What we can learn from China’s flawed P2P sector
China’s P2P sector has grown rapidly thanks to the increasing wealth of the middle classes, and under-regulation. The UK can learn from this flawed model, says Adam Tyler, chief executive of the National Association of Commercial Finance Brokers (NACFB), as he introduces a new training programme to make SMEs more aware of the potential risks.
As the N in NACFB stands for National, it’s not in our remit to look very hard at countries as far distant as China. But I will do it just this once.
Recent events have made the UK look like an unlocked door to be pushed against by would-be trading partners. At least one official at the state-backed Chinese Academy of International Trade and Economic Cooperation has described the trade situation between his country and the EU as “frustrating”. In this atmosphere, the NACFB has been invited to attend Chinese investment themed events as an exhibitor, and meetings as a contributor, and so it’s become necessary to get up to date on the issues facing these countries, so we can share with them any experiences we have had that seem relevant.
The biggest one is the issue of regulation. Chinese banks offer interest rates that are far from generous, so savvy investors look for other places to place their money, and wade into a world that’s largely free of effective regulation.
The results are not often pretty. The peer-to-peer lending sector has developed underground in a very literal sense, with one lender (Ezubao) reportedly burying 1200 account books to cover their tracks as they vanished with $7.6bn. It proved easy to disguise what was actually a Ponzi scheme under the camouflage of peer-to-peer lending, because of the cyclical nature of investments and pay-outs.
Later investigation into the company found that about 95 per cent of the investments made were fake, while in a cheerful nod to the film Brewster’s Millions, its chairman managed to spend $150m in a short space of time. Well over one thousand documents, secured in eighty bags, were carefully buried twenty feet underground – deep enough that you might not have expected them to be found, but a scandalised police force got to them eventually.
China has found space for nearly four thousand formally registered P2P funders, plus, one presumes, a few who have ducked under the barrier. Such funders are often marketed by state banks, who refuse to guarantee repayments.
The temptation is clear. Ezubao was able to ensnare almost one million investors with the generous yet plausible promise of nine to 14 per cent interest, and thanks to the growth of the Chinese middle classes in rural areas, the mean average investment ran as high as $8000 (£6387). Aware that no one was effectively watching where the money went, the business managers found ways to subsidise their extra-curricular activities.
Not so long ago, within the lifespan of our 24-year-old Association, such a scheme would have been simply unviable. China was a less prosperous nation and a more cautious one. The company would have needed actual bank branches to get the same outreach, and the middle classes represented a much smaller proportion of the population. By some estimates and definitions of what constitutes a middle class, there were five million households in that category in the year 2000, and today there are 225 million of them – forty-five times as many.
It’s this honeypot of relative wealth that has encouraged unscrupulous lenders to grow faster than the regulatory bodies set up to come after them.
Here in the UK the last decade of regulation has fundamentally kept pace with the explosion in alternative funding types. But when we look to do business with other countries, it would serve us well to be aware we cannot take it for granted that they share our attitude to transparency.
In not entirely unconnected news, the NACFB has a new training and education programme which we have just rolled out to our members as I write this. One thing we have had to bear in mind when preparing a set of exams for members is that the topics must be very carefully judged. Too specific, and individual brokers will say the exams are not appropriate for them; too vaguely-defined, and they will help nobody.
The topics we’ve chosen, to start with, are as follows: Introduction to Consumer Credit, Complaints Handling, Financial Crime (how to spot it, not how to get away with it), Data Protection, and Treating Customers Fairly.
There are also a number of other titles which will relate more closely to the day-job of each member. It will mean that everyone can choose to remain focused on whatever they are experts on, while sharing the same set of basic competences.
What’s particularly helpful about our system is that it doesn’t just tell you what you got wrong but revisits each question where you missed the right answer and explains it with a “reason why” box. The course then recommends further reading on the area that it has identified as being one that you have found challenging. A score of 100 per cent means more if you’re not scoring it on a second run with the answers neatly written down on the back of a business-card.
The point is to make users feel engaged with the process, as if it was there to help them instead of aiming to find them wanting. It’s not a policeman with a radar gun hiding behind a tree.
But looking further ahead, our country may (hopefully) have some new business partners that we are not yet experts on, and our training programme may move to reflect and correct that.