Do retail investors have a future in P2P and crowdfunding? A group of influential industry stakeholders met (virtually) last month to explore the regulatory direction of travel. Kathryn Gaw reports…
It is no secret that peer-to-peer lending and crowdfunding platforms have been on the receiving end of some bad press recently. The continuing fallout from Lendy’s failure and the high-profile collapse of mini-bond provider London Capital & Finance (LCF) have impacted the entire alternative lending community and the Financial Conduct Authority (FCA) has been quick to respond.
Marketing bans, investment restrictions and a series of consultations have all been introduced over the past two years. As a result, several big players have left the regulated space, while others have adapted their business models to reflect the changing regulatory environment.
Peer2Peer Finance News, in partnership with the UK Crowdfunding Association, gathered together a group of industry stakeholders – including platform bosses, legal representatives, lobbyists and government representatives – to discuss the key issues in P2P and crowdfunding regulation, and the future of retail investment.
The event, which was held under Chatham House Rules, resulted in a lively 90-minute discussion. Conversation ranged from the risk/ protection balance, to the future of retail investment and the lack of qualitative data in the P2P space.
Roundtable participants noted that many retail investors only ever hear about P2P lending in the context of platform failures, which obviously presents a negative view of the industry. This is not helped by the fact that the FCA frequently lumps P2P lending products in with higher-risk investment options such as cryptocurrencies.
This may be a reflection of the FCA’s limited understanding of P2P and crowdfunding, our panellists suggested. Traditionally, the regulator has approached this sector from a retail protection perspective, meaning that P2P is often described in terms of risk, rather than as a balanced, medium-risk product that can aid diversification.
However, our panellists all agreed that over the past year or so, the FCA has shown a willingness to learn and they are starting to see more collaboration between the regulator and sector participants.
“That is a stark contrast to what we’ve seen before,” said one panellist. “They’re more knowledgeable and more collaborative now.”
But this has been a long time coming.
In November 2020, Dame Elizabeth Gloster released her report on the LCF collapse, which was highly critical of the FCA’s regulation of the mini-bond provider. As a result of this, the regulator is implementing a number of changes, one of which involves bringing the supervision and policy teams closer together.
“In some respects they are starting to get it right from an investor’s perspective,” said one panellist.
“But the regulation can encourage fintechs to go elsewhere. ThinCats and Landbay handed back their licences to go institutional. It is possible that more people will move into the unregulated space.”
ThinCats and Landbay are just two examples of platforms that have chosen to stop accepting retail money. There are some concerns that more will follow, thereby eroding the options that are currently available to yield-seeking retail lenders.
This begs the question: in trying to protect retail investors from unnecessary risk, is the FCA preventing them from accessing the risk-balanced inflation-beating returns that the sector offers?
“The FCA is conflating risk with losing money,” one panellist said. “People will lose money – that’s what investments are about. As long as people understand what they’re getting involved with then surely that will continue.”
But investors want a return, and if they can’t get that return from their savings accounts, they will look elsewhere – even it if means that they will be taking on more risk. Some stakeholders at the event suggested that P2P lending could represent a medium-risk option for these investors.
However, it is becoming harder and harder for P2P platforms to get that message across. The regulator will always have the loudest voice in the room, and when it brands P2P as a ‘high risk’ product that needs to be closely monitored, that’s what people will hear.
“The rules are all based on interpretation which is the beauty of what regulation is about. But the more you tighten that up, the more platforms will leave,” said one platform owner. “They aren’t necessarily going to change their business models.”
The good news is that the regulator appears to be learning and is open to working more closely with industry members.
Not too long ago, the FCA didn’t understand the difference between P2P lending and equity crowdfunding, for instance. Through years of collaboration with P2P stakeholders, this understanding has improved. But our panellists pointed out that staff turnover is high at the FCA, and every time a new team is put in place, platform executives feel that they have to start from square one again.
This was also one of the key takeaways from the Gloster Report, and the regulator has already committed to taking a more joined-up approach to its operations.
One panellist said that the FCA has begun to start asking the right questions and has shown a willingness to engage with the sector.
“P2P should be a regulated sector and regulation should be a balance between protection and innovation,” said another panellist.
However, a few blind spots still remain when it comes to P2P regulation.
Our panel of experts described the FCA as being overly reactive. Rather than anticipating potential problems and working with platforms to avoid them, the regulator has tended to take a knee-jerk approach to the scandal of the day.
After the Lendy debacle, P2P platforms were mandated to effectively screen new investors, by asking them to self-certify and pass a quiz before being allowed to access lending opportunities.
In response to the LCF collapse, the regulator issued a temporary ban on the marketing of mini-bonds, which has now been made permanent.
Our panellists noted that over the past year, the FCA has understandably been preoccupied with Covid, pushing regulatory reform and industry awareness further down its list of priorities.
Post-Covid, P2P platforms will have their hands full, dealing with the end of forbearance schemes, the return of small investments and regional recovery plans. So our panellists believe that now is the time for the regulator to show that it has learned from the mistakes of the past and take a pro-active approach to P2P regulation, before the next crisis emerges.
Each and every one of the industry stakeholders who attended the closed roundtable agreed that there is a need for more engagement between the regulator and the P2P sector – particularly when it comes to protecting retail investors.
While it is not the FCA’s job to promote P2P to the public, the regulator does have a responsibility to act in the best interests of the consumer.
P2P and crowdfunding stakeholders know better than anyone that what retail investors really want is to earn a return on their money. Through the sector, people can also tap into socially and environmentally beneficial investments, such as supporting local businesses and funding green projects.
Roundtable participants recognised that many retail investors are increasingly tech-savvy and are comfortable managing their portfolio online. While they may benefit from more financial education, they are certainly not stupid. The P2P sector has catered for many of these types of investors for more than 15 years now.
Our panellists all agreed that regulation is vital, but they want to see more evidence that the FCA has learned from the past, has a better understanding of P2P and crowdfunding, and sees what they have to offer to retail investors.