Tim Simon, CEO of Madiston LendLoanInvest
Although peer-to-peer (P2P) lending has been hitting the headlines for the past few months, it's actually been quietly building momentum for a number of years, with more people appreciating the potential benefits of this form of lending.
While many are struggling to secure bank loans, P2P lending is positioned as a fresh, realistic alternative, with the Financial Times reporting that it's possible for both lenders and borrowers to benefit by using this method. In fact, the P2P lending industry was thrown into the spotlight in March after the Budget took place and this looks set to be the year that P2P lending finally comes of age, entering the mainstream with great potential. Osborne's call for support is a turning point for the industry; P2P lending will now be part of an Individual Savings Account (ISA), strengthening this lending option and making it more attractive for all involved.
The Budget support marks a very important step forward, showing that HM Treasury as well as the Financial Conduct Authority (FCA) is encouraging the industry. Both see the increased competition in the financial services sector as a good thing.
Indeed in a recent speech given by Martin Wheatley, Chief Executive at the FCA, he describes ways the FCA hope to encourage more innovation in the financial services market.
"We want an FCA that creates room for the brightest and most innovative companies to enter the sector".
Wheatley talks about important areas like crowdfunding and peer to peer, transforming finance in improbable timescales and he encourages further innovation in financial technology, citing mobile technology and online investing as priority areas.
FCA regulations present a huge turning point for P2P lending
For P2P lending, as a rapidly growing industry, it was a huge turning point when the FCA took over the regulation of consumer credit on 1 April this year, introducing tougher regulations, clamping down on poor practice whilst clearly encouraging innovation. The FCA is responsible for making sure that consumers are protected.
It has set minimum standards for new start-ups, ensuring they have at least £20k capital and a run off plan to ensure loans can be completed. This is an important development and means that both borrowers and lenders will be assured that this is a credible route to consider.
FCA Regulation is giving the industry important authority and attracting more attention to P2P lending companies, all for the right reasons. This recent credibility is building important criteria for new players in the market, setting up a strong foundation from which the industry may grow, meaning that P2P lending is set to thrive.
And what kinds of people are attracted to P2P lending? A wide range of both lenders and borrowers are increasingly turning towards the industry as it provides a real alternative to traditional bank loans. Those finding it difficult to secure a bank loan are considering P2P lending, and with the FCA starting to crack down on payday loan companies, with many being forced to close, it appears to have a firm belief in the future of the P2P lending sector. On top of this, the FCA is allowing the industry the opportunity to grow, recognising it as an opportunity for everyone, not just 'sophisticated' investors.
This is something often misunderstood about P2P lending. On many P2P lending sites it is easy to join as a lender, you don't need to be deemed a sophisticated investor to do this and you can start with as little as £10. According to the FCA, P2P lending is classed within the lower risk category for investment, meaning that it can be available to all types of savers. P2P lending is providing an opportunity to the general public to achieve sensible returns on their savings, with the FCA standing guard. As more savers become aware of this method for growing their savings, and more borrowers discover this alternative source of funds, the P2P lending industry is forecast to reach £45billion in the UK alone within the next decade.
What other measures are in place to protect these new P2P consumers?
The latest regulations require P2P firms to keep their clients' money segregated from the company's own funds. This is good news for lenders as money in their holding accounts will be protected from any business problems, and will be covered under the Financial Services Compensation Scheme (FSCS) until their money is lent out to borrowers. At that point, many P2P platforms provide their own compensation schemes to help protect lenders. Another positive to this is that a good P2P lending company will pass on the interest earned in the client's holding account, meaning that there's still the potential to earn more on your savings, even while it's waiting to be lent out.
Should any difficulties arise from using a P2P lending platform, the FCA requires the P2P firm to have a thorough process for complaints. In the event of a problem, the client should turn to the firm itself for a solution, and if necessary, can then approach the Financial Ombudsman Service for a more thorough assessment. While lenders and borrowers shouldn't expect any problems to arise from P2P lending, they should rest assured that the FCA has instigated a robust process for handling and monitoring complaints. It's also worth noting that the FCA is implementing regular reporting requirements including details on each firm's financial position, loan book and complaints so they can observe and anticipate changes as the industry develops.
It's certainly important to recognise that the FCA regulations have brought many advantages to the relatively new industry of P2P lending. It's supporting the development of the sector whilst protecting both lenders and borrowers. With better rates and lower risks for lenders, combined with greater access for borrowers, the FCA has introduced a variety of benefits to the P2P lending industry, bringing more transparency for both borrowers and lenders, and building a strong foundation for the industry to continue to thrive. With the FCA's new "Project Innovate", the FCA clearly aims to support more innovation in the UK's booming financial technology sector.
To find out more visit Madiston LendLoanInvest https://www.lendloaninvest.co.uk