Stephen Findlay, founder and CEO of BondMason, gives his suggestions for the regulator to ensure the P2P lending industry adopts good practices.
Regulation continues to be a central matter for direct lending. In 2015, the Financial Conduct Authority (FCA) started its full authorisation process and in 2016 launched its regulatory framework review.
Whilst most peer-to-peer (P2P) lenders welcome authorisation and support the key principles, such as increased transparency and the protection of client monies, there is a concern that over-regulation may hamper innovation.
Ten questions to ask a P2P lender before investing
Although regulation is moving forward, lenders and investors should bear in mind that just because a platform is FCA regulated, it does not mean the quality of loans or returns is guaranteed.
Regulation is moving forward
P2P lending was covered by the Office of Fair Trading before being transferred to the FCA in 2014. Since then, the FCA has called for P2P lending platforms to apply for full authorisations - granting interim permissions while the process is underway.
Authorisation has proved to be a slower process than initially expected, with many platforms still awaiting authorisation, despite having applied more than a year ago. Authorisations are trickling through, but there is still some way to go.
As we begin the start of 2017, we predict that nearly 25% of P2P platforms will fall outside of the tightly interpreted definition of peer-to-peer lending as adopted by the FCA and up to 10% of platforms may exit the market completely.
Maintaining platform quality
Regulation does not necessarily guarantee the quality of a platform. When investors are looking to deploy capital across P2P platforms, FCA authorisations will serve as a 'badge of trust'.
The danger is that when comparing lending platforms against each other if one has authorisation and one does not, there will be an assumption that money is safer and better protected within the platform displaying full FCA authorisation.
Furthermore, just because a platform is FCA regulated, it does not guarantee good returns, for example. Or, in more detail:
• Regulation does not guarantee the quality of credit/pricing
• Regulatory hurdles are not significant for the simpler P2P lending models and barriers to entry remain low for new participants; and
• The quality of platform operators is, and remains, mixed - some are very good, some are less experienced.
