The sheer speed at which peer-to-peer lending has taken off seems to have caught the UK government and the Financial Conduct Authority (FCA) by surprise. As banks continue to act with reticence when it comes to providing credit for small businesses and consumers, the peer-to-peer model has been picking up much of the slack. The result has been a largely unregulated industry that has lacked some of the protections that are in place within more traditional sectors of finance. However, that is all about to change as the FCA has announced a series of regulatory changes that are designed to protect the interests of both the investor (lender) and the borrower, which will come into force from 1 April 2014.
Peer-to-peer lenders must have clear and concise information on their websites – allowing investors and borrowers to gauge the suitability of the service and ascertain with whom they are dealing. While this rule remains a little vague, it should mean the majority of peer-to-peer websites are easy to navigate whilst leaving users in no doubt where their money is going. The risks of borrowing and lending via peer-to-peer services must also be clearly communicated in the simplest terms possible, and not underplayed in any way.
2. Protection against collapse
Before the FCA’s new rules were announced, investors were effectively left to chase outstanding payments themselves in the event that the peer-to-peer website went out of business. However, despite the fact that many services already offer consumer protection in the event of bankruptcy, it is now incumbent on all peer-to-peer lending companies to have safeguards in place that guarantee the orderly run-off of their loan book in the event of a company failure, which should ensure that lenders continue to receive their expected loan repayments.
3. Accurate and fair comparisons
A minority of unscrupulous peer-to-peer lenders have been guilty of using manipulated and misleading information regarding the affordability of their products. The FCA now demands that these services compare their rates with those offered by traditional loan providers in a fair and accurate way. The FCA can also now monitor the claims made as part of TV, online and print commercials, and it has the power to ban adverts deemed to be misleading.
4. Funds that haven’t been loaned out must be held separately
Peer-to-peer service providers must now hold funds that are waiting to be loaned in a separate account, segregated from the day-to-day operations of the platform provider. This means that those funds can be repaid to individual lenders should the company fail. Whilst the robust platforms currently do this anyway, this new requirement should give lenders increased confidence in the peer-to-peer service provider’s management of their capital.
5. The introduction of a capital buffer
Peer-to-peer lenders will now be required to have a minimum of £20,000 but often a much higher capital buffer before they can operate. The size of the buffer is determined by the amount of money the lender has matched. This money is there to fall back on should they run into financial difficulties. This minimum buffer will increase to £50,000 in 2017, and it is intended to provide an added layer of protection and confidence for those who lend and borrow money via peer-to-peer websites.
Unlike mainstream savings accounts, investors in peer-to-peer products are still not covered by the Financial Services Compensation Scheme, which protects up to £85,000 of a saver’s capital. However, the FCA has announced that a full review of the regulations will be carried out in 2016.
This innovative sector of the financial services industry is now worth over £1 billion every year, and it is continuing to grow exponentially each year. It gives borrowers access to low rate loans, and it allows savers to grow their capital with rates of interest far in excess of anything currently on offer by high street banks and traditional savings accounts. These regulatory changes should deliver greater protection to all consumers, and they should encourage more people to put their trust in peer-to-peer services.
Lending Works is a peer-to-peer lender that matches thoroughly underwritten personal loan borrowers to shrewd lenders so both receive a much better deal. Lending Works is the first peer-to-peer lending company that protect its lenders against borrower default. For more information, please visit – www.lendingworks.co.uk