Taking the lead
Ex-regulator Christine Farnish isn’t scared of a little competition – in fact, she relishes it. The chair of the Peer-to-Peer Finance Association talks about risk, red tape and why this is such an exciting time for the peer-to-peer finance industry
“I LIKE COMPLEX PROBLEMS, especially some of these longer-term problems that there aren’t simple answers to,” asserts Christine Farnish, chair of the Peer-to-Peer Finance Association (P2PFA).
The former financial services professional and regulator isn’t talking about peer-to-peer lending in this instance, but her tenure as chief executive of the National Association of Pension Funds (NAPF) between 2002 and 2006. “The previous job I enjoyed most was when I was at the NAPF, because it was nice being in charge of something and we were going through turmoil at that time,” she says. “The pension system was pretty much on the front page of newspapers every day of the week.
“There was a problem with funding, with regulation, with the shift from defined benefits to defined contributions, and it was a very complex area. It was hard for ordinary people to get their head around and understand.
“We got stuck into a lot of these complex issues and there weren’t any easy answers but I think we came out in a better place and became stronger…it was a very interesting time.”
It is immediately clear from talking to Farnish that she is not scared of a little controversy and that she is keen to champion effective competition for consumers – qualities that hold her in good stead for her role as head of the P2P sector’s self-regulated trade body. The P2PFA now has nine members – RateSetter, Funding Circle, Zopa, Lending Works, LendInvest, MarketInvoice, Landbay, ThinCats and new entrant Folk2Folk – which collectively make up around 80 per cent of the UK’s P2P lending market.
“The thing that attracted me specifically about the P2PFA was that I’ve always believed in competition in markets, wherever you can possibly have it,” she explains.
“It’s in my blood. I was schooled in that when I worked for the [telecoms watchdog] Oftel in the 1990s, before I went to [the former City regulator] the Financial Services Authority.
“There isn’t enough competition in financial services markets for my taste. What I really liked about P2P lending was there was this new, innovative set of businesses wanting to come in, challenge the status quo and actually provide better deals for consumers by disintermediating the market.
“It was clean, transparent, it wanted to do the right thing, it wanted to get a better deal for customers – all of those things I found hugely attractive.”
Farnish felt that P2P platforms, with their entrepreneur founders, were very smart at setting up their businesses but less familiar with how to deal with politicians and regulators.
“They knew about the technology, they knew about the skills and risks involved,” she says. “What they didn’t understand was either how government works or how regulation works, so I felt I could actually help with those things a little bit.”
A key moment in the UK P2P sector’s history was when the Financial Conduct Authority (FCA) took over regulating the sector from the Office of Fair Trading (OFT) in 2014. It said at the time that it would undertake a full review of the rules in 2016.
Farnish says the shift from the “light-touch” OFT to the City watchdog was “absolutely the right thing” for the sector, but notes the challenges that the FCA faced – and still faces – in overseeing a relatively new industry.
“I think there’s a learning curve that the FCA has gone up and there’s probably some work to do,” she says. “This market’s not going to stand still. It’s going to continue to evolve and change, like other disruptive technology-platform markets.
“I’m now on the board of [energy regulator] Ofgem and we’re seeing some similarities with what’s happening with the new disruptive suppliers and forms of generation coming into the energy market.
“It really does challenge the way you think as a regulator. So the FCA is on a journey, as indeed we all are, and I think they’ve done a good job so far, I really do. They’re taking the time to get it right and they’re really starting to think through the issues.”
Farnish is diplomatic in her comments about the City regulator, but like the rest of the industry, she was hoping for a faster authorisation process. Some of the sector’s best-known firms had to wait an arduous 18 months for approval, while others are still waiting.
“There are 3,000 people working in the FCA and there are a lot of members of various teams involved in this,” she asserts.
“If I had any advice to give the FCA, I would say looking back, it might have been helpful for them to
have set up a dedicated team from day one, because I think they would have made more progress, they would have had a stronger understanding of how the market works and how it’s developing and they would have had that in real time.”
The order, as well as the pace, of authorisation has come under fire from some industry onlookers, as many smaller platforms gained approval much more quickly than the largest and most established players.
Farnish attributes this to two reasons, one being that the FCA started off by looking at platforms that launched after it had taken over regulation of the sector from the OFT.
“The other reason is that the FCA has always felt – whether this is right or wrong is an open question – that large equals riskier,” she says. “I think you could challenge that mindset quite reasonably because often large means better organised, more skilled and better systems, so you can see how it’s not necessarily the right way to look at all the players.”
The FCA published its interim feedback from its review into debt and equity crowdfunding last December, which indicated that it would implement tougher rules on the sector.
Interestingly, while many in the industry found the interim feedback more hardline than expected, Farnish does not think it went far enough.
“There was nothing in there that surprised us,” she states. “If anything, I think we might have expected the FCA to go a bit further in some areas.
“For example, our P2PFA guidelines say that member platforms can’t discriminate between retail and institutional investors. I think that’s a very important bit of consumer protection that wasn’t mentioned in the FCA document.
“We’re also very clear that platforms are transparent about their loan books and use a standard way of calculating default losses so that it’s done in a comparable, fair way. Again, that wasn’t in the document, so we think there’s more to be done, but there’s time to do it and the FCA is working in partnership with the likes of us to get some of this in place.”
The P2P industry appears to have finally shaken off its bad press of 2016, when several high-profile figures expressed concerns about the potential risks for consumers. Secret lobbying by traditional financial institutions was to blame for some of this negative media coverage, according to Farnish.
“P2P lending’s out of the news because it’s all going very well and there aren’t shock-horror stories to write about,” she says.
“I suspect some of the former bad press we were getting was actually inspired, under the surface, by phone calls from some of the very large, traditional incumbent institutions in the financial services market who want to slow the whole thing down.
“That would give them time to invest properly in their customer service and systems and offer small businesses and consumers better deals than they do at the moment.
“That’s the way competition works; that’s perfectly normal, that’s what you’d expect.”
Improving financial awareness and understanding of P2P is a key focus for Farnish, but she thinks there is still some way to go.
“If you did an opinion poll, you’d still find the majority of people have never heard of P2P lending, so there’s still a big job to do,” she says.
“Innovative Finance ISAs are really going to help with that because they’re going to put P2P into the mainstream in a way that hasn’t happened yet.
“It’s good for consumers as it gives them a new choice of what to do with their money that gives them a very fair return, they won’t be exposed to the inflation risk and it’s less risky than stocks and shares.”
What does the future hold for P2P? Farnish wryly comments that “crystal balls are always dangerous” but reiterates the commonly-held view that the IFISA will boost awareness and uptake of P2P investments.
Farnish says that another downturn in the credit cycle is “as inevitable as night following day” and that the P2P sector will only continue to be successful if platforms do two things: communicate clearly with investors about the risks and be prudent about who they lend to.
“Who knows what the future holds for our economy? The General Election made things even less certain than they were before,” she says.
“The importance of prudence and caution in terms of the way the platforms run themselves is more important now, because an uncertain environment means things could happen in a negative way at a macroeconomic level, which could result in higher loss levels.”
Despite an unknown outlook for the wider economy, Farnish thinks it is an exciting time for P2P.
“I think the mindset, skill-set and culture of the people who set up these platforms and their vision is an extremely consumer-centric one that won’t go away,” she says.
“They are absolutely the sort of people who innovate. They don’t stand still. If something can be done better next week, or done differently next week, they will do it.”