From the very beginning, peer-to-peer lenders have pledged to be more transparent than the banks. But will this be viable as regulation and platforms evolve?
FROM ITS INFANCY, the peer-to-peer sector has been built on a promise to be more open, and to share more ‘warts and all’ data with investors, than its established – and more reticent – rivals, the big banks.
It’s a commitment shared by many industry leaders, and is down to the wish to treat all customers equally and be better and more accountable lenders, says Giles Cross, chief executive of West Country-based property lender Folk2Folk. “The commitment to transparency and superior customer outcomes is still at the heart of the sector,” he explains. “The world has seen enough irresponsible lending.”
But as the industry matures and becomes more mainstream, can it maintain that youthful openness, or will new constraints and more complicated relationships with the wider world result in a reduced, or at any rate, more nuanced, approach to what information is shared, when and with whom?
It’s a question that has been prompted by a number of recent – and apparently conflicting – developments. One the one hand, the long-awaited Financial Conduct Authority (FCA) review, published over the summer, seems to point to a new, more consistent, perhaps less forgiving regulatory regime. One based on tougher scrutiny and stricter requirements for compliance.
On the other hand, the actions of some influential platforms seem to be taking the sector in a different and arguably less transparent direction. Specifically the decision by the UK’s largest P2P lender, Funding Circle, to cease publishing a downloadable loanbook on its website, in the run-up to its pioneering and eagerly anticipated initial public offering (IPO) scheduled for October.
Cross believes that Funding Circle’s decision was entirely legitimate in the light of its impending IPO – companies which are about to float are obliged to manage the flow of information and get the best price they can. “It’s a commercial decision – not to do something that might affect the value they create for their shareholders,” he says. “The success of their IPO is important to all of us.”
But, he adds, Folk2Folk will continue to publish its own loanbook, even though he’s not convinced that it is of great practical use. “What does the retail customer really understand from looking at the whole loanbook? We will continue to publish our loanbook in the spirit of transparency, although I am not sure what value it really offers.”
Funding Circle itself says that the decision was taken because of the dwindling numbers of investors who actually used its loanbook data and not because of any desire to pull back on transparency. In a written response for this article, the platform says that only 0.3 per cent of its investors accessed the online loanbook in the final month of its availability.
The statement goes on to say that it is “committed to the highest possible levels of regulatory compliance and transparency” and points out that it has launched a new and improved statistics page “to provide investors with accessible and digestible loan performance information”.
Commercially justified or not, any move by such a major player in the sector is bound to reverberate, according to Alison Harwood, London-based senior vice president of institutional investor Varengold Bank – which backs P2P lenders including MarketInvoice.
“I can see the reasons for Funding Circle’s decision in support of its IPO, but I do think it’s a little bit sad,” she says.
Although Varengold is not an investor in Funding Circle, Harwood thinks the decision has contributed to a change in the mood music coming out of the sector as a whole.
“Previously there has been a big push from the industry on transparency, and that momentum seems to have dissipated,” she comments. “It feels a bit like the big platforms think they have done enough and don’t need to do any more.”
For others, the real question over transparency comes after Funding Circle – and potentially others like it – have floated, rather than before. “Once it is public, there is a real question over loanbook disclosure,” says Andy Davis, industry watcher and author of two influential reports on P2P for the Centre for the Study of Financial Innovation.
“If [Funding Circle] provides detailed information to some third parties but not to all investors, there is a risk it will create opportunities for people to trade with inside knowledge based on market-sensitive information.”
Consequently he believes that normal service – in the form of a downloadable loanbook on the Funding Circle site – will be resumed in due course, and that we shouldn’t read too much into its having been withdrawn in the first place. “I think it will be temporary,” he says. “Funding Circle is a kind of special case that we can’t extrapolate much from.”
The industry body, the Peer-to-Peer Finance Association (P2PFA), has also been in the spotlight for its role in the loanbook saga. It changed its ‘principles of operation’ so that a downloadable loanbook was no longer a requirement for membership, conveniently just before founder member Funding Circle made its change.
