The UK body charged with regulating the P2P industry, the Financial Conduct Authority (FCA), laid out its vision of how it saw the innovation, competition and regulation promoting the growth of the consumer credit market, in a speech in late September. (1)
Jonathan Davidson, the FCA’s head of supervision, said that the UK to some degree, and Europe to a larger degree, had got some “catching up” to do compared to the success of the US in diversifying their finance markets, with the expansion of the P2P market.
However, Davidson identified a double-edged sword in that growth, with the challenge of creating a sufficient supply of P2P loans to meet investor demand, and the conjoined risk especially from the FCA’s regulatory viewpoint, that this demand doesn’t result in more problems:
“There are trends we need to keep an eye on – a notable one being whether loan volumes in P2P are growing fast enough to keep up with investor appetite.”
Responding on the eve of LendIt Europe 2016, Founder and CEO of P2P short-term lender Welendus Nadeem Siam said:
“We will bring the short-term consumer credit market to the peer-to-peer investors for the first time. Bringing new and innovative product like Welendus to the market will help grow the loan volume to keep the investors’ appetite. This is what the industry needs to maintain its growth and to keep up with the growing investor demands.
“Having new innovative startups like Welendus will help the UK and Europe in catching with the USA in the Fintech race. Bringing new innovative products will add a great value to the market and will help millions of customers on the both the lending and the borrowing sides.” (2)
A review of current regulatory arrangements
In tackling these ‘market integrity’ questions the FCA, which first introduced rules for the regulation of crowdfunding platforms back in March 2014, is currently undertaking a review of current regulatory arrangements. This follows a recent two-month consultation period, covering both loans based and investment based P2P crowdfunding platforms. (3)
It’s also interesting to note that in its call for input the FCA laid out a number of issues related to loan-based crowdfunding it wanted views on, highlighting three key areas for regulation of loan based P2P businesses:
- Considering whether financial promotions, due diligence, and prudential standards are still appropriate for the way the market has developed
- Whether to mandate in greater detail, the disclosure firms are expected to give consumers and the time that the disclosures must be provided
- Whether platforms should be required to assess investor knowledge or experience of the risks involved in this type of investment.
The P2P lending boom
Part of the overall reason for this FCA review dates back to the financial crisis of 2008 which created today’s high margin, low-interest rate landscape which has attracted the current wave of innovative P2P lenders, said Davidson in his speech.
“The other major drivers, of course, are new platforms and technologies. So you can point to developments like real-time data sharing, predictive analytics, and mobile tech, as well as opportunities from the API Open Banking Standard.
“From a competition regulator’s perspective, I need to make it clear from the outset that we’re very open to new firms taking advantage of today’s favorable market conditions – assuming they have ideas for useful products,” he confirmed.
To underscore that commitment to innovation he said since 2014 the FCA has already authorized 12 firms who are operating P2P platforms and are assessing 86 additional applications, of which 39 are operating under interim permission.
“The FCA is very supportive of new fintech innovation and has also been very supportive of the Welendus vision. We are working closely with the FCA on our application and looking forward to being authorized before the end of the year bringing an all new peer-to-peer lending product to the market,” added Siam.
Despite the optimism Davidson also sounded a note of caution in his speech:
“However, we are well aware that a lot of the innovative models firing up enthusiasm today have yet to be stress-tested through a full economic cycle. Peer-to-peer lending was a tiny industry in 2008, we are today seeing more and more money enter the market, particularly from retail investors and hedge funds.
“The important question for us is ‘how do P2P lenders respond to this greater demand?’ So we will keep a close eye on the market to make sure firms don’t respond by lowering underwriting standards, creating affordability issues for borrowers and credit risk for lenders,” he added.
The future of the P2P industry
The FCA’s head of supervision explained that the recent call for input is simply the first stage of a post-implementation review of the P2P market integrity since March 2014: “We are also conducting firm and consumer research to understand further how different parties engage in the market and their needs and understandings. (4)
“This is helping us develop an increasingly sophisticated picture of both investor, and borrower experiences and needs, as well as business models and practices, systems and controls.
“The next step will be to look at all this information and decide whether the current rules remain appropriate, or whether we need to think about any changes. And we will be saying more about this in due course.”
Davidson concluded the portion of his speech devoted to the P2P industry by stressing the benefits for a long term relationship, especially where there is an innovation which maybe doesn’t make market sense: “My call to you in the industry is to keep us updated where you are seeing innovative trends you are unsure of. We get a lot of thoughts from trade and industry bodies of where risks might be evolving. We want this to continue.”
Author: Stuart G. Hall
About the author : As Senior Growth Marketer Stuart is using a variety of data sources to create a customer acquisition strategy with which to launch Welendus later this year. With a background at eBay’s Shoping.com, and five year’s startup experience, he is keen to use growth hacking tactics to grow the business, working closely with each part of the team to deliver that.
(1) ‘Balancing regulatory objectives in the dynamic consumer credit market,’ speech by Jonathan Davidson, Director of Supervision – retail and authorisations at the FCA, at the Future of Lending Conference, Sept 2016
(2) ‘Short-term P2P lender Welendus joins top accelerator and plans crowdfunding,’ Nadeem Siam, LinkedIn, Sept 2016
(3) ‘FCA launches call for input on crowdfunding rules’, FCA Press Release, July 2016
(4) ‘Crowdfunding to come under the microscope in joint study from the Financial Conduct Authority and Cambridge University’s center for alternative finance,’ Francesca Washtell, City AM, Sept 2016