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P2P under the microscope

Last week, the House of Commons Treasury Select Committee discussed peer-to-peer lending, underlining the growing awareness and mainstream appeal of the sector.

Tracey McDermott, Acting Chief Executive and John Griffiths-Jones, chairman of the Financial Conduct Authority (FCA), answered to MPs on the House of Commons Treasury Select Committee and outlined the organisation’s view on how oversight of P2P platforms and other providers of alternative finance, such as crowdfunding, should evolve in the future.

Of course it is quite right that politicians and regulators keep a close watch on relatively new forms of finance such as P2P lending. They should equally be reassured that the major players in the industry (P2PFA members) are well aware of the importance of transparency, consumer trust and prudent credit risk decisioning in lending responsibly and acting to protect the interest of our lenders and borrowers.

Read on to find out what was discussed in the Treasury Select Committee and explain the steps Zopa and the P2P Finance Association are taking to work with regulators to ensure that consumers continue to be able to access great value loans and great returns on their hard-earned money through peer-to-peer lending.

The importance of diversification

Conservative MP and select committee member Chris Philp led the questioning. He introduced the sector as a growing industry, and expressed a concern that P2P loans and equity crowdfunding could be exposing consumers to risk that they might not sufficiently understand.

Philp was particularly worried about the fact that each P2P lender was loaning money to a single borrower, and would therefore not benefit from a ‘portfolio effect’. "Do you think consumers understand they are taking one-to-one bilateral counterparty risk?" he asked.

McDermott clarified that lenders on peer-to-peer platforms actually do benefit from diversification. An individual borrower’s loan might be made up of hundreds of ‘microloans’, spreading the risk.

Furthermore, making sure our lenders understand the risks involved in peer-to-peer lending is non-negotiable in everything we do at Zopa, and part of the Operating Principles set out by the P2PFA. Lender information on the website is clear, jargon-free, and supported by easy-to-understand videos. Lender marketing always includes a Capital@Risk notice.

All this is in addition to Zopa’s diversified lending mechanism, reducing risk by ensuring that each lender’s capital is spread among a large number of borrowers through a tried and tested diversification policy.

Provision funds

Philp also asked Tracey McDermott whether platforms should be compelled to set up some form of fund to help mitigate losses among lenders.

Again, Zopa has taken steps to address this issue. It has in place a Safeguard Fund, which is a pot of money worth more than £10 million that can be used to offset any potential losses: while not a guarantee or insurance product, this does offer lenders some additional peace of mind.

The future of P2P regulation

With questions about risk and provision funds at the forefront of the enquiry, Griffiths-Jones remarked that the FCA would continue to keep a constant eye on the sector to ensure consumers were adequately protected, without hampering innovation.

He commented that he considers it likely that, sooner or later, peer-to-peer lenders might start to offer packages, at which point they “become awfully like a bank”. He concluded: "What I can assure you is that we’re not asleep at this wheel. What I can’t assure you is when is the right moment to intervene – but it is being kept under constant review."

New P2PFA principles to reinforce consumer confidence

In a timely fashion, the P2P Finance Association has this week unveiled a new set of "operating principles" aimed at reinforcing consumer confidence in alternative finance.

The organisation’s chair, Christine Farnish, said: "Our new operating principles set a benchmark of fair dealing and transparency. By the New Year, all our members will publish their full loan books, show bad debt losses in a comparable way, and commit to ensuring that retail investors get a fair deal compared with institutions."

Farnish added: "These new measures will help build further consumer confidence, demonstrate our commitment to ethical practice and set a beacon of good practice across the market."