A Rocky Road
IN THE TWO YEARS since the Financial Conduct Authority (FCA) commenced its post-implementation review of the peer-to-peer lending industry, so much has changed. Whereas a mere handful of P2P platforms had full FCA authorisation in 2016, now the vast majority are approved by the City watchdog.
Furthermore, many lenders have gone on to achieve ISA manager status in order to offer Innovative Finance ISAs. Among the biggest lenders, there are plans to launch a bank and even float on the stock market.
However, while platforms focus on building their business, the spectre of the FCA post-implementation review still hangs over the industry.
Interim findings were released at the end of 2016, but at the time of writing, the full review had not been released. Initial expectations were that the report would be published during the summer of 2017. Since then, the report has disappeared from the FCA’s policy development webpage amid speculation that the big political and economic focus on Brexit was behind the delay.
“The sector has somewhat been forgotten since the implications of Brexit for financial services have become clear,” explains Jonathan Segal, partner at law firm Fox Williams.
“Whilst the P2P sector is close to my heart, its relative importance in the UK’s financial services sector is still insignificant.
“Quite rightly, the FCA has been concentrating its resources on Brexit planning which affects the whole of the UK’s economy. Unfortunately, I think P2P has been an early Brexit casualty.”
Meanwhile, Robert Pettigrew, director of self-regulated trade body the Peer-to-Peer Finance Association (P2PFA), believes the delay could be due to the complex nature of such an innovative sector.
“I don’t believe that the FCA has forgotten about P2P lending, but that the time they are taking reflects their determination to understand the underlying dynamics of a sector which continues to evolve and which continues to establish itself in the financial services landscape,” he says.
Ian Anderson, chief operating officer of business P2P platform ArchOver, suggests the delay could actually benefit the industry.
“While the FCA still needs to continue to enhance their rules of the P2P sector, in light of the uncertainty around Brexit, it’s surely better to come up with recommendations for the industry’s future carefully, rather than quickly,” he says.
“Giving the FCA time to prepare for the impact of leaving the European Union will be the most effective way of ensuring the P2P sector can continue to grow and thrive.”
Some platforms are hoping the full review goes further in its measures than the proposals in the interim report.
Sophie Pearce, managing director of business P2P lender MoneyThing, says she had anticipated an appropriateness test would be introduced.
“This is already in place for crowdfunding but not for P2P,” she explains. “Is this needed to better protect consumers? There are good arguments on both sides.
“I’d also expect the review to look at financial promotions and disclosure. There is significant variation between platforms at present and a standard framework for the sector would be beneficial to consumers to make like-for-like comparisons.”
This is supported by Jake Wombwell-Povey, co-founder of P2P investment manager Goji, who suggests there could be enhanced disclosure and appropriateness requirements.
ArchOver’s Anderson adds that whatever comes out of the review, it’s important that it doesn’t diminish the unique characteristics that embody P2P of “innovation, flexibility and the provision of a genuine alternative to traditional savings and investments”.
He says the FCA will be looking to balance innovation and freedom of choice with trust.
“It will want to ensure that robust systems are in place to protect lenders and borrowers,” Anderson explains.
“Having stringent borrower vetting processes and strong borrower relationships is where the real security lies. Whether the FCA reflects that in the spirit of its review remains to be seen.”
In the meantime, there have been plenty of other P2P-related issues to occupy the City watchdog. First there was the FCA’s letter to P2P bosses in February 2017 telling them wholesale lending through their platforms could be in breach of regulations.
The watchdog said that if a lending business borrows through a P2P platform and lends that money to others, it may be “accepting deposits”.
If the borrower does so without the correct regulatory permissions, this would involve a breach of the Financial Services and Markets Act (FSMA) and may be a criminal offence.
More recently, property and pawnbroking P2P platform Collateral went into administration. The FCA showed some teeth when it intervened and installed its own firm BDO rather than the platform’s chosen administrator Refresh Recovery, which it said it did to protect investors.
Could there be more skeletons in the P2P sector’s closet?
“We can’t comment on another platform’s behaviour or performance,” Anderson says.
“Platform behaviour will always be linked directly to the quality of the management team. When it comes to transparency, we could ask ourselves: how transparent are platforms, really?
“Take default rates, for example. Do investors really understand them? These rates are notoriously difficult to truly understand, and there’s certainly a chance that we could see them unravel over the next couple of years.
