Peer-to-peer lending to be regulated by the FCA in the UK: FinanceFeeds investigates

Rick Steves

As government authorities mature their regulatory rules, Peer-to-Peer lending will become increasingly popular to the masses, particularly in today’s policy context of low central bank rates. The US, Spain, Lithuania, Germany, and the UK already have implemented regulation and other European countries will soon too. China intends to follow through, even despite frequent fraudulent practices […]

Peer-to-peer lending to be regulated by the FCA in the UK

As government authorities mature their regulatory rules, Peer-to-Peer lending will become increasingly popular to the masses, particularly in today’s policy context of low central bank rates. The US, Spain, Lithuania, Germany, and the UK already have implemented regulation and other European countries will soon too. China intends to follow through, even despite frequent fraudulent practices in the sector.

Another step was taken recently, with the UK Financial Conduct Authority new and amended rules and guidance coming into force this week, regarding client money, disclosure and advice relating to P2P agreements.

In order to explore the subject, FinanceFeeds reporter Ricardo Esteves spoke today with Luke O’Mahony, PR Manager at RateSetter, a UK based p2p lending firm with over a million registered users.

Peer-to-peer lending will now be facing regulation by the Financial Conduct Authority (FCA), which might increase public awareness. What annual volumes do you estimate for the industry in the coming years? 

One development which is likely to lead to significant growth is the introduction of the Innovative Finance ISA (IF ISA), which will allow people to include peer-to-peer loans in a tax free wrapper. Research we carried out in December 2015 showed that one in four cash ISA holders were considering opening an IF ISA. RateSetter’s growth to date has been very strong: the platform has lent more than £1bn since October 2010, and half of that lending took place in 2015 alone.

Central banks have been taking unorthodox steps to force banks into lending to the economy, with little results. What is your opinion on the timing of p2p lending businesses and consequences to the banking system?

A lot of the focus from Government and central banks has been on new measures which effectively subsidise lending (and we would include the Funding for Lending Scheme in this), but nevertheless, small businesses are still finding it difficult to obtain finance.

Marketplace lenders like RateSetter lend to businesses at competitive, open market rates, and the Government-backed British Business Bank is lending directly at market rates to UK SMEs through RateSetter, which has the effect of boosting funding for small businesses without distorting the market.

Ratesetter covers client defaults with its Provision Fund. What impact has it had on net profit margins?
 
The Provision Fund is made up of risk-weighted contributions from borrowers, and has a perfect track record of ensuring that no individual investor has ever lost a penny with RateSetter. It is an integral part of our business model, so we do not view it as having an impact on profit margins.

According to the company’s disclosure, the Provision Fund fund already amounts to the sum of £17,611,134 and is able to cover against 133% of claims. Ever since the introduction of such concept, the firm has been able to match supply and demand with greater volumes. While lending and borrowing rates have been decreasing, RateSetter’s average rates are currently at 6.1% and 7.7%, respectively.

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