Peer-to-peer lenders are being pushed towards institutional funding to boost liquidity, as the regulator’s crackdown on mini-bonds leads to caution among retail investors in the wider alternative finance industry.
The Financial Conduct Authority (FCA) is planning to make a ban on the marketing of mini bonds to retail investors permanent but has also extended the proposal to include speculative illiquid securities, which could hit crowd bond providers.
There are hopes that crowdfunding platforms will be exempt from the ban as they are regulated, unlike mini-bond providers, but the move has already resulted in property P2P lender CrowdLords ceasing regulated activity as it considers its options. It was also revealed last month that the Financial Services Compensation Scheme believes that Basset & Gold mini-bonds marketed by regulated parent company B&G Finance before its collapse were mis-sold.
Mark Turner, managing director in Duff & Phelps’ compliance and regulatory consulting practice, said the FCA’s clampdown on mini-bonds and the way it has lumped it together with warnings about the risks of Innovative Finance ISAs could deter retail investors from P2P lending. The coronavirus crisis has also made many retail investors more cautious, which Turner said means platforms are considering institutional funding to manage liquidity and make withdrawals easier.
“When everyday investors see what the FCA is saying and they see some of the less good behaviours and failures, that no doubt causes some of them to think twice before putting money into this sector,” he said. “There are definitely providers looking at their business models and thinking we have been reliant on retail investment and are looking for alternative funding sources such as professional investors or institutional money. “We were already seeing a shift to institutional money before and the speed has now increased.
“For certain P2P lending firms, having a stickier funding base, which maybe comes from some institutional money in the mix, enables them to manage liquidity more effectively and ride out stresses which better protects all types of investors.”