“What’s more, there could be other obstacles on the horizon. Smaller platforms, with less backing, could see their funds run out, and any crash on the property market could significantly damage certain P2P platforms.”
RateSetter says it is not currently anticipating any specific regulatory issues in the P2P sector.
“In terms of the future, we expect the regulatory framework for P2P will evolve over time, with the sector maintaining its leading position in terms of transparency and platforms continuing to innovate,” Laurence Perrin, head of compliance for RateSetter, says.
Rather than sit and wait for action from the FCA, there is an argument that the P2P sector could take a lead on it. Pettigrew says the operating principles of the P2PFA – set up in 2011 as a self-regulatory body for the industry – “continue to send a clear signal that responsible platforms are willing to embrace standards beyond that which is mandated by regulation.”
Pettigrew explains that these standards have set good practice measures in place that could be used across the wider industry.
“For example, a standardised methodology for calculating and reporting on bad debt and loan defaults which would ensure that net returns quoted by platforms could properly be compared and assessed by investors,” he adds.
Similarly, the UK Crowdfunding Association (UKCFA) – whose members include P2P bond providers Abundance and Downing – has its own code of conduct for members to follow.
“Regulation is not a panacea,” a spokesperson for the UKCFA explains. “Platforms and their senior management are responsible and accountable for their behaviour. We have always argued that principles-based regulation puts the onus on companies to be ‘good actors’ rather than hiding behind or simply avoiding one dimensional rules.
“To support that we constantly discuss ethical and practical issues of running crowdfunding platforms and will issue our own voluntary guidance where we feel either regulation is not clear enough or does not reflect the unique issues of the sector.”
Standard-setting bodies outside the sector also have their eye on the world of P2P. The Lending Standards Board (LSB) – which sets a benchmark for good lending practice in the UK by outlining how firms should deal with personal and small business customers – is looking to expand its remit to P2P.
Firms pay to register with the LSB and are regularly monitored to ensure they keep up with the standards.
“P2P is pretty well recognised and as it is looking to build its reputation, working to a set of standards is an opportunity to outwardly demonstrate that it is building trust,” says David Pickering, chief executive of the LSB.
He says the LSB has the powers to publicly reprimand firms and can also spot and deal with issues faster than the FCA may be able to, which is of benefit to the consumer.
Wombwell-Povey believes the most successful industry standards are led by the sector as it can lead to better outcomes than standards that are “lumped on commercial entities by state entities like regulators.”
However, MoneyThing’s Pearce insists financial regulation can still be more effective.
“Voluntary standards certainly have their place, but by their nature they lack genuine teeth,” she says.
“Being asked to leave an association is not a strong enough sanction to be a useful deterrent to poor practice. If you want to hold the industry accountable for a standard, then that has to come from the FCA.
“However, where regulation lags behind the market, as it inevitably does from time to time due to the fast pace of innovation, voluntary standards can help fill this gap and help firms to demonstrate that they are acting with integrity. Maintaining good practice is imperative for a confident market to blossom.”
There are also plenty of established overarching regulatory rules for P2P platforms to follow beyond operating principles and codes of conduct.
“As well as the review, the FCA has been working on other topics that are of direct interest to our sector including on assessing creditworthiness in consumer credit and reviewing the motor finance sector,” RateSetter’s Perrin adds.
The next big regulatory step could be P2P platforms going public. Funding Circle, Zopa and RateSetter are all rumoured to be considering initial public offerings (IPO).
“IPOs will bring more credibility to the sector but no doubt also more scrutiny,” Wombwell-Povey predicts.
Anderson warns an IPO may also place extra pressure on the whole sector.
“Shared ownership results in new sources of capital and adds another level to the lender-borrower relationship,” he says. “But it also places excessive demand on P2P platforms to keep that capital performing.
“The faster P2P platforms grow, the more likely they are to attract the stern gaze of the regulators – and rightly so. If this should negatively impact smaller, niche P2P players that are focused on providing quality service on closely managed platforms – this would be unfortunate.”
The FCA may have thought regulating P2P was going to be easy when it took ownership of consumer credit in 2014. But you only have to look at the time it has taken for many platforms to become regulated to see how complex the P2P sector has become, with many established brands having waited years for approval.
Balancing regulation and innovation is an ongoing challenge for the FCA, particularly in its oversight of the ever-evolving P2P industry. Whenever the full review is released, all P2P stakeholders will be hoping that not too much complexity is added, so that the industry can continue to flourish.