THE PEER-TO-PEER lending industry has hit back at a warning from the financial regulator to consumers about the risks of the Innovative Finance ISA (IFISA).
The Financial Conduct Authority (FCA) said it has seen evidence that IFISAs are being promoted alongside cash ISAs and has urged consumers to “carefully consider where their money is being invested” before purchasing the “high risk” product.
“Investments held in IFISAs are high-risk with the money ultimately being invested in products like mini-bonds or P2P investments,” the FCA said on Monday.
“These types of investments may not be protected by the Financial Service Compensation Scheme so customers may lose the money invested or find it hard to get back.
“Anyone considering investing in an IFISA should carefully consider where their money is being invested before purchasing an IFISA.”
The regulator has previously flagged concerns over the way that P2P is marketed to consumers and has proposed categorisation or appropriateness tests, potentially limiting the sector to sophisticated investors.
P2P lending platforms have criticised the FCA’s comments, arguing it does not differentiate between the various types of peer-to-peer lending, some of which are less risky than investing in stock markets.
Frazer Fearnhead is founder and chief executive at the House Crowd, a property-focused P2P lender. He said restricting P2P products to sophisticated investors is not the answer.
“Restricting to sophisticated investors would just kill the industry – it is meant to give the general public access to the sorts of returns and investments that only high-net-worth people could previously access,” he told Peer2Peer Finance News.
“If you rob them of that, what are they left with? They’ll never stand a chance to build up a nest egg for retirement because they are left with things like cash ISAs which don’t even beat inflation.”
He said the FCA’s warning is a “knee-jerk reaction” and it is unfairly lumping high-risk products in with lower-risk ones.
“I appreciate the need for transparency but the FCA tends to go over the top. To differentiate between what we do and a stocks and shares ISA and to try and introduce this level of appropriateness test which they are trying to do is ridiculous.”
He pointed out that losses suffered by listed companies can be far greater than those from the P2P sector. Although P2P lenders which secure loans against property may experience loan defaults, they do not see such hefty falls in asset value.
“There has never been a property in the UK that has fallen by 80 per cent in six months,” he said.
“To me, lending is a lot simpler than investing in a company, you need to be an expert in it to understand all the things that could go badly or well with that company.
“Lending can be secured against an asset and the risk is that the borrower doesn’t repay, it is very simple. There are risks involved and borrowers need to be aware of them, but the FCA does not seem to distinguish between different types of P2P loans. There are different levels of security with P2P loans.”
Julia Groves, partner at Downing, said she thinks the industry is doing well when it comes to financial promotion, contrary to the FCA’s warning.
“Neither bonds nor P2P loans are covered by the financial services compensation scheme deposit guarantee, nor are any investments for that matter,” she said. “Investors’ capital is always at risk and that should be made clear in any financial promotions – even if there is a provision fund in place.
“As a rule I think the industry does this well. If any providers don’t do it well, the FCA should intervene promptly on that individual case.
“In our view, tighter supervision and enforcement would be more effective than sending out an indiscriminate warning note. Then the whole industry gets the message, and the better players aren’t penalised.”
A spokesperson for the UK Crowdfunding Association said there is no need to ‘rein in’ the IFISA.
“If providers follow the existing rules it should be abundantly clear to potential investors that the IFISA is not a cash product,” the spokesperson added.
“The problem is that the existing rules need to be enforced in a timely and more public way. This will dissuade any providers who seek to avoid the controls the majority of platforms across P2P and crowdfunding comply with.
“You only have to look at the very low levels of complaints regarding IFISAs to see that the existing regulations are working well. What we need to see is the FCA gearing up to intervene when a platform doesn’t follow those rules.”
James Meekings, Funding Circle’s UK co-founder and managing director, noted that there are a wide range of platforms and products available, so investors are able to choose a risk level that suits them.
“At Funding Circle we offer investors a choice of two lending options depending on their risk appetite, and we have a strong track record built over eight years of small business lending,” he said. “The IFISA is providing much-needed choice for investors looking for attractive returns without the volatility typically experienced in the stock market.”
The recent collapse of mini-bond provider London Capital & Finance has increased regulatory scrutiny of products marketed to retail investors.
Fearnhead suggested the FCA’s warning on IFISAs this week is a reaction to this news. “They’re lumping P2P lending in with London Capital & Finance, which was not acting in a regulated fashion anyway, so why are we all being tarred with the same brush? It’s a complete knee-jerk reaction and lumping the whole P2P industry in with one bad apple.”
Orca Money’s chief executive Iain Niblock has argued that the collapse of London Capital & Finance actually highlights the relative stability of P2P lending.