Stephen Findlay, founder and CEO of BondMason, gives his suggestions for the regulator to ensure the P2P lending industry adopts good practices.
Suggestions to the FCA
When the FCA launched its 'call for input' last July, BondMason highlighted particular areas that would benefit from change or could be cause for concern. These issues still hold true and we outline them below:
Credit experience: We encourage the FCA to assess credit experience of senior personnel at each P2P platform. In addition to platforms clearly explaining their credit processes to lenders, extra protections could be included by introducing some very basic underwriting criteria for early-stage companies looking to borrow.
Avoiding pooling: Maintaining the one-to-one relationship between lender and each loan that makes up the borrower's total borrowing is important, with reporting by each P2P platform to its clients on this basis at all times.
Innovative Finance (IF) ISA: Only P2P loans should be allowed in IF ISAs, not debt securities offered by equity crowdfunding platforms. Our concern is that an investor may invest their savings or pensions through an IF ISA into a debt security (bond, debenture) issued by a start-up or very early-stage company without a meaningful trading history or asset security, which is closer to equity risk than debt.
Provisions funds: Provision funds generally worsen returns for lenders, yet may provide lenders with an inappropriate sense of protection and comfort. We do not believe the FCA should encourage an increase in the usage of provision funds.
Disclosure: We would like to see all P2P platforms clearly show the 'Capital at risk' warning on their landing page and sign-up pages for lenders as well as clear disclosure that the loans are not liquid, accompanied by an explanation of how an investor can get their money back.
As the review moves forward in 2017 and more platforms complete the authorisation process, the challenge for the FCA is to ensure they seek to assist the industry to adopt good practices.
However, it is not the FCA's responsibility to ensure best practices. This is up to the participants and the industry itself. Over time, the better operators will emerge and the weaker participants will exit.
Regulation is important but having FCA approval should not be held out by platform operators as a sign of good quality lending and investment returns. After all, the banks in the UK in 2008 were FCA regulated, but this did not guarantee the quality of their loan books or protect their clients.
This should be remembered in the context of P2P lending and FCA regulation today.
BondMason researches and invests across P2P platforms for institutional and retail clients.
