If we limit P2P lending to sophisticated investors we destroy much of the point of it, says The House Crowd's Frazer Fearnhead.
On the 8th April, the FCA commented that investments held in an IFISA were “high-risk” – and ultimately claimed that “anyone considering investing in an IFISA should carefully consider where their money is being invested before doing so”.
The words seemed reasonable enough (who doesn’t want investors to be careful?) but the implications for P2P lending were unmistakeable.
Because it’s not the first time the regulator has expressed concerns over P2P, and there’s a real sense that an entire industry (one that’s been at the forefront of innovation) is being rebuked for the actions of a few – or, more specifically, one.
If we limit P2P lending to sophisticated investors, we destroy much of the point of it; potentially even killing the industry.
The current discussion around restricting IFISAs can be traced back to the actions of London Capital & Finance, a firm which boasted about – and actively advertised – its status as a regulated lender and was granted ISA Manager status in 2017.
Of course, the regulation only related to its marketing and promotion, and the “fixed rate” ISAs it was offering didn’t technically qualify as ISAs. The result of this mismanagement is that London Capital & Finance’s 11,600 investors can expect to recoup about a fifth of their original investments, instead of the 6.5-6.8% returns promised.
It’s a horrendous situation, and if it were part of an industry-wide epidemic, it would be understandable to use punitive language and even take punitive measures. But it’s not: it’s the bad behaviour of a rogue provider, and any punishment should be specific and proportional to the crime.
If we were talking about banking, where an entire industry was misselling products – as was the case with PPI – then regulatory interference would be understandable. But a more compelling comparison might be Theranos: the biotechnology startup that falsely promised painless, pinprick blood tests and was rendered defunct as a result – an egregious case, to be sure, but one that’s unlikely to be repeated anytime soon.
There is correcting, and there is overcorrecting. The FCA can sometimes veer towards the latter, unnecessarily painting everyone with the same brush. There is a very real need for transparency in this industry, and all reputable lenders acknowledge it. But there’s also a need to acknowledge that P2P lending, at its best, is a simple and robust alternative to traditional investment; the entire point of it is that you don’t need to be a sophisticated investor to build a nest egg. If we limit the IFISA to those with ‘expertise’, we limit the public to cash ISAs (which, if they’re lucky, will beat inflation) and stocks and shares ISAs (which by no means guarantee a consistent return).
The FCA’s rhetoric has been singularly unhelpful, as has the discussion of an ‘appropriateness test’. The solution is clear: lending should, in every instance, be secured in as many ways as possible, but most importantly with a legal charge over an asset.
There need to be appropriate checks, balances, and regulations on all lenders, P2P included. But the proper way to treat a paper cut is to put a band aid on it, not perform open heart surgery. Instead of reacting severely against the entire P2P industry, the FCA has a real opportunity to encourage education, visibility, and investor satisfaction. For the sake of investors, providers, and the economy, it must seize it.