WHY WE NEED INCREASED REGULATION OF THE PEER-TO-PEER LENDING MARKET

In the first of a two part series, Chris Maule, CEO and founder of UK Bond Network, discusses why insufficient information should not be tolerated.

Alternative finance, virtually unheard of prior to 2008, is now a recognised route to raise capital. Research, conducted by Cambridge University and EY, has revealed that the alternative finance market in the UK is now the largest in Europe. Indeed in 2014, the amount raised by peer-to-peer (P2P) business lenders increased by 200% on 2013’s figures, taking the UK market to £1.78bn.

Although this growth should be applauded, its speed, together with the newness of the sector, has meant that regulation has lagged behind. This is a cause for concern as it leaves investors in some alternative finance platforms exposed should any default take place.

Chris Maule, CEO, UK Bond Network
Chris Maule, CEO, UK Bond Network

In recognition of this, the Financial Conduct Authority (FCA) recently conducted a review of the regulation governing crowd funders and the promotion of non-readily realisable securities. For clarity, non-readily realisable securities encompass any investments not listed on a Recognised Stock Exchange (RIE), and include loans, minibonds, corporate bonds, and equity investments, all offered by P2P and crowdfunding platforms. Within this the regulator identified common issues which, unless rectified, will continue to undermine trust in the alternative finance sector.

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The first issue identified by the FCA was the “insufficient, omitted or the cherry-picking of information” rife among crowd funders. Indeed, many provide far too little information about the companies on the platform. Typically there is only a small summary available – not nearly enough on which to base an investment decision. There is also often, and perhaps more importantly, no mention of the specific risks associated with a particular investment opportunity, instead solely commentary around the specific attractions. Such practices fall directly against the FCA’s mantra on communications and promotions, that they must be fair, clear, and not misleading. Without fair and clear information, investors can be left unaware of the risks posed by a given investment.

This isn’t just a problem for investors; it may be an elephant in the room for platforms too. As alternative finance is now regulated by the FCA, if an investor suffers a loss, and the platform did not inform the investor of the risks involved at the point of investment, the investor has a right to recourse against the platform. That means that if a P2P loan, issued after 1 April 2014, defaults and subsequently results in a loss of £250,000 for the underlying investors in the loan – the platform could be liable to make their investors good on the loss suffered. It’s easy to see how this could quickly become a big problem for platforms that don’t make the appropriate specific and general risk disclosures to their investors. Indeed, the FCA has urged platforms to disclose “all relevant information” to investors.

Because of these factors, at UK Bond Network we strive for transparency in everything we do. It isn’t simply the ‘right’ thing to do, but is crucial to ensure the longevity of our business. Consequently, we do not advise on investments, nor do we give any form of ‘rating’ to bonds offered on the platform – something which could also be considered as giving advice. Instead we provide our investors with a wealth of information, detail both the attractions and risks of each investment, and then allow our exclusively experienced investor base to make their own, informed, independent decisions.

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