Clear as day
The City watchdog’s new rules mandate greater transparency from peer-to-peer lending platforms, so what does this mean for the industry and its customers?
EVEN THE SMALLEST peer-to-peer lending platforms generate a large amount of data on their investors, their borrowers and the interest rates and default rates on their loan portfolios. But how much of this data should they be sharing publicly? The financial regulator wants to see P2P investors given more detailed disclosures, but some industry stakeholders are concerned about ‘information overload’.
Against a backdrop of high-profile P2P platform closures and a sharper focus on consumer protection by the Financial Conduct Authority (FCA), there will be no escaping the drive towards greater transparency in the sector.
Platforms will need to be even more open about the risks involved for investors, pricing of loans and about what happens if things go wrong.
In its final rules for P2P lending platforms issued in June, the FCA called for greater disclosure from an industry which already prides itself on being much more open and transparent than the incumbent banks it seeks to challenge. The FCA wants to see firms give investors sufficient information about the nature of their P2P investments, the risks involved, fees and charges, and the role of the platform. Platforms will have to publish an ‘outcomes statement’ every year revealing actual and expected default rates and, where they offer a target interest rate, the actual return achieved. The regulator also reaffirmed that investors must understand what could happen to their portfolio if a platform ceased trading.
“Transparency is absolutely paramount and lenders on a platform should be clearly presented with every bit of information about historical performance, years of operation, payback track record, asset expertise of the team, operational best practice and most importantly the relationship between the rate received by the lender and the rate paid by the borrower,” said Mike Bristow, chief executive and co-founder of CrowdProperty.
“This final point is critical as borrower rate is the strongest proxy for the risk being borne by the lender capital – as that capital is lent out in a competitive market.
“Opacity across these factors should not be accepted and lenders must ask themselves why all these factors are not being made clear if they aren’t.” CrowdProperty prides itself on the highest levels of transparency and Bristow says the firm already surpasses any increased disclosure requirements and recommendations made by the FCA.
Currently, the amount and quality of data and information available varies considerably by platform. Some firms such as CrowdProperty, Lending Works and RateSetter publish a huge amount of statistics including details on arrears and bad debts, borrower characteristics, interest earned, the size of reserve or contingency funds and how they are used, and much more.
“RateSetter has always been a market leader in transparency and disclosure of accurate, reliable and accessible data for investors,” said a RateSetter spokesperson.
“For example, we display our market rates in real time and we publish the latest data on returns, lending volumes, risk management and the provision fund every month. We will provide a range of additional information in line with the new regulations.”
In contrast, some platforms share “nothing or next to nothing”, according to Neil Faulkner, managing director of P2P research and ratings group 4th Way.
Meanwhile, Funding Circle stopped publishing its full loanbook in the run up to its stock market float last year, instead offering a statistics page which is updated on a quarterly basis. It said few investors used the full loanbook data anyway: just 0.3 per cent of investors accessed it in the month before it was pulled. Almost simultaneously, trade body the Peer-to-Peer Finance Association changed its rules for members – which include Funding Circle – so that they no longer had to publish their full loanbooks, in a move which seemed to signal a shift away from total transparency for the sector.
Since the FCA’s review, platforms have begun revealing more of their loan data. Faulkner said Proplend has now supplied its complete historical loanbook to 4th Way, while Kuflink will soon start publishing a number of additional statistics.
“I think these sorts of changes will continue to trickle in,” Faulkner says.
“Platforms that want to be taken seriously should publish their loanbooks to the general public, so that customers have the peace of mind that analysts and highly engaged amateurs will be probing the platform’s data. The less information platforms provide, the more assumptions investors need to make when gauging the risk level.”
Growth Street’s chief executive Greg Carter told Peer2Peer Finance News that, since the FCA review, his platform is thinking about how best to communicate to customers the way it assesses loan risk.
“Since the FCA change we are reviewing the way we categorise loans internally, and we will need to start disclosing loans we think are at risk of default,” Carter comments. “We’re working on clearly disclosing that to investors.”
He explained that the platform is always monitoring the health of its borrowers, and where it sees a rising risk of default, it can reduce the borrowing limit or change the interest rate on a loan. It wants to be able to show investors at-risk loans and action it is taking on them.
