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Peer-to-peer lenders told to clean up poor practices or face crackdown

The financial regulator has sent a seven-page letter to peer-to-peer lending firms warning them the industry must clean up poor practices or face a “strong and rapid” crackdown.

Peer-to-peer firms match individual borrowers or companies with lenders willing to put money aside for longer, hunting for a good return. As the banking middleman is cut out, borrowers often get slightly lower rates, while lenders can sometimes earn 6%+, though the regulator has repeatedly said it’s concerned that many don’t understand the risks involved.

Now The Times has revealed that in a letter sent to 65 firms, the Financial Conduct Authority (FCA) has highlighted an array of problems with some lenders, including weaknesses in disclosure of information to clients, complicated charging structures and poor record-keeping.

The letter itself hasn’t been published, and when we contacted it today the FCA wouldn’t officially comment. But we understand that the contents of the letter quoted in The Times is correct.

For more on how this works, including a full breakdown of the risks, see our Peer-to-Peer Lending guide.

What is peer-to-peer lending?

Peer-to-peer lending websites are industrial-scale online financial matchmakers. They can allow borrowers to get slightly lower rates, while investors who offer loans get far improved headline rates, with the sites themselves profiting via a fee.

But investing your money this way is NOT like traditional saving, as there’s no savings safety guarantee and you could lose your money. It may also be hard to get your money out early and your cash may not be lent straightaway, so you may get no interest for a while. See our Peer-to-Peer Lending guide for a full list of risks.

What does the letter sent by the FCA say?

MoneySavingExpert.com hasn’t seen the text of the letter sent by the FCA, so we don’t know full details.

However, according to The Times, the FCA says in the letter that certain platforms have made “significant changes to their business models without notifying us”. It also adds that this is being driven by pressure on many in the industry to return profits, resulting in them taking “additional, opportunistic risks” in certain areas, and warns of “severe” consequences to the stability of platforms.

The letter reportedly says the FCA is “reviewing the adequacy of a number of firms’ financial resources” and says the industry must “act now” to clean up poor practices or face a “strong and rapid” crackdown.

For full details, see The Times’ story Peer-to-peer lenders given final warning by Financial Conduct Authority (you’ll need to register to read the whole article).

What else is the FCA doing on this?

In June 2019, the regulator published new rules designed to better protect investors, which all peer-to-peer firms will need to follow by 9 December 2019. These rules include a limit on how much new investors can put into peer-to-peer lending, new checks to ensure you have the knowledge and experience to invest and stronger rules on plans if a lender goes bust. See New FCA rules on peer-to-peer lending for more info.

By Callum Mason

Source: Money Saving Expert

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The peer-to-peer industry isn’t doing enough to protect investors

The abundance of peer-to-peer lenders offering high yielding loans has been getting the attention of regulators.

Many peer-to-peer lenders target unsophisticated retail investors, who can invest as little as £100. And yet, there is a relatively high cost to on-board small investors, because platforms have to handle customer calls, and anti-money laundering requirements.

There have been dozens of failures, but the closure of Lendy has shocked the industry. The high-profile peer-to-peer lender accrued more than £160m on its loan book, and by the time the administrators were called, £90m was believed to be in default.

Many firms are being supported by equity injections (crowdfunded by retail investors), but given their high cash burn, it is simply a matter of time before they too fail.

Some providers offer woefully inadequate provision funds, which give a false sense of security. When Collateral collapsed last year, it emerged that they did not have the correct regulatory permissions.

Profitability aside, there is a fundamental issue with most peer-to-peer firms.

They are just a data intermediary between borrowers and lenders, rather than a financial intermediary. They earn fees based on volume of transactions, regardless of the underlying loan performance, whereas financial intermediaries, such as banks, have obligations to repay depositors when loan investments go bad.

Without this alignment of interest, the level of due diligence performed during the underwriting process is limited, and the onus is on the investor to understand the risks and read the terms and conditions.

But many investors do not bother reading the small print, which is usually signed electronically at the click of a button. Investors are often unaware of the risks.

Clearly, more needs to be done to protect investors. Recent regulatory changes to protect investors include a cap on investor wealth in such investments.

However, minimum standards of underwriting criteria should be introduced by the Financial Conduct Authority, such as valuation methodology and borrower’s solicitor requirements, so that risks are managed.

In Germany, for example, a banking licence is required by all lending firms. Obtaining this is a more thorough process to check that the lender’s systems and staff are appropriate.

Default rates are currently artificially low, because at the end of a loan term, borrowers easily jump ship to another peer-to-peer lender eager to lend money.

Meanwhile, the shortage of good quality loan opportunities means that small peer-to-peer players, who don’t have established broker relationships, will end up lending on risky assets and borrowers.

Both borrowers and brokers are wary of the ability of peer-to-peer lenders to raise a sufficient quantum of funds within the timescales required. The weak underwriting process of some peer-to-peer firms means that they are mispricing the loans, so ultimately the investors are insufficiently compensated.

Having emerged only in the past decade, peer-to-peer firms were largely not in existence during the 2007 crisis, so like a game of musical chairs, when the credit cycle turns, no one wants to be holding the loans when the music stops.

By Vivek Jeswani

Source: City AM