign up to both bodies.
“It is important that in putting together standards to be observed in the peer-to-peer lending sector that the interests of investors and borrowers are paramount; alternative standards are likely to contain considerable overlap with those which already exist, and, unless identical, risk creating uncertainty or confusion concerning the marginal differences between various initiatives,” said Pettigrew.
It should be noted that membership of the LSB isn't free, with fees varying depending on a company’s size. This is the operating structure of most independent trade bodies.
It is also important to note that while the P2PFA represents some of the sector’s biggest platforms, there are many peer-to-peer platforms in the UK that operate outside of its oversight.
The P2PFA and Funding Circle also responded to claims made by the banks that did not make it into the The Sunday Telegraph article.
Of the idea that P2P platforms do not have turnaround units, a Funding Circle spokeperson told us that it recovers an average of 40 pence on the pound for defaulted loans. AltFi Data, an independent loan analytics specialist and sister company to AltFi, corroborated that number.
Funding Circle's in-house collections and recoveries team operates what it calls a 'survival for revival' approach, working with struggling firms to get them back on their feet, in theory translating to a better recovery for investors. The firm argues this approach is possible exactly because it doesn't lend money off its own balance sheet, and cannot simply write debt off.
Commenting on the P2PFA’s member platforms, Pettigrew said: “When borrowers with loans facilitated by P2PFA platforms run into difficulty, peer-to-peer lenders already do considerable work with them to get them back on their feet as that is in the interests of the lenders and borrowers alike: different platforms have their own approach to making that happen, including through the use of teams dedicated to take forward that assistance.”
The second claim being quietly pushed by the banks is that peer-to-peer lenders act to protect their investors, rather than their borrowers, when borrowers get into trouble. It is difficult to say if any specific examples are being hinted at here.
How is the regulator responding to pressure from the banks? An FCA spokesperson said: “The FCA is in the process of finalising new rules to improve standards in the sector. The aim of the rules is both to achieve appropriate consumer protections and allow loan-based crowdfunding to play a valuable role in providing finance to small businesses and individuals. All firms in the sector are supervised. Standards of consumer protection will be a continued focus of that supervision.”
While not exactly a rebuffing, one wonders what the banks will make of this balanced take on their competitors.
The peer-to-peer sector itself recognises the need for improved regulation in certain areas, while of course touting its upside. Pettigrew spoke of the sector’s support for ‘the general policy direction’ of the recent consultation paper, arguing that many of the proposals build on the operating principles of the P2PFA.
But the sector seems to have finally drawn a line at the proposed marketing restrictions, after initially delaying judgement. These restrictions would limit P2P promotions to targeting the following groups: those certified or who self-certify as sophisticated investors, those certified as high net worth investors, those under advisement from an authorised person, or those who certify that they will not invest more than 10 per cent of their net investible portfolio in P2P agreements.
Pettigrew said these restrictions will bring peer-to-peer lending in line with financial investments bearing ‘fundamentally different risk profiles’, by which he is almost certainly referring to equity crowdfunding platforms.
It now seems the industry is rallying around an alternative solution to the regulator’s proposed restrictions. AltFi has learned that a number of P2PFA members are working on ‘appropriateness tests’, designed to ensure investors fully understand the risks of investing before parting with their cash.
“P2PFA platforms accept the need for appropriate safeguard, which includes a proper appreciation by lenders of the potential risks involved in peer-to-peer lending. This can be delivered effectively by platforms devising and operating their own robust, on-line test, comprising a series of questions and statements which prospective lenders would have to complete: which would confirm their appropriateness before proceeding to make lending decisions, and which would be re-taken at intermittent intervals, to ensure that they are reminded of the implications of investment periodically,” said Pettigrew.
The thinking is that this would ensure consumer protection while avoiding cutting ordinary investors off from a new asset class, to which institutional investors are increasingly gravitating.
Without knowing the specific banks involved, it is hard to judge the extent to which the pressure being applied on regulators may be seen as strategic. But it is nevertheless important context that NatWest, part of the Royal Bank of Scotland Group, launched an online business lender named Esme in 2017. Earlier this year, the bank announced that it would seek to scale the Esme project significantly in 2018, after fielding 3,800 loan applications during a successful pilot phase.
Esme specialises in unsecured small business loans, ranging from £5,000 to £150,000 for terms of one to five years, backed by personal guarantees. Borrowers must be limited companies with two years’ trading history. Its annualised rates range from 3.84 to 26.40 per cent. In short, while it funds loans differently, it is otherwise not so very different from a peer-to-peer lender.