Ten per cent of the peer-to-peer (P2P) investment platform market has been branded a serious risk to investors amid a warning millions of pounds of losses could be incurred.
Tougher rules from the Financial Conduct Authority are needed on firms in the P2P lending market to ensure it stamps out inexperienced and potentially dangerous players, a provider has said.
Stephen Findlay, CEO of P2P lending provider BondMason, said there were a number of firms operating in the market that he considered “very concerning” and that threatened to cause consumer harm.
When vetting P2P lending platforms for his own business, a mere 13 out of 80 made the cut he said, albeit some just did not fit the firm’s business model.
Bondmason launched in October 2015 and provides direct lending opportunities as well as P2P lending through self-invested personal pensions.
Mr Findlay believes 10 to 15 per cent of current market participants are not up to scratch when it comes to experience and expertise.
He warned losses in the tens of millions of pounds could start to crystallise as early as this year as a result.
He said: “There are a handful of P2P platforms that we are very concerned about – the quality of their lending appears poor, or misaligned with the rates of returns offered to lenders.
“We hope that our concerns don’t result in losses for retail investors, but we suspect this may start to appear in 2018."
He said the total value of the loan books the company was concerned about was £200m-300m, which could translate into losses in the “tens of millions”.
He explained the problem was the operators behind P2P lending platforms had varying degrees of experiences and skill sets.
While some were well versed in lending, investment management and the importance of being a custodian for other people’s money, a number of operators had no experience of investment or lending, he said.
“Given that very few platforms invest alongside their clients – have ‘skin in the game’ – the operators will little or no prior experience are learning their trade using other people’s money,” he added.
Part of the problem was the authorisation process of firms, according to Mr Findlay.
The Financial Conduct Authority (FCA) took over consumer credit regulation from the Office of Fair Trading in 2014 and initially faced a backlog of applications it had to process from incumbents as well as new entrants.
The regulator said in an update in March 2016 it had “received a lot of applications" from firms wanting permission to operate a P2P platform and that eight firms had been fully authorised, while a further 86 firms were awaiting a decision, of which 44 had interim permission.
Mr Findlay said platforms were able to receive regulatory approval “based on submitting a coherent regulatory plan and application”.
He said: “In our opinion, the regulatory approvals could have done more to ensure the quality of the operators, by including, for example, a nominated role of chief credit officer for all 36(h) platforms – someone who would need to demonstrate requisite experience and expertise, and be accountable for the performance of the platform for investors."
But the FCA told FT Adviser: “We use a range of sources to assess whether P2P firms meet our conditions for authorisations and that the individuals in key roles are ‘fit and proper’.
“This includes a comprehensive review of a firm’s documents and policies, which would include a firm’s business plan, as well as direct dialogue and engagement with the firm."
It added: “In December 2016 we published an interim feedback statement setting out initial findings and concerns identified in the P2P sector. We have been very clear that where we do have concerns and a firm does not meet our conditions we will refuse their authorisation.”
It said the authorisation process considered people’s skills and experience to carry out their roles and run the business without harming consumers but admitted there were no minimum requirements that needed to be met.
“While there is no explicit requirement of a minimum level of experience, our assessment would take into account previous roles held by an individual, alongside their knowledge of the business, of regulatory standards applicable to the sector, and of the systems and controls that should be in place within the firm,” it said.
P2P lending has boomed in recent years. Between 2012 and 2014 the size of the alternative finance industry increased from £267m to £1.74bn – £749m of which was from P2P business lending and a further £547m from P2P consumer lending.
The FCA defines P2P lending as platforms used by individuals “to lend money to other individuals or businesses, or businesses can use them to lend to individuals, in the hope of receiving a financial return in the form of interest payments, together with repayment of capital.”
Business to business transactions are not covered by regulation.
But with the boom also came the failings. Last July RateSetter was forced to step in with £80m of its own money to make sure investors were not affected by a series of bad loans it had written.
Mr Findlay said lending as an asset class was a good opportunity if done well, but the important thing was to get the due diligence right.
“Lending is like fixed income return if it’s done well. It’s not correlated to the equity markets, can deliver higher returns on cash, is relatively sustainable returns without eating into your capital.”
“But advisers are quite right to be nervous about this space. It takes time to get into the detail of whether these platforms are good at it or not.”
But Robert Pettigrew from the Peer To Peer Finance Association (P2PFA) refuted the claims.
He said: “I would be genuinely surprised were the allegations made to be credibly demonstrated. The process of authorisation has taken quite a considerable period of time, and, although some relatively newly-established platforms managed to obtain speedy authorisation at the outset, the general experience has been fairly thorough."
He said P2PFA had seen evidence that platform failure generally arose where insufficient priority had been given to credit risk management or where there were other flaws in the business model, such as being unlikely to gain sufficient scale to reach profitability.
He added: "If there is evidence to substantiate [Mr Findlay's] claims, I would be interested to receive it."
Raj Shah of Sheffield-based Blue Wealth Capital, said he shied away from the products and believed many other advisers were too.
He said: “In my opinion it’s way out there on the risk spectrum. The products seem to be too new, don’t have enough track record and on the face of it are too risky."