This would build on the data the platform already gives consumers, including monthly updates showing them who they are lending to, the number of borrowers and how much they are borrowing, and the probability of default. Growth Street also shares aggregate-level information on defaults such as the number and value of defaults and the cost to the loan loss provision, but not “confusing detail” about individual cases and technicalities of the recovery process.
“We have plain English descriptions on the website of how we manage risk on investors’ behalf,” Carter adds.
Asked how he knows whether the data Growth Street publishes is even being read by customers and prospects, and how it is being used, Carter pointed to the platform’s appropriateness test. This is a requirement of the FCA’s new rules but Growth Street says it has had one in place since 2016. It checks investors’ knowledge of P2P lending before they can invest through the platform.
“To pass that test you have to make yourself familiar with the Growth Street proposition and the key risks you’re undertaking by investing, so that’s one way we know the information is being looked at because they pass that test,” Carter explains.
Carter believes transparency is vital to foster trust between investors and platforms, but said the data given must be explained properly. “We work very hard to find the right balance between clarity and transparency because there’s a big danger that transparency can become an exercise in releasing huge amounts of information that retail investors can find difficult to understand,” he says.
The increased emphasis on transparency could prompt more P2P platforms to undergo stress tests on their loanbooks. Buy-to-let specialist Landbay commissioned an independent stress test on its loanbook in May, which found its investors would still receive returns of more than three per cent in an economic downturn.
“Landbay believes in transparency and has led a call for increased transparency in the sector by releasing the results of its voluntary Bank of England stress test,” a spokesperson told Peer2Peer Finance News via email. “The firm discloses its full loanbook and performance, doing more than the FCA is requesting. As such, it didn’t need to change anything in light of June’s rules.”
When it comes to transparency, BDO’s head of fintech and challenger banking, Matt Hopkins, thinks that platforms face a delicate balancing act to provide the right level of detail without bamboozling investors. He says there is “understandable caution in ensuring information is not confusing or misleading”.
“It is too simplistic to assume that more disclosure can provide better client education – governance around the quality, relevance and accuracy of disclosure is far more important than volume,” he states.
This was a key argument against full disclosure made in response to the FCA’s consultation, when platforms said they feared investors could be “overwhelmed with information”.
Some suggested that disclosure documents need not include details of exactly how loan risk is assessed, for example, but would be better revealing only high-level information such as general borrower criteria and security details.
The lack of a prescribed format could also mean it is hard for investors to make comparisons between platforms, they noted. But aside from the potential to overload investors, could too much transparency be bad for competition among platforms as commercially sensitive information is forced out into the open? There is also a concern that sharing too much information about the debt recovery process could undermine that process, for example, when investors discuss the details in online forums.
Loan pricing might be one particularly tricky issue for platforms as it is commercially sensitive data. The FCA could make things fairer by forcing banks and non-bank lenders alike to reveal their average borrower APRs, suggests Faulkner.
“Most platforms hide their average loan prices, which makes it difficult for investors to estimate their investing total costs,” he asserts. “The total cost to the investor is the total paid by the borrower including fees, minus the interest paid to investors before bad debts.
“The reason for secrecy on loan pricing is understandable: P2P lending platforms want to prevent other platforms – or banks – from secretly using that information to undercut prices.
“The FCA could create a level playing field by forcing all platforms, banks and non-bank lenders to publish their average borrower APRs, which is an interest rate that incorporates all arrangement and exit fees into the total cost paid by the borrower.”
Hopkins said smaller platforms have the most to fear from increasingly onerous disclosure rules.
“Smaller platforms have to tread more carefully to ensure their disclosure is not detrimental to their business model,” he explains.
In fact, the volume of data available across platforms of different sizes could end up distorting the picture for investors.
“You could be in a position where a platform is unfairly prejudiced by the default on one loan, or conversely where a platform’s default rate is flattered due to minimal data points rather than the actual quality of their book,” Hopkins says.
“For a smaller platform with a niche product offering, there may be sound reasoning as to why their risk factors, outcomes, and default rates are divergent to other market participants.”
This means more analysis will be needed alongside any published data, to put it in context for people, Hopkins suggests.
“All data needs a health warning, as with limited data sets there is a risk that you are giving assurance to quality that is not currently tested.”
As the wave of data coming out of the P2P lending sector grows to a deluge, platforms will have to ensure they are explaining properly what it really means, to avoid their investors being swept away by the flood.
This article featured in the September issue of Peer2Peer Finance News, now available to read online.