ABLRATE has heralded the City watchdog’s tighter rules on fair loan pricing but warned that investors should not see price as “a silver bullet for due diligence”.
The Financial Conduct Authority released its updated regulations on peer-to-peer lending earlier this month, after a lengthy post-implementation review of the sector. It mandated platforms to demonstrate that they are pricing P2P loans fairly, reflecting the risk profile of the borrower.
The asset-backed P2P lender said that it welcomed the policies on fair pricing, which “should give consumers a better ability to compare platforms”.
“Because of different business models and different goals of platforms, the pricing of some loans is not a fair representation of the risks involved,” Ablrate said in a blog post on its website.
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Ablrate said that platforms seeking a very high volume of loans would need to charge lower rates and fees to be competitive, while platforms like Ablrate, which can charge higher rates and offer higher returns on a smaller number of projects, could be deemed as higher risk by consumers.
However, Ablrate refuted the assumption of an automatic parallel between rates and risk. It cited an example of a loan it made to a borrower, where another lending platform made a loan to that borrower on supposedly similar security at lower rates. Ablrate said that when the borrower went into default, it managed to recoup all of its investors’ funds, while the other finance provider looks set to lose the majority of loaned funds as the security was not in place correctly.
“This new regulation…should even the playing field,” the Henley-on-Thames-based firm said. “However, we doubt it will, because until the pricing of loans is prescriptive it will remain subjective. Think of the business models that would be affected if suddenly they have to price their loans at a higher rate?
“As a lender, you should not look at price as a silver bullet for due diligence. We hear ‘why would a business pay X when they could get the money cheaper, what’s wrong with the deal’. The answer generally is that the money is not available cheaper.
“Not because the deal is bad, but because it doesn’t fit certain criteria laid down by the banks and even if it does it can take months to organise and often deals are time sensitive, so those time frames don’t fit.”