Risk, regulation and responsible lending
Regulation and growth plans were top of the agenda as P2P executives gathered online for the latest Peer2Peer Finance News webinar in November 2021. Marc Shoffman reports…
Platform bosses, regulators, institutional partners and consultants gathered online for the P2P Leaders Forum, hosted by Peer2Peer Finance News in November of last year.
The sector has plenty to chew on, with the prospect of tougher marketing restrictions and increased institutional investor interest.
The event was held under Chatham House rules, giving delegates the freedom to speak freely about concerns such as the Financial Conduct Authority’s (FCA) regulatory approach to the sector as well as ideas on how to attract external finance.
High risk questions
One of the main concerns raised was FCA proposals for new regulations in the P2P lending sector such as tougher marketing rules and investor restrictions. The regulator published a discussion paper in April, lumping P2P lending in with “high-risk investments” such as cryptocurrencies and minibonds.
Read more: FCA publishes proposals to strengthen financial promotion rules
It is seeking views on whether more types of investments should be subject to marketing restrictions, what marketing restrictions should apply and if they should be tougher. But delegates at the P2P Leaders Forum questioned why P2P lending is listed under the high-risk banner with unregulated products.
“The idea of one-size-fits-all regulation doesn’t seem to be of benefit to P2P lending when we have high-risk frameworks that others don’t,” one panel member said. “There is concern that the output from the discussion paper won’t be appropriate for P2P but maybe more suitable for cryptocurrencies.”
Speakers at the event agreed that the FCA should look at the actual harm that investors face by investing in P2P lending, against what it perceives to be the risks. “There have been high-profile collapses but the loss rates on the whole across the industry are low,” one participant said. “Retail investors have probably lost more money in the collapse of the Woodford funds than across the P2P lending sector. “It is important to get a sense of context when deciding what the harm you are looking to mitigate is.”
The FCA was urged to avoid pre-judgement when it comes to its consultations on high-risk regulations. But delegates said platforms appear to be preparing for changes anyway. This could involve seeking more institutional funding. “There are questions of what platforms will do if the bar continues to be raised in terms of retail investors,” one speaker said.
“Extra regulations could squeeze retail funding. “That could mean bringing in institutions. “In some respects that is not a bad thing as all businesses should have diversified funding models. “Normally that is because of market, not regulatory risk.”
Increasing institutionalisation
The level of institutional interest in the sector is already on the rise. Institutional money made up 66 per cent of UK P2P lending funding proportions in 2020, up from 42 per cent in 2019, according to the Cambridge Centre for Alternative Finance. Attitudes to, and opportunities presented by, the institutionalisation of the sector were discussed during the seminar.
Panellists agreed that institutional funds give platforms a certainty of funding and can help them grow. Others said it also works well as part of a mixture of capital alongside retail as long as there are protections in place to ensure all types of investors get equal access.
“In reality the crowd moves in a very unpredictable way, while borrowers need predictability in their funding, so in order to make the system work we need to find the right balance where we have the P2P network but also some longer term reliability on sources of funding,” one stakeholder said.
Read more: P2P sector reacts to new FCA proposals
Another panel member said that investors should be reassured by seeing institutional funds on a platform due to the thorough due diligence the platform would have completed to have received this. “I think retail investors should take additional reassurance seeing institutional investors in a specific platform,” the panellist said. “The due diligence can take three weeks, a month or two months and it’s a testament to the robust model of the platform that is eventually funded.”
Institutions may not just be interested in funding loans though. The event also discussed how platforms can attract equity funding. The main query was, when is the best time to raise equity?
One speaker said platforms should seek to fundraise when they are at a point in their journey where they have a clear articulation of what they plan to do with the money. However, another speaker said that the short answer to when platforms should look to equity fundraise is “when you don’t need it”.
“I think the best time to raise is when you don’t need to because you’re under no pressure and the investors see they’ll need to give you a good deal to get into the round,” the panel member said. “A normal fundraise should get the company to clear milestones and enable them to get to the next round of funding if that’s applicable. There’s a particular question of how much you need to get to the next milestone and is that justified by the commerciality of the business?”
Talking tech
Beyond institutional funding, delegates at the event also discussed how technology can help them grow. Fintech partnerships, embedded finance and open banking were all described as key ways for P2P lending platforms to attract and retain users.
One senior technology expert said fintech partnerships are an effective method of acquisition as you can “piggy back” off the brand equity of partners. Open banking was highlighted as an opportunity to grow and hold on to customers and also to develop tools for forecasting loan arrears and defaults, but platforms were urged to make it relevant for users.
Read more: P2P entering a “new era”, says LandlordInvest chief