BondMason Foundation micro-loans

Regulation continues to be a central matter for direct lending. Last year the Financial Conduct Authority (FCA) started its full authorisation process and launched its regulatory framework review. Whilst most 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. Although regulation is moving forward, lenders and investors should bear in mind that just because a platform is FCA regulated, doesn’t mean the quality of loans or returns are guaranteed.

Regulation is moving forward

Peer-to-peer lending was covered by the OFT 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 whilst the process is underway. Authorisation has proved to be a slower process than initially expected, with many platforms still awaiting authorisation despite having applied over a year ago. Authorisations are trickling through but there is still some way to go.

As we move from 2016 into 2017, we predict around 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.

Regulation doesn’t necessarily guarantee the quality of a platform

When investors are looking to deploy capital across P2P platforms, FCA authorisations will serve as ‘badge of trust’. The danger is that when comparing lending platforms against each other if one has authorisation and one doesn’t, 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 doesn’t guarantee good returns, for example;

  • Regulation doesn’t guarantee the quality of credit / pricing
  • Regulatory hurdles aren’t significant for the simpler P2P lending models and barriers to entry remain low for new participants
  • The quality of platform operators is, and remains mixed – some are very good, some are less experienced

When the FCA launched its ‘call for input’ back in July 2016, BondMason highlighted particular areas that would benefit from change or could be cause for concern – these issues still hold true.

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 didn’t 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.

*Warning: nothing in this article should be construed as advice.  Your capital is at risk

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