The head of the Peer to Peer Finance Association (P2PFA) has urged the FCA to increase regulation covering the growing sector in order to avoid customers being potentially misled and later complaining.
Peer to peer companies work by acting as a middle man between lenders and borrowers, allowing each to borrow or invest without going through a major financial institution or bank. This means investments with, usually, high returns (often around 5% annual interest), but also with higher risk than would be associated with a conventional savings account. The availability of these kinds of returns has seen the sector massively increase in popularity while bank’s interest rates are particularly low.
To date, the P2P sector is estimated to be worth around £2.7 billion, with one company alone, Funding Circle, having funded some £1.5 billion worth of loans.
With the P2P sector growing as fast as it is, lenders are concerned with making sure that customers know exactly what they are getting into when they borrow or lend through a P2P scheme, in order to avoid problems down the line.
The director of the P2PFA, Robert Pettigrew, said: “Investors need to be aware that peer-to-peer lending products in no way resemble anything equivalent to the guarantees represented by a bank deposit.”
If left unchecked, the worry is that consumers may be misled into believing that a P2P loan or investment has the same security as a similar product from a bank or other financial institution, which could then mean “significant potential consumer detriment going forward”.
As well as leaving consumers feeling hard done by, this could then come back and harm the industry, depending on the nature and level of redress that the relevant authorities deem appropriate.
Andrew Tyrie, head of the Treasury select committee, has already issued a warning to the FCA, urging them to work on some form of governance concerning P2P lending on similar grounds, arguing that there is a risk that “poorly informed investors may be left with a false sense of security about the balance of risks versus returns”.
The FCA is already looking into the P2P industry, given its soaring popularity among less experience investors, and has sought the held of researchers as Cambridge University in order to consult on potential regulation. The Cambridge Centre for Alternative Finance (CAF) will examine P2P lending as well as equity crowdfunding – a similar but, importantly, separate form of investment.
The P2PFA was keen to emphasise the difference between P2P loans and crowdfunding – which involves a group of people separately investing in a small company or project in order to get financial return down the line. It is confusions and false equivalences like those often made between the two alternative funding mechanisms that the body wants to iron out.