New platforms are opening up every other week and for borrowers this is great, but what about from an investment point of view? Do these peer-to-peer lenders even adhere to rules regarding client assets or segregation of client monies?
Is the market truly safeguarded or could it perhaps become another mis-selling scandal?
From April next year, as part of the transfer of regulation of consumer credit to the FCA’s remit, the watchdog will take responsibility for peer-to-peer (P2P) lending platforms, looking to protect both the borrowers and the people investing money via the platform.
The FCA has now sent out questionnaires to P2P lending companies to find out more about their business models for P2P lending in order to help inform the development of the rules on which they intend to consult on.
The questionnaire states: “The more information we have available to us, the more appropriate the proposals on which we consult will be, so we believe it is in your interests to respond to the questions.”
The FCA has sent 63 questions to lenders enquiring about business models, financial reports, client assets, PII, dispute resolution, lending volumes, promotions, record keeping, and reporting.
Some of the questions posed by the FCA are:
- How do you assess and manage credit risk to lenders and potential losses arising from borrower default?
- What process do you follow when promoting your platform?
- What are your current record keeping arrangements in respect of your holding of client money paid by investors and received from borrowers, including checks to see if records are correct?
- Are investors required to confirm they have read your risk warnings before they make an investment or do you rely on them to read the relevant section of your website/ other disclosure materials?
As liquidity from conventional sources has dried up, the growth of the P2P market has been underpinned by increasing demand.
Research from the Open Data Institute predicts that the market will be worth £1 billion by 2016 if it continues to grow at its current pace. The data suggests that in the last three years peer-to-peer lending has trebled in size. The report analysed data from Zopa, RateSetter ad Funding Circle, which provides 92 per cent of all P2P lending activity.
The Breedon Review estimated demand for new funding by all businesses exceeded supply between £84 billion and £191 billion, with SMEs facing particular difficulties obtaining funding. This is a result of banks becoming more risk adverse because of their own regulators’ concerns regarding the adequacy of their capital to absorb potential losses.
However, it is inevitable that in a growing, seemingly stable and unregulated market unscrupulous practice or individuals will spot an opportunity for fraud, and with £785 million of cyber fraud occurring, it will be extremely hard for the Regulator to find the right balance in implementing rules come April next year.
B&C spoke to Shoaib Bux, Director of Mayfair Bridging, who said: “As a peer-to-peer bridging finance lender we received this questionnaire. Fortunately for us we are already authorised as a FCA regulated lender and as an operator to a peer to peer investment scheme in bridging loans.
''I think it is great that the FCA if finally asking the right questions. Depending on how the FCA regulate the actor, I am sure following this questionnaire many of the smaller P2P platforms will not be operating come this time next year.''
Because of the relative youth of the industry the FCA’s questionnaire should produce a lot of findings for the regulator to oversee and manage this booming industry. It will also identify firms which may have only entered the market to earn a quick buck, pushing them out to make the market more responsible and transparent.
However, it must do so with much caution as it will not want to hamper the success story of an industry which is playing an integral part for more and more businesses seeking SME funding and helping our economy today.
The FCA will consult later this year on the further rules that will apply to firms conducting P2P activity.
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