The Financial Conduct Authority (FCA), the UK’s financial services regulator, has this week sent a 7-page letter to 65 P2P lending platforms with a strongly worded last warning to clean up their act or face a crackdown. The document highlighted what the FCA has identified as common problems across the sector including weaknesses in disclosure of information to clients, opaque charging structures and inadequate record keeping. The conclusion is that retail investors are, in the opinion of the FCA, being exposed to often inappropriate levels of risk and the P2P sector is not doing enough to either warn and protect them.
P2P lending platforms rode a wave of largely positive publicity for a number of years over the period of recovery after the Great Recession. With interest rates at rock bottom and traditional lenders tightening their purse strings after strict new rules were enforced on capital requirements and risk assessment criteria on business loans, the fintech platforms seemed to efficiently kill two birds with one stone – they offered an alternative to the stock market for savers losing money on bank balances and provided SMEs with a much needed new source of finance.
That wave took Funding Circle, the industry’s biggest name in the UK, all the way to the London Stock Exchange almost exactly a year ago. However, Funding Circle’s IPO now, in retrospect, looks like it was, at least in the short term, the sector’s apex moment. Since debuting on the London Stock Exchange at 440p last September, Funding Circle’s share price has since slumped to 97.7p – a loss of almost 78% in 12 months. Two P2P lenders, Lendy and Collateral, have also collapsed this year, costing thousands of small retail investors millions of pounds that were invested through them.
Lending markets data company Brismo says around 275,000 private investors have put money into P2P lending, with more than £22 billion lent over the decade since the sector emerged. But the FCA now says that P2P platforms are not doing enough to make inexperienced investors aware of the level of risk this form of lending exposes them to, attracting them with “headline-grabbing returns in a low interest rate environment”.
One of the biggest criticisms levelled by the regulator is that some P2P platforms have made significant changes to their business models without notifying them. It believes these changes, which it sees as heightening the risk to their financial stability, are being made as a result of pressure being placed on companies in the sector to reach profitability.
P2P platforms specialising in lending against property development, often considered lower risk because the property is used as collateral against the loan, drew particular criticism. The FCA letter warned of deficiencies in:
“the depth of due diligence on borrowers and monitoring of development progress; the operation of secondary markets; default rates and recovery actions”.
In an effort to avoid more P2P lenders failing, the FCA also said it would be reviewing the “adequacy” of the financial resources of platforms it has reason to suspect may be at threat.
Having faced considerable criticism for not properly fulfilling its watchdog duty in the aftermath of the Lendy and Collateral failures, the regulator has been stung into action. New rules to improve standards in the industry are due to come into force in December and will cover areas including governance and investor disclosure as well as failure contingencies.
The wider industry will perhaps feel aggrieved that its reputation is being called into question by poorly run operators the FCA should have originally done a better job at holding to better standards. The biggest operators such as Funding Circle, Zopa and Ratesetter do clearly state that lenders should spread their risk between small sums exposed to multiple loans so one default doesn’t have a major impact on overall returns, or turn them into a loss. They will also argue that they perform strong due diligence on borrowers. However, with an air of negativity now surrounding the sector, it remains to be seen how well it is able to recover and move forward.