PEER-TO-PEER lending platforms are resilient enough to withstand a financial downturn, according to a major economic study into the sector.
The new report, which was released on Sunday evening, was commissioned by the Peer-to-Peer Finance Association (P2PFA) and carried out by economic consulting firm Oxera.
It said that P2P does not create systemic risk and that platforms are well-placed to weather a downturn in the credit cycle. Borrower defaults would need to more than triple for average investor returns to fall below zero, according to the report’s findings.
“This landmark study into the economics of P2P lending provides important insight into the state of the market in the United Kingdom, and also addresses concerns which some have expressed about the understanding of investors, the business models of platforms and the regulatory framework,” said Christine Farnish, chair of the P2PFA.
“The report provides clear evidence on the robustness and resilience of the sector. We hope it provides a useful input to policy-makers and regulators”.
The study went on to say that P2P lending poses little risk to the wider financial system and cannot be compared to the contagion risk posed by the conventional banking sector.
“P2P lending poses little risk to the wider financial system, not just owing to its small size but also to P2P platforms facilitating longer-term investments to investors, rather than instant-access current accounts to the wider public,” it said.
The study focused on the eight members of the P2PFA, an industry body, who collectively make up more than 75 per cent of the UK market.
The report said that P2P provides a new and competitive option for retail investors, who mostly have a good understanding of the risks involved. It found that the platforms provide good levels of transparency for investors and conduct credit-risk assessments akin with those of traditional lenders.
The new research comes at a good time for the P2P industry, which has endured a slew of negative press over the past year. City grandees such as Lord Turner and Treasury Select Committee chair Andrew Tyrie have expressed concerns about the sector, particularly regarding the risks for investors.
“The report emphasises the crucial importance of ensuring that retail investors are well-informed – particularly as the number of those participating expands – as well as making sure that platforms themselves undertake sound credit-risk management and adhere to high standards of business conduct,” said Farnish.
“Whilst P2PFA member platforms are required to commit to unrivalled levels of transparency and robust operating principles, it is clear that the regulatory regime has scope for further development so as to ensure that exemplary levels of confidence can be maintained for this increasingly significant part of the alternative finance landscape”.
Reinder van Dijk, partner at Oxera, said: “P2P lending has been a real innovation in the market for credit, bringing benefits to both borrowers and investors. The existing regulatory regime in the UK has been successful in enabling the P2P market to develop to where it is today.
“As the sector continues to mature, regulation will need to evolve alongside it to ensure consumers continue to achieve the benefits made possible by this new model.”