The P2P lending market is big business in the U.K. According to the U.K. Peer-to-Peer Finance Association (P2PFA), a self-regulating P2P industry group that includes most of the biggest names in U.K. marketplace lending, the country's P2P lending industry had hit £9 billion in loan originations from the group's members as of Q1 2018.
The figures also reflected having provided finance for approximately 50,000 businesses and 221,000 individuals overall, with a total investor count of about 150,000. According to the The Times of London, those figures are even higher – though they agree on the 150,000 investor count, they think about £10 billion in total loans have been underwritten.
And as the figures associated with the industry have gotten bigger, the players have as well. Zopa, the U.K.'s biggest P2P lending market for consumers, announced a return to profitability earlier this month, and is currently pursuing plans to acquire a banking license that would open up deposits as a potential source of low-cost, high-stability funding. Funding Circle, the U.K.’s largest small and medium-sized business lending marketplace, has arranged over $4 billion in loans and is heading for an IPO by the end of the year.
Given all that growth, it is unsurprising that the industry has managed to catch the attention of Britain's financial regulator, the Financial Conduct Authority – or that the FCA has proposed more stringent regulations for the P2P lending industry as a whole.
“We believe that loan-based crowdfunding can play a valuable role in providing finance to small businesses and individuals, but it’s essential that regulation stays up to date as markets develop," noted Christopher Woolard, executive director of strategy and competition at the FCA. "The changes we’re proposing are about ensuring sustainable development of the market and appropriate consumer protections.”
Concerns About Hidden Risk
Much of the FCA’s recommendations and concerns revolve around transparency, and making sure that participants on both sides of the platform – borrowers and lenders – have a very clear understanding of what they are getting involved in.
“Platforms do not always communicate to investors the true nature and risk of the investment they will be exposed to,” the FCA said. Instead, according to the report, P2P platforms in many instances were “emphasizing the positive nature of investments while failing to balance this out with appropriate explanation of risks.”
Moreover, according to the report, platforms can at times create a feeling of scarcity among potential investors – and when it comes to loans, that pushes “investors to act impulsively.”
The new proposals, according to the regulator, are designed to do four basic things: Ensure that investors receive clear and accurate information about a potential investment, including the risks involved; ensure that the potential financial return on investment is correctly calibrated to the actual risk of the loan; provide transparent but robust systems to evaluate price and risk of loans; and finally, promote overall strong governance and business practices.
Moreover, the FCA logged concerns in its report that while P2P platforms have successfully flourished in a low interest rate, high-growth environment, their structures and businesses may not be well-equipped to handle either the increased upward drift of interest rates or the possibility of an economic slump. According to the FCA, either could potentially trigger a wave of unexpected defaults, particularly in the higher-risk lending brackets found on some marketplace lending sites.
The U.K. financial regulator is planning to crack down on peer-to-peer lenders and crowdfunding platforms, following concerns that investors could be taking on more risk than they realize. In a long-awaited review of the sector published on Friday, the FCA proposed tougher rules for the peer-to-peer industry, which has grown dramatically in the last decade as banks have retreated from high-risk lending and interest rates have fallen. The FCA said it was worried that a rise in interest rates could trigger a spate of defaults on many of the high-risk loans that peer-to-peer lending websites facilitate.
“When a platform advertises a target rate of return, we want that target rate to be achievable and for investors to understand and be fairly remunerated for the risks they are exposed to,” the report noted.
Moreover, the FCA continued, borrowers also have a reasonable expectation of being “afforded the same protection when provided with credit under a P2P agreement as with other types of credit.” That means, according to the report, platforms should be responsible for determining not just whether the customer will repay, but also how affordable that repayment will be for the consumer – within reason.
“Creditworthiness assessment is not an exact science, and we recognize that affordable loans can become unaffordable due to a change in the customer’s circumstances or wider economic events,” said the FCA. “However, we do expect firms to have effective processes in place aimed at eliminating lending that is foreseeably unaffordable.”
The Industry Reacts
The FCA noted in its own report that its interactions with industry leaders and stakeholders had been broadly friendly and supportive.
“Respondents agreed that credit provided through P2P agreements should be subject to the same creditworthiness requirements as other types of credit,” the FCA wrote. “Respondents were broadly supportive of our proposals, and welcomed the extension of the creditworthiness requirements to credit limit increases under P2P agreements.”
And public response from the U.K. market’s larger players has echoed that broadly supportive stance.
Zopa CEO Jaidev Janardana was particularly positive on the development, and welcomed the coming regulatory structure as a positive good for the industry as a whole.
“We also believe strongly in a well-regulated industry – we lobbied for years for effective regulation,” Janardana noted in a statement released shortly after the FCA report dropped. He added that as a founding member of the P2PFA, they – and all other members of the organization – already independently hold themselves to the sorts of standards outlined in the FCA report.
“The more that can be done to make sure all P2P organizations have these standards, the better in our opinion.”
And Zopa’s CEO was not the only public booster.
“The association has always maintained that all investors lending through a peer-to-peer lending platform need to be clear about the performance of the platforms on which they invest,” Paul Smee, chairman of the peer-to-peer finance association, told The Times of London.
The proposed regulatory changes are still in their earliest form, and will likely see some additions and revisions before their final form rolls out.
The comment period on the proposed regulations officially opened about a week ago, and will run through late October 2018.
The FCA plans to release its full policy proposal by Q2 2019.