The Peer-to-Peer Finance Association is the highly-respected trade body of p2p lenders in the UK and they plan to put rules in place for the various lending platforms to make sure that retail investors aren't left with only scraps to invest in.
Christine Farnish chairs the group that represents 90% of the UK p2p lending industry, she says that the P2PFA will empower its directors to expel p2p lending platforms that refuse to comply with its regulations to protect the everyday investor's interest.
The new regulations will take effect this summer, and will surely be well-received by retail investors who've watched as the lending platforms that were originally created for them have become more and more involved with the major banks. Asset managers and banks have began investing millions into p2p lending platforms and making competition for lending opportunities increasingly difficult to come by.
“Our members (the p2p lending companies)are very clear that they don’t want to discriminate between retail and institutional investors,”
“Institutions must be offered the same service as ordinary people.”
- Christine Farnish, P2PFA's independent Chairwoman
This regulatory move by the P2PFA is a marked difference from what is currently happening in US peer-to-peer lending. In the US the vast majority of loans are made by hedge funds, banking institutions and professional investment firms that use automation software to snatch up the most profitable loans as soon as they land on the platforms.
The P2PFA has watched as institutional investor involvement in p2p has grown significantly over the last year and feels the need to step in before things become unfair for retail investors.
In recent news, we've seen Metro Bank agree to a deal to lend through Zopa, one of the largest p2p platforms, London-listed investment trusts have raised more than £500m to invest in peer-to-peer loans, and Landbay, which offers loans for buy-to-let properties, says an unnamed global bank will be lending £250m a year through its platform.
This has spurred on a sharp rise in loans funded: some £1.2bn was lent on platforms that belong to the P2PFA in 2014, and £459m in the first quarter of 2015.
UK's Big 3 P2P Lenders Still Protecting Retail Investors
The “big three” platforms, Zopa, Funding Circle and Ratesetter, have chosen a different direction in how they manage the balance between institutional and retail loan investments, the 3 companies say that they don't want to allow the retail investor to get left out in the cold.
Both Zopa and Funding Circle use a system that randomizes newly approved loans that are granted to retail or institutional pools, yet, neither platform has put a limit on institutional lending.
Funding Circle, which services small business loans, admits that a small number of loans rejected by institutions may be put back into the loan pool for retail investors. However, it says that its own credit assessments should ensure there are no poor-quality loans on the platform.
Ratesetter has been the slowest to allow an overflow of bank involvement. As of right now, they have only one institutional investor, P2P Global Investments, a listed fund — which invests in about 5% of Ratesetter's loans.
Rhydian Lewis, CEO of Ratesetter says that enabling banks to take over the lending "would hollow out our business. We are determined to be a household-name brand.” They may allow more in the future, but they plan on making sure it doesn't dominate the lending.
The P2PFA is conducting a broad review of its regulations and operating principles, to “keep the industry clean”, says Ms Farnish. This will also include rules on handling credit risk and extra transparency requirements, the group will invite “peer reviews” of members by others so that issues with compliance can be raised and addressed.
“If there is a bad apple, they wouldn’t stay in the P2PFA,”
- Christine Farnish
Peer-to-peer lending platforms act as online marketplaces that service loans without taking them on to their own balance sheets. Because they are not subject to capital requirements and do not run brick-and-mortar branches, they are often able to offer competitive interest rates to both lenders and borrowers.
Peer-to-peer lending is currently yielding an average of 5.15% a year to UK investors, according to the Liberum AltFi Returns Index.
The UK government plans to make P2P eligible for the individual savings account (ISA), which will bring about welcome tax benefits, this will probably come about in 2016 and the move that is expected to encourage a new surge of retail investor when it happens.
It will be interesting to see how this regulatory measure from the P2PFA effects the peer-to-peer lending market and it's relationship with everyday people. Bank involvement in US p2p lending sector has become so great the the very name is changing, many have began to remarket the sector as "marketplace lending".
Fortunately, the big two, Prosper and Lending Club say that they remain focused on attracting and serving the needs of retail investors.
Last year, both Prosper and Lending Club introduced “speed bumps” to lending in order to make sure retail investors have a fair shot at competing for their loans.