Peer-to-peer lending platforms are “not surprised” at the City regulator’s “sensible” warning on secondary markets, and suspect that further regulation could be introduced in the sector.
The Financial Conduct Authority (FCA) penned a letter to the boards of directors of P2P platforms on 25 May, which was published yesterday, telling platforms they should price all of their secondary market transactions fairly or risk losing their secondary market privileges.
“I think these are legitimate concerns from a regulatory perspective and I suspect that all the FCA wants to see is for P2P lenders to address its concerns by instituting the necessary procedures as set out in the letter,” said John Cronin, an analyst at Goodbody.
Louis Schwartz, chief executive of Loanpad, said that what the FCA is telling platforms is sensible and the platform’s own secondary market is essentially par only.
“If a loan is below par it would immediately be suspended from trading,” he said.
“It certainly seems sensible that platforms should ensure (where they set the price) that the products they transfer between investors are priced accurately.”
Ian Anderson, chief operating officer at ArchOver, said the platform has never run a secondary market, mainly because its crowd never wanted it whenever they surveyed them on it, and was unsurprised at the FCA’s warning.
“I can’t really give much in the way of thought on the subject other than to say I am not surprised – when the platform decides what should be sold its going to come back and bite you,” he said.
The City regulator also encouraged P2P platforms to prioritise liquidity monitoring as a part of their wind-down plans, to enable them to quickly identify any potential cashflow triggers which could impact on the availability of the business.
The publication of this letter to P2P platforms followed the FCA revealing it had written to the bosses of equity crowdfunding platforms about the key risks it sees in the market, such as that consumers are still making “inappropriate” investments despite existing marketing restrictions.
Both Schwartz and Anderson said that wind-down plans are essential and it is necessary that they plan for all eventualities.
Anderson said the FCA is gunning for those that should not be investing into P2P products and that he suspects the FCA’s direction of travel will be to effectively ban restricted retail investors from P2P.
Read more: The top 10 things the FCA is focusing on
“We believe it’s a vital element of running any kind of consumer investment based business that you have the funds and the plans to run down a business properly,” said Anderson.
“FCA has not finished in its drive to increase legislation to ultimately stop naïve investors from investing in the P2P sector.
“How effective that legislation will be is a moot point, platforms will still see uneducated investors tick all the boxes, pass the on boarding tests, read the risk warnings and yet still invest money they cannot afford to lose.
“Legislation can only go so far, what is really lacking is investor education.”
Schwartz said he does not believe there will be a ban on retail investors but rather a shift towards better disclosure and increased transparency.
“Given the number of platform failures it is no surprise that the FCA is shining the spotlight on the sector,” he said.
“We see this as the natural evolution in any emerging regulated sector and will result in a smaller number of strong, well-run platforms.
“The FCA is naturally concerned that retail investors are making investments without fully understanding the risks involved and/or investing disproportionally into the sector relative to their total investable assets.”