The P2PFA maintains that its rules changed because the usefulness of the loanbook to retail investors diminishes as some of its members get larger and more complicated. And also – as new chair Paul Smee explains in this issue’s profile interview – because of fears that the very detailed information they contain could be used by speculators to game the system.
Not everyone agrees with that point of view. Stuart Lunn, chief executive of Edinburgh-based platform Lending Crowd, wrote of the Association’s decision in a June blog post that “investors deserve better”. He said that Lending Crowd (which is not a member of the P2PFA) would continue to publish its loanbook and remains “firmly opposed to any reduction in transparency”.
“My criticism was more about the way the decision was handled than the decision itself,” he says now. “A trade body should be mindful of the broader base within the industry and we’re not convinced the P2PFA does that. It would be better for sector growth and the different stakeholders to have greater transparency and access to information. That’s why we’re supportive of the FCA’s stance.”
And while the Association has to be pragmatic when it comes to accommodating the needs of its larger members, the vital importance of transparency to the sector’s appeal should not be forgotten, says Neil Faulkner, founder of P2P analysis firm 4th Way.
“Without transparency, P2P would be a much weaker proposition,” he asserts. “There is no plausible reason that investors want to hear for reducing the standards of transparency.”
Meanwhile, what of the FCA review and its potential impact on transparency and growth? This document is likely to be more influential than the actions of any one platform, however high profile.
“We take the view that markets grow with transparency, and we agree with the FCA proposals in this area,” says John Battersby, head of policy and communications for RateSetter, the UK’s third-largest P2P platform.
“It’s very important that investors have the data they need to make decisions.”
RateSetter publishes a wide range of information, from daily updated market rates and statistics to monthly analysis and investor emails – and a full loanbook, updated quarterly.
It also supports the FCA’s suggestion of an appropriateness test – essentially a check to ensure that would-be investors understand that P2P is not risk free like a bank account and may not be the right place to invest your entire life savings.
But in common with many other platforms, RateSetter has one big gripe with the review. “There is one thing that we don’t agree with, and that’s the marketing restrictions proposal,” says Battersby.
“The whole point of RateSetter is to open up this asset class to everybody, and we think the restrictions are disproportionate given that investment with us is not no risk, but it is low risk. They would put people off unnecessarily.”
The proposed rule changes would limit the marketing of P2P to sophisticated or high-net-worth investors, or to regular investors who certify they will not put more than 10 per cent of their portfolio into P2P.
Not only could that put quite a crimp in the growth plans of many platforms, it also goes against the egalitarian ethos of the sector, says Folk2Folk’s Cross. “It’s very patronising to say that P2P is not for a certain kind of person,” he states. “My desire is not that the industry becomes about demonstrating your financial status but rather about being transparent about what the risks are.
“The sector has been good for its customers and I would be very disappointed if any of my investors were stopped from taking advantage of what it has to offer them.’”
Any such ruling would bring P2P into line with the regime already operating in the equity crowdfunding sector – perhaps attractive from a regulatory consistency point of view, but controversial with those who believe that lending is inherently less risky than any form of equity investing.
Lending Crowd’s Lunn says that if the restrictions are introduced and are seen to work, he expects that the FCA will seek to apply them more widely.
“It’s not necessarily wrong, but is it appropriate that the restrictions should only apply to P2P, or should they be broadened to include stock market investors?” he says.
“I can’t see the restricted class remaining in P2P in isolation. In three to five years I think it will be applied to other asset classes too.”
Overall, he believes that that the review is positive and will help the sector to move into a new stage of growth by opening P2P to new and relatively untapped sources of capital. “The FCA report shows that a continuous evolution in regulation can only help growth and help attract other types of money,” he adds. “Particularly mediated money.
“There is not a significant level of engagement with P2P in the wealth management and IFA market. The FCA review addresses the concerns of those intermediaries and if the outcome is that their trust in the sector improves, that is a good thing.”
So perhaps those apparently-conflicting messages on transparency are not so conflicting after all, but rather a sign that the sector is simply growing up. And surely that is a transition to be welcomed by industry, regulators and customers alike.
This story featured in the October issue of Peer2Peer Finance News, now available to read online.