An excellent piece by the Evening Standard’s Anthony Hilton earlier this week looked at the potential for peer-to-peer lending and crowdfunding to revolutionise the world of banking.
Hilton, a City journalist of long-standing, described these services as “the first really useful innovation in finance since the automatic cash machine”, and who would argue with him.
But he was concerned that over-zealous regulators could in future stifle the sector by putting too many obstacles in the way of potential lenders and investors. These could include obliging users of P2P platforms to demonstrate that they were aware of the risks or could afford to lose some of their cash, Hilton said. (He contrasted this position with the freedom to gamble away money by betting on football matches, where there is little or no regulatory intervention.)
There is no suggestion yet that the Financial Conduct Authority (FCA) is planning to impose such draconian rules, although in a recent report into the sector the watchdog did point out with some concern that the majority of people who put money into crowdfunding had no prior experience of investing directly in businesses.
But in order to be successful and build on the terrific progress it has made over the last few years, P2P has to strike a careful balance when it comes to consumer protection.
Clearly no one wants a high level of regulation that overplays the potential risks and deters people from making reasonable loans and investments. But rules and safeguards are nonetheless important when it comes to maintaining consumer confidence in the sector and ensuring P2P does not get overrun by firms which are happy to pull the wool over customers’ eyes or take unnecessary risks to make a quick buck.
At the moment, the FCA appears to be getting this balance right. It is correct, for example, to take firms to task for describing P2P loans as a form of “saving”; and its recent crackdown on crowdfunding services which are reluctant to give investors a true picture of the businesses they are putting money into is also welcome. Hopefully, regulation will not become more intrusive as P2P moves into the mainstream, for example with the potential introduction of a new type of ISA.
And on capitalism…
In his article, Hilton made another good point about how P2P services were allowing people to connect with the more benign side of capitalism. When we put money into a savings account or buy units in an investment fund, we are far removed from the loans our bank will make with our money, or the businesses that the fund holds shares in.
One big advantage of P2P is that customers get a much clearer picture of how their spare cash is being used for the benefit of others. With one major bank scandal following the next at the moment, it is easy to lose sight of what banks were originally set up to do. Fortunately, P2P now offers a genuine alternative.