We wrote recently about the risks attached to various forms of saving, lending and investing, pointing out that each has its own risk profile and that P2P lending is by no means risk free.
This week, City watchdog the Financial Conduct Authority responded by publishing details of an investigation into crowdfunding services. The FCA has oversight for investment crowdfunding as well as peer-to-peer lenders such as Zopa – the FCA calls these “loan-based crowdfunding platforms”.
And although the watchdog said it saw no need for extra regulations to bolster those already in place, it did reveal some concerning findings.
On the investment side there was particular concern that investors – almost two-thirds of whom had no prior experience of putting money directly into companies – were not always being given a clear picture of the firms they were backing.
In some cases, the FCA found, information about the businesses seeking funds was “cherry picked”, with important details withheld from investors.
Certain sites had deleted negative forum comments made by users in order not to damage companies’ chances of raising money.
Crowdfunding services form part of the sharing economy and give individuals the chance to put their money into companies and projects they would otherwise have little or no opportunity to invest in.
The businesses which seek cash via crowdfunding are unlikely to be listed on any stock exchange: from their point of view, this source of finance can be much more convenient and can also help publicise what they are doing.
Because these firms tend to be new and often without a track record of success, the risk of losing any money invested in them can be high. For backers, the other side of the coin is that one may turn out to be the next WhatsApp or Twitter.
Although crowdfunding services are generally upfront about the risks investors face, regulators need to be sure that people aren’t being misled about the businesses they are putting money into.
On P2P lending, the FCA said that some services were comparing loans to savings accounts, failing to explain how returns would be taxed and not showing APRs clearly.
Christine Farnish, chair of the Peer-to-Peer Finance Association (P2PFA), says: “The FCA’s review of the peer-to-peer lending industry and equity crowdfunding industry comes at an appropriate time. While I am encouraged to see growth and the wider benefits delivered through our sector, we must remain vigilant to the wider challenges too.
“The report is correct to highlight incidences of where companies have misled customers and the FCA is right to take a tough line as this could bring the whole sector into disrepute.”
Farnish adds that P2PFA rules mean that members must provide “clear, balanced and fair information” to all customers. “Any member which does not abide by these rules faces expulsion,” she says.
The success of crowdfunding and P2P lending depends to a large extent on consumer confidence. As such, we welcome the FCA taking a tough approach to services which try to mislead consumers about the risk relating to our industry.
We see lending as its own asset class, with its own risk profile for lenders, not savers. Within P2P lending the risk to reward ratios can vary from low, medium or high depending on the platform’s credit risk scoring and loan book performance. Another important factor is the type of loans lenders fund, be they personal loans, business loans or even property loans. But with all peer-to-peer lending platforms your capital is at risk and no lending is risk free.
Zopa was the pioneer of the P2P industry and we have worked hard to build consumer trust over the past 10 years through responsible lending and how we position Zopa to our customers.
Since the FCA began regulating the sector in April 2014, Zopa has aimed to ensure all its marketing and financial promotions are fair, clear and not misleading according to the FCA’s guidance.