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Peer2Peer Finance News | July 23, 2019

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Wholesale lending deemed to be against P2P rules

Wholesale lending deemed to be against P2P rules
Marc Shoffman

PEER-TO-PEER platforms should not be engaging in wholesale lending, according to updated readings of regulations.

A number of P2P platforms have had wholesale lending operations in the past, where they lend investors’ money to other lenders.

But updated interpretations of Financial Conduct Authority (FCA) rules have suggested that wholesale lending may not comply with current P2P regulations.

Read more: FCA seeks views on whether to extend compensation scheme to P2P

A RateSetter spokesperson said they sought clarification from the FCA in October 2016 over wholesale lending and decided to stop taking on new wholesale partners the following December.

“We raised a concern that under one interpretation, wholesale lending would not be consistent with the current regulations,” RateSetter said in a statement to Peer-to-Peer Finance News.

“In mid-December 2016, we decided to stop taking on new wholesale partners, partly due to this regulatory uncertainty and partly because we believe that we are now at the stage where it is becoming more efficient for us to originate new loans direct or via brokers.

“In late December 2016, the FCA agreed that wholesale lending is not consistent with current regulations, so we replied confirming our intention to run down our existing wholesale lending and replace it with direct and broker lending.”

Read more: Here’s what the P2P sector thought of the FCA feedback 

The spokesperson said the platform has been building up its in-house capability anyway, so the decision to run down this form of lending and let it amortise away meant it could focus on using that capability to originate direct loans to individuals and businesses at scale.

Wholesale lending currently makes up 14 per cent of the loan book, the spokesperson said.

Crowdstacker currently offers an investment in development finance provider Amicus, but the platform’s co-founder Karteek Patel insists that this is not wholesale lending, as it is secured and lenders know where their money is going.

“Crowdstacker offers a loan product, for Amicus Finance, which is itself a lender,” he told Peer-to-Peer Finance News.

“Crowdstacker lenders are actually lending directly to Amicus the business, and the loan is secured against the assets and business of Amicus itself. So this differs from wholesale lending.

“Wholesale lending does occur in the industry and the FCA is right to be looking closely at this to ensure consumers are protected and platforms are given a clear set of rules to abide by. But essentially this same consideration around quality of borrowers applies.

“At the end of the day if you’re lending money to a good quality business or businesses, there is an opportunity to make good rates of interest and you are happy with the risk profile, the advantages of P2P for retail investors remain.”

Neil Faulkner of P2P analysts 4th Way said other platforms will also be involved in wholesale lending but warned that it is important the terminology is not mixed up with its use in banking.

“Wholesale lending has historically merely meant, more often than not, that the lender gets deals through a broker,” Faulkner said.

“So the wholesale lender is still the lender, it’s just that the borrower-facing side and the ‘loan origination’ comes from another company. In these cases, the lender still does its diligence checks to make sure the borrower is creditworthy and to price the loan.

“That still goes on a lot in P2P lending, as it’s a useful way to find borrowers through existing channels.”

Faulkner said wholesale lending in P2P has come to mean something a bit different.

“It is about P2P businesses lending to other businesses and then those businesses go on to lend to their own customers,” he said.

“My view is that this wouldn’t have been a bad thing per se, provided the P2P site did sensible checks on those end-lending businesses,” he continued. “If they took sensible precautions like securing the debt based on the loans originated by those end-lending businesses, and ensured that the specific risks of those kinds of loans were clear to investors if it was allowing a large proportion of them.

“But that is not the case as the FCA says it is against the rules.”

It is unclear whether the FCA is looking into this as part of its review into the sector, as its call for input last year did not mention wholesale lending.

The FCA has been contacted for comment.

Read more: Who’s afraid of a little innovation?