A new era of regulation for P2P lending

On Monday this week, a new FCA regulatory framework came into effect for peer-to-peer (P2P) lending in the UK, in line with June’s PS19/14 Policy Statement. Following the release of this paper by the City watchdog six months ago, we communicated to our customers that the new rules represented a welcome step forward for the sector.

The FCA took over regulation of P2P lending six years ago, with the first set of guidelines having been in force since 2014. Yet in the time that Lending Works has been operational, the sector has evolved at a rapid pace, and it is thus only right that the level of regulation keeps pace with this change. 

In our opinion, this new iteration of regulations has done just that, and in a proportionate manner. As a result, customers can have greater confidence that platforms are fit for purpose, and the credibility of P2P lending can be both enhanced and sustained.

The new regulations in a nutshell

The PS19/14 Policy Statement was compiled following a twelve-month consultation (the CP18/20 paper), and applies to loan-based (aka peer-to-peer) and investment-based crowdfunding platforms in the UK. 

The framework is encapsulated in a 102-page document, although the key points it covers are as follows:

- New rules on risk management and corporate governance 

- Strengthening wind-down plan arrangements

- Mandating a minimum level of information disclosed to investors

- Application of MCOB and other handbook requirements for platforms which provide home finance

- Restrictions on marketing communications

- The requirement to conduct appropriateness tests

The latter two of the above, in particular, are measures geared towards protecting less-experienced investors, which we wholly approve of. We also recently outlined in further detail the steps we have taken to fully adhere to the first three points. 

Ultimately though, with the exception of the MCOB regulations (which are not applicable to a consumer lending platform such as Lending Works), we have put the building blocks in place to fall into line with rules such as these since the day we opened our doors. Putting the customer first will always be our primary mantra, and it is in this spirit that we value the principles of transparency, risk management and fairness to both our borrowers and our lenders.

A view of peer-to-peer lending in 2020

According to Link Group’s most recent Marketplace Lending Index, collective lending among marketplace (or P2P) platforms in the UK has now reached £16m per day. Growth rates have continued their inexorable rise, with the numbers for H1 2019 showing a 21.6 per cent increase on the corresponding period the year before. Indeed, the latest projections suggest the sector is on course to reach the £6.2bn mark for 2019, which would equate to annual growth of 16.7 per cent.

It should be pointed out that loss rates have ticked up somewhat too, which have reduced net returns for investors. The research attributes this increase in loss rates to a softening economy, a fall in the level of contingency fund use by platforms, and an inevitable consequence of the industry’s growth.

Average net returns remain healthy at just under 4 per cent, but it underscores the importance of regulations like PS19/14. The growth of peer-to-peer lending in the UK has seen great dynamism added to the sector, with various platforms adopting a range of risk models and loan types. Investors with an appetite for risk are catered for with platforms offering higher gross returns, while the more risk-averse can put their hard-earned money into platforms with tighter lending criteria, and a cushion in place such as a contingency fund. At Lending Works, we’ve delivered consistent returns, which illustrates the effectiveness of the Lending Works Shield.

Nevertheless, the key point here is that prospective P2P investors should be able to easily weigh up their options, with reliable, comparable and transparent information to hand, whilst also having the confidence that platforms comply with a robust set of rules. This is precisely why the new FCA regulations are a step in the right direction, and the sector heads into 2020 stronger as a direct result of their implementation.

The future for P2P

Back in 2014, peer-to-peer lending platforms put a lot of daylight between themselves and other types of financial institutions by actually welcoming the arrival of FCA regulation. Many P2P firms took this a step further by joining the industry body and embracing a common (and strict!) set of rules has been part and parcel of developing a reputation for excellent customer satisfaction, and this understanding among leading platforms has enabled P2P lending to be greater than the sum of its parts.

Against an economic backdrop characterised by weak growth and near-record-low interest rates, investors in peer-to-peer have found a haven between the volatility of high-risk investments, and the value-erosion of savings accounts. Net returns in recent years within P2P have averaged in the realms of 4 to 5 per cent, which is a considerable achievement. 

For our part, we’ve consistently taken a long-term view, investing heavily in our people, our technologies, our customer service, and also our business model to ensure that we thrive at all stages of the economic cycle. As a result, the advent of PS19/14 hasn’t necessitated any sort of overhaul. Instead, it will create a level playing field which is fairer to the customer, and this is one of the many reasons we believe the next stage in the development of peer-to-peer lending will be the most exciting one yet.