There are still opportunities for new entrants to the peer-to-peer lending market, as Frank Brown, managing consultant of financial services regulatory consultancy Bovill explains…
Despite action by the regulator and some adverse press coverage, the peer-to-peer lending market is still very much open for business. Existing players continue to hit new milestones (such as Funding Circle’s $10bn announced this month), and secure increased funding. And there remains a steady stream of new authorisations.
That P2P still remains an attractive sector should not come as a surprise. There are still plenty of opportunities for new entrants to expand the market – given the right proposition.
If an industry as new as P2P can have legacy issues, there’s clearly a ‘second move advantage’ for new potential entrants who have an opportunity to build systems and processes ready for the new Financial Conduct Authority (FCA) rules:
- SMCR – the new governance rules are not just about assigning responsibility to individuals. An effective control framework is required to document and demonstrate ‘reasonable steps’ have been taken.
- Three lines of defence – will you need a dedicated compliance function? risk? internal audit? It is far easier to build these assumptions into the growth plans, from day one, so they are already considered step costs, like office space and IT infrastructure.
- Recovery and resolution plans – we’re in discussions with a number of potential new entrants who are at the very early stages of their IT planning. We’re emphasising that it is important to consider the ‘what ifs’ of worst case scenarios, alongside all the great functionality.
- Appropriateness tests – whilst incumbent firms are progressing with their plans to comply with the requirements, it is far easier to build the process from scratch – and price it in to the strategy.
The final point around strategy is one of the most important discussions we have with new potential entrants. When putting together the business plan (both for the regulator, and for investors), it is very important that the revenue projections are realistic. It is absolutely the case that there are good returns to be made in P2P, but these should be forecast to reflect the post-PS19/14 and post-SMCR reality of the future, not the results of the past.
The PS19/14 rule changes will impact new business figures, but it is important not to overlook the impact of SMCR too – particularly in relation to bad debt. The FCA has highlighted that whilst some areas of a firm’s business may be unregulated (like commercial lending), there still remains an overarching expectation that the standards of good conduct will be maintained – and that senior management will be held to account, if they are not.
For new entrants, and for incumbents, it is this key point around getting the strategy right which is very important, as chasing an unobtainable forecast is a sure-fire way to create conduct risk problems in your business. That said, shrewd firms who take a realistic view of risk and reward should continue to prosper in the sector for many years.