October saw several interesting developments in the peer-to-peer direct lending market. Alternative investment platforms awaiting authorisation can be encouraged that the FCA has taken an initial step forward by giving full authorisation to mainstream P2P platform Lending Works – with some further hints from Chris Woolard at the FCA that more may be on the way. Data indicates that the P2P industry continues to show growth, perhaps this is no surprise as savers continue to suffer with low interest rates and September saw inflation rise. We also saw and interesting turnaround from Lord Turner who, at the recent LendIt conference, seemingly took a more positive stance on the direct lending industry.
FCA direct lending authorisation takes a step forward?
For many the FCA regulatory process has been long and drawn out, with some lending platforms applying for full authorisation over a year ago. The FCA make the point that the process is so long due to the factors they must consider for each application namely:
• The completeness of the application
• The complexity of the business
• The firms demonstrated compliance with regulatory requirements
However, there are some signs that things may finally be moving forward. Mid-October saw Lending Works become the first mainstream P2P lending platform to receive full authorisation from the FCA.
Lending Works’ authorisation comes hot on the tail of FCA’s director of strategy and competition, Chris Woolard’s speech at the recent LendIt Conference where he hinted that the waiting may be coming to an end for some platforms - “You should expect us to complete our major authorisations work in this sector soon. In terms of our review of the landscape, we expect to publish a feedback statement before the end of the year.”
Figures from the FCA show that only 12 P2P lenders have been approved, 85 additional applications are still being processed - 39 of which are currently operating under interim permission, 3 platforms have withdrawn their applications and to date, no applications have been declined.
Peer-to-Peer Finance Association data indicates ongoing industry growth
According to figures from the P2PFA, peer-to-peer lending continues to grow steadily. Since January, P2P lending platforms have expanded their books by £2 billion and in Q3 alone peer-to-peer lenders provided £700 million of new funding. This is an improvement over Q3 2015, indicating ongoing industry growth. Christine Farnish, chair of the P2PFA, commented that data highlighted the strength of P2P lending in the UK “Peer to peer lending continues to deliver a competitive alternative to traditional lending.”
Lord Turner Direct Lending turnaround
Back in February 2016 Lord Turner, former boss of the now defunct Financial services Authority levelled criticism at the peer-to-peer lending industry stating: "The losses which will emerge from peer-to-peer lending over the next five to 10 years will make the bankers look like lending geniuses." However, during a recent speech at LendIt Europe , he reversed his standpoint noting that “my judgement is that the direct lending industry will grow and play a useful role, alongside tightly regulated banks, in our overall credit supply system.” Lord Turner seems to have shifted from being a detractor to moving over the fence and taking a more positive stance. In a post LendIt interview with Peer-to-Peer Finance News Lord Turner stresses the importance of keeping direct lending both simple and transparent. Stating that if the P2P industry becomes more complex it may become a “flashing red light” for regulators.
In the interview, Lord Turner also makes a point of qualifying his somewhat controversial statement from earlier in the year. He argues that he was referring to individual retail investors undertaking their own credit analysis whereas in fact he realises they only play a very minor part in the overall direct lending market.
Financial Conduct Authority (FCA) and the Cambridge Centre for Alternative Finance CFA join forces
Announced at the CCAF’s inaugural conference, the University of Cambridge and the FCA have formed a partnership to undertake research on P2P and work together on the ongoing review of the UK alternative finance industry. This partnership is thought to be the first of its kind in financial securities regulation and the CCFA is a leading researcher on disruptive finance globally and thought to be well-suited to provide independent, academic support in the alternative finance arena.
"We look forward to collaborating with the FCA very closely in the coming months to systematically collect market data, gather crowdfunding user feedback and undertake policy-related analysis.” Robert Wardrop, Executive Director at CCAF
Despite the FCA’s officially closing its ‘call for input last month’, the CCFA’s programme of research will feed into the FCA’s ongoing post-implementation review of the alternative finance industry. The CCFA note that its programme of research will focus on and include:
- Providing insight into the investor population – who they are, how they assess risk, their expectations.
- The nature of the alternative investment industry – it’s place in the overall financial services industry
- How platforms compare in terms of types of investments, risks and returns
Innovative Finance ISA – more on the way as Lending Works receives full authorisation
Back in April the Government announced that P2P lending would be eligible for a new tax free ISA. With Lending Works recently receiving full FCA authorisation, it could potentially pave the way for an imminent flurry of peer-to-peer ISA’s coming on to the market as more direct lending platforms gain full FCA authorisation. Platforms can only apply for permission from the HMRC to sell ISA’s once they have received full FCA authorisation. Due to delays and a long waiting process, there are currently only three companies offering IF ISA’s – all of whom really fall under the crowdfunding umbrella rather than P2P.
Lending Works anticipate it is likely to be ready to launch its ISA in January 2017. Other platforms are likely to follow suit but only as and when they receive FCA authorisation. FCA’s Chris Woolard did hint at the recent LendIt conference that more authorisations were imminent. In a debate at the recent LendIt conference that centred on the future or P2P platforms within the SME lending many felt that the IF ISA could be a real boost to peer-to-peer funding, helping to grow its market share. Kevin Caley, founder of ThinCats noted “We are constrained at the moment by lack of funds in the market…As the Innovative Finance Isa comes in, I think that will more than double the amount of funding in the market within the next year or so. That will put strains on our industry, but it will also lower rates and it will mean we are very competitive.”
Continued pain for UK savers
Savers continue to suffer from record low interest rates. According to data released by Moneyfacts , the number of savings products available in the UK have fallen dramatically – indeed they identify a total drop of 274 since January – 127 since August when the Bank of England slashed its interest rates to a record low of 0.25%. This drop in product availability coupled with savings rates continuing to plummet means a gloomy outlook for savers. Mid October saw both Lloyds and TSB follow Santander’s lead and announce that they would be slashing the returns on their highest-paying current accounts.
Savers’ pain is being added - inflation rose to 1% in September - its highest level in two years. With very few traditional savings accounts offering interest higher than 1% it means that inflation is higher than any interest earnt.
According to thisismoney however, there may be a glimmer of hope if city rumours are correct. Insiders are indicating that the Bank of England may abandon its plan to cut interest rates in an announce due out this week.
*Warning: nothing in this article should be construed as advice. Your capital is at risk