Ex-FCA chief concerned over P2P growth

Ex-FCA chief concerned over P2P growth




An influx of investors in the peer-to-peer (P2P) market following recent cuts to interest rates could result in less knowledge of the risks involved, according to Tracey McDermott, former chief executive of the Financial Conduct Authority (FCA).

In a letter to the Treasury Committee, Tracey she expressed concerns that the rapid growth of the P2P marketplace could impact on the level of investor understanding.

“We do have concerns that the evolution of firms' business models into more complex arrangements could have impacted on the level of consumer understanding, and so we are proposing to carry out research to test the current levels of understanding of the risks involved as part of our review,” Tracey cautioned.

However, Kevin Caley, founder and chairman of ThinCats, explained that while new investors may now be drawn to P2P lending, the success of the sector means its current demographic has not changed much since its early days.

“…For all this rapid growth, the profile of people that lend on P2P platforms hasn’t changed much.

“Most are still the early adopters who are confident in their own investment decisions, and are self-aware when it comes to balancing risk and reward.

“With interest rates at an all-time low, investors are rightly concerned that their money isn’t working hard enough for them, so we expect to see the investor profile change slightly as more and more people wake up to the benefits of diversifying investments across P2P as well as more traditional asset classes.”

ThinCats requires a minimum investment of £1,000 to ensure that investors think carefully before bidding.

Despite Kevin’s assertions, Narinder Khattoare, sales and marketing director at Kuflink Bridging, admitted that this success brought risks.

“…It has come more into the mainstream, which means that many more potential investors have become aware of it and consequently the FCA has taken an active interest in ensuring that investors are adequately protected.

“The potential danger in any new sector is that competition can erode standards and the FCA has been quick to ensure that a regulatory framework is in place.”

But Narinder argued that these risks were avoidable.

“Provided investors are fully aware that there is an element of risk and they take proper advice, then creating further compliance barriers to investor entry would be counterproductive, something which the regulator has already indicated it is not going to do.”

Robert Pettigrew, director of policy and communications at the Peer to Peer Finance Association (P2PFA), explained that the industry’s significant growth has made it difficult to keep all investors well-informed.

“One of the challenges of this rapid expansion has been ensuring that those investing through the platforms understand that there is a degree of risk, as with any investment product.”

Nevertheless, Robert insisted that P2P was safer than many other forms of investment.

“However, the level of risk for consumers engaging with peer-to-peer platforms is less than for other investment products, such as stocks and shares.

“Platforms are committed to ensuring that investors are well-informed, and the commercial imperative of peer-to-peer lending necessitates that good value is created for both investors and borrowers.”

Stuart Lunn, CEO of LendingCrowd, claimed that P2P investors are now savvier than ever, though more could still be done to enlighten investors.

“Many lenders recommend that investors seek specialist financial advice before investing, and an increasing awareness of the P2P sector among independent financial advisers could result in investors being more savvy.

“All P2P lenders should make sure that they have clear, detailed information about investing and the associated risks readily available to help educate potential investors about the sector.”

Chirag Shah, CEO of Nucleus Commercial Finance, echoed this sentiment.

“Recent events suggest not enough importance is assigned to the risk of platforms going bust.

“Investors should be looking for tighter reporting requirements on the deals a platform is involved in, and collection statistics on deals which have not gone as per plan.”

Chirag added that while some P2P lenders have grown, many smaller firms have been left behind to consider less attractive investments.

“…Larger lenders have grown bigger and small lenders have continued to struggle for volumes and have been forced to consider deals the top lenders won’t touch.”

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