Angus Dent, CEO at ArchOver
Peer-to-peer (P2P) finance has only been in existence for around 12 years. As a result, the Financial Conduct Authority (FCA) has only recently needed to take note of it, and has not yet decided how to regulate this relatively new subset of companies. There is no one set of rules to stimulate competition and support business.
At present, best practice directives are handed out on a case-by-case basis. While it’s good that the FCA has not resorted to a heavy-handed cover-all approach, which risks stifling the sector, running a business in these conditions is hard – you never know when the hammer might fall. Many of the sector’s key players are running at a loss as they try to stabilise their costs against seasonal fluctuations in income. Patchy regulation only adds to those challenges – uncertainty is the enemy of profitability. To counter that, robust investment in security is essential to keep users’ confidence high.
At the same time, the FCA is trying to make sure that borrowers and investors are protected when they use P2P platforms, and that companies are sticking to client money regulations. To help speed the process, the P2P market needs to ensure it has security built in to its procedures and loan structures – the more the industry can mitigate the risks involved, the sooner we’re likely to reach regulatory agreement.
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Stop looking back
Now the FCA must stop trying to catch up and make a leap forward to produce regulations fit for 2020 and beyond. You can’t play the game if you don’t know the rules. The FCA needs to implement clear, sector-supportive regulations if it is to fulfil its primary purpose – to stimulate competition in the sector while protecting borrowers and investors.
The FCA is due to release a new set of regulations this summer, which should in theory lay out a unifying set of best practices for the whole sector. It must resist the temptation to turn regulation into a box-ticking exercise, and instead focus on the substance of what the sector does over legal form.
This is an opportunity to put into writing the original founding principles of peer-to-peer lending – namely, innovation, a reduction in red tape, a more transparent approach to lending and borrowing and a steadier, less market-linked rate of ROI.
Importantly, the FCA should also keep in mind that P2P lenders operate under a very different set of principles to the banks. It should encourage the flexible and straightforward approach that has helped companies like Zopa and Funding Circle pass the £2bn lending mark, helping the P2P sector reach the next level of success.
At the same time, it’s important to ensure that that flexibility is backed up with security. The FCA needs to focus on building lender assurance into its regulation – P2P’s viability in the future will rely on proving to investors that their money is secure and carefully looked after.
There are several roadblocks in the way of that ideal scenario. First, the lobbying power of the established banks. If P2P lending grows fast enough and builds a solid reputation, it could pose a serious challenge to the high street banks’ low-cost capital. Until the banks can be certain of the competition posed by P2P, there will always be a certain amount of resistance. The FCA should counter that by treating P2P as a different beast with different goals.
A lot of British law works by relying on the common sense of its interpreters rather than presuming their imbecility. The FCA needs to do this with regard to P2P regulation. The new rules published in the summer should allow P2P companies to maintain their rapid fulfillment model, whilst always remaining vigilant against malpractice and ensuring funds can be recouped in the case of a loan default.
Is agreement possible?
Ultimately, peer-to-peer lending provides a unique and much-needed service in a time of extremely low interest rates and tight banking purse-strings. It helps investors build their portfolio, whether it be to increase the size of their pensions pot or get closer to house deposits, and it provides the ready cash to help small and medium-sized businesses grow.
That role will be best served by a comprehensive review of regulations, providing a single basis for the industry to work from and a solid security stance to mitigate risk for investors and borrowers. We need to move away from repressive box-ticking and focus on encouraging growth.
It’s time to end the confusion – 2017 must be the year that P2P gets the regulation it deserves.