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Peer2Peer Finance News | June 18, 2019

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Should bank-style stress tests for P2P lenders reassure investors?

Should bank-style stress tests for P2P lenders reassure investors?
Hannah Smith

THE RESILIENCE of the peer-to-peer lending sector in a downturn has been debated since the industry’s fruition.

Trade body the Peer-to-Peer Finance Association (P2PFA) requires its platform members to carry out bank-style stress tests on their loan portfolios, but how much confidence should P2P investors  have in these models if  the cycle turns?

P2PFA member Funding Circle has claimed its loanbook would hold up in a recession, after subjecting itself to the toughest Bank of England stress tests. The P2P business lender has said it could still deliver a three to five per cent return to investors in a downturn.

“At Funding Circle, we rigorously prepare for changes in economic conditions,” said the firm’s chief risk officer Jerome Le Luel in a December 2018 update.

Read more: Funding Circle’s UK loanbook hits £4bn

“Part of this is to regularly stress test the loans in each of our markets.

“Although every recession is different, the results show that even in severe economic conditions investors should still be expected to experience positive returns.”

Daniel Meere, managing director of consulting firm Axis Corporate, said that the stricter stress tests have been “both useful and necessary”, as they give an indication of how institutions would respond to ‘black swan’ events, and they look back over a long timescale.

He said most of the questions stress tests pose are reasonable as they help assess good governance and responsible practices. He noted these tests are increasingly being applied at the consumer level, to both secured and unsecured lending.

P2P ratings and research group 4thWay, which conducts independent stress tests for P2P lenders, said the fact that platforms are making the effort to set themselves these tests should sit well  with investors.

“The more data they publish, the harder it is for them to lie to you,” said managing director Neil Faulkner.

“P2P is a new industry, it has only been around since 2005. Some platforms don’t have the skills they need but many have employees who have come across from banks to do the exact same thing they were doing before.”

Read more: Direct lenders could face ‘test’ in 2019

This article featured in the February edition of Peer2Peer Finance News, now available to read online.