FCA Feedback Statement

Author

Date

13th December 2016

No one ever said that the FCA’s task of setting out a definitive set of rules and regulations for the crowdfunding industry was going to be easy, but last week’s interim feedback statement underlines just how far the regulator’s deliberations still have to go. It doesn’t help that the report talks about the dangers of “regulation arbitrage” – I imagine that most people had to look up what it meant! – or that crowdfunding was the descriptor used to cover both equity and debt finance. Commentators had just about got round to calling the latter crowdlending, or P2P lending, to make the distinction between the two very different forms of investment.

But be that as it may, the crux of the matter appears to be that some of platforms are pushing the boundaries of ‘interim permissions’ to the point where, to all intents and purposes, they are acting like a bank, but are not governed by the same jurisdiction or restrictions as a bank. As P2P Lending evolves and new business models appear so the lines are bound to become blurred. The FCA’s dilemma is that any set of rules made at a given point in time is almost certainly going to be out of date very quickly. And so, reluctantly, I have to agree that it is better to wait and to get it right than to rush something out for commercial expediency.

In the meantime, I can confirm that ArchOver does not try to operate like a bank and has no plans to become one. Our proposition is clear and fair, starting with our policy to treat all lenders equally.

One of the major problems is that, in its efforts to be fair and transparent, the FCA is creating more confusion. If it knows which platforms and services conform to its idea of what is good and clear, perhaps one way ahead would be to name them, authorise them and set them up as an example for everyone else to follow. Surely it would be far more instructive to benchmark the industry than to use opaque expressions (e.g. regulation arbitrage) to try to get its point across.

It would also be better to show us what is acceptable than to wait until someone does something wrong and then to beat them with a big stick. Everyone would understand that.

In the meantime, the P2P lending sector is continuing to provide invaluable support to the SME sector and interest-starved investors are still receiving a reasonable return on their money. Where’s the harm in that?

New Ideas, Polar Bears and Praise for the FCA’s Approach to P2P Lending

Author

Angus Dent

Date

9th August 2016

Thought provoking piece in CAPX by Jamie Whyte challenging the new “intellectual protectionists” who, unless we are careful will stifle change and growth, make everything cuddly and bankrupt us in the process. If we accept only the perceived wisdom of today and make it an offence to suggest anything else, yes some supposedly clever people really have suggested that we’ll stagnate.

Contrast the approach of making denial of climate change a criminal offence, with the active approach taken by the FCA to P2P lending as reported in Business Insider. The ingenuity of a lot of people is being encouraged and a sector carved out of the banking industry, which is and will continue, there’s an awfully long way to go yet, to provide better service to consumers. Of course the real contrast for the FinTech sector is not with the polar bear, but between the US and the UK. The UK has the white heat of the revolution, echoes of Coalbrookdale from an earlier industrial revolution, and with continued acceptance of new ideas by regulators and financiers will keep it.

I’m not suggesting that everything is perfect, rightly there is concern that lenders (or investors in FCA speak) fully understand the risks they are taking. A recent survey suggests that the message is being heard. As a sector we need to continue to reinforce the message heard by those in the dark blue sectors and work, with the FCA, on the lighter blue. What we need is continued consultation, a continuation of the active approach to regulation and a fuller analysis of the security provided by P2P lenders. A move away from a concentration on the nebulous and usually unquantifiable concept of risk to security provided.

For the record I don’t deny climate change, it is real, although I suspect it and its effects have been overstated. As for Germaine Greer, see the CAPX article, I agree with little she says and she has an absolute right to say it and to be heard. Only by hearing can we be challenged to change and develop and yes this may at times be very uncomfortable and much less than cuddly. C’est la vie.

Product or Service?

Author

Angus Dent

Date

29th July 2016

The CEO of the FCA, Andrew Bailey’s, comments to the House of Commons’ Treasury Committee when questioned by Chris Philp MP, have given rise to some comment and a very good open letter from Christine Farnish, Independent Chair of the Peer-to-Peer Finance Association. The discussion so far is one of detail. It seems to me that before we get to the detail we should consider the principles involved.

Usually banks, correctly in my opinion, describe what they provide as products. We as consumers buy a product, say a deposit account paying 0.5% interest pa. We have no idea what the bank does with the money, that’s not our concern; we have our 0.5% return. Which given the doctrine of ‘too big to fail’ is correctly almost the risk free rate of return……a few Italian readers may disagree. No further information is required.

On the other hand P2P lenders provide a service to their lenders (and borrowers). We bring the opportunity for lenders to earn a on their money than is available with a bank product. We should make it clear how much security the lender will have and leave it to the lender to make a judgement on whether or not the trade off between security and return suits them.

Of course this begs the question how much is sufficient service; another judgement call. Most of the platforms will, correctly in my view, provide credit analysis on the potential borrower. It is for the lender to assess whether the platform’s systems of credit analysis are sufficient for their purposes. The platforms must, and do, publish their systems of credit analysis. Too few, again my judgement, of the platforms provide a sufficient monitoring service after the loans have been made (perhaps this is driven by the upfront fee model, as Chris Philp suggests). The platforms should provide sufficient information on the potential borrower, or class of borrower, to allow the lender to make a judgement on whether to lend. To my knowledge all of the platforms work hard at this provision and are regularly increasing the amount and scope of the information provided. Regretfully, as with all markets, there will never be a perfect provision of information.

It is for the potential lender to judge whether the information provided is sufficient. If they don’t find it sufficient then they’ll leave their money with the banks product. The decision is always with the lender. After all it is the lenders capital that is at risk, this must always be made clear.

Accepting the principal that the banks provide a product and the P2P lenders a service is the first step in accepting that the P2P lenders need only a small amount of capital, when compared to a bank. The capital required by the P2P is sufficient to allow the P2P, in a calamitous financial position, to transfer information under its living will to another nominated party to monitor all loans facilitated to repayment. This is, of course, exactly what the FCA require of us.

Media and finance industry need to work together to show that P2P comes in more than one flavour

Author

Angus Dent

Date

9th June 201620th July 2016

Once again, we find mainstream media treating the diverse alternative finance sector as one homogenous group and misleading or alarming investors in the process.

This time, we have Ruth Lythe of the Daily Mail launching with a headline on 7 June, “MPs attack risky online firms offering 7% returns from lending savers’ cash to strangers to buy cars and even phones”.

The article refers to Zopa’s recent announcement of its point-of-sale partnership with Unshackled.com.

In essence, the article can be summarised in one of the lines within it: ‘P2P loans are risky’. This is written without providing any context for the reader, which is both naïve and does a great disservice to existing and potential investors.

A comment on the losses experienced to date by peer-to-peer investors would have been good (they are below what the banks accept as ‘normal’ and are published by the largest platforms in the smallest detail for all to see, which is something the banks never do).
A comment on the variety of models available in P2P would have been helpful too, rather than bracket everything under one, doom-laden label.

Of course a judgement has to be made when investing in peer-to-peer. Judgement is required in most forms of investment, but what really matters and needs explaining when making sweeping assessments of this nature is how the likelihood of loss is mitigated and managed, which differs from platform to platform.

In the case of Archover, all business loans have to pass the scrutiny of not only our own lending specialists, but also those of leading credit insurers, who provide cover on the underlying asset that we use as security. If we were even tempted to lower our standards we would not be allowed to do so. I know of no bank that can provide that same level of comfort.

In other parts of the market, RateSetter and others have provision funds which cover all losses. This means that, to date, nobody has ever lost money lending over their platforms. The banks rely on the good old UK tax payer for such a guarantee.

I think I speak for the entire industry here when I say the FCA is doing an excellent job in making sure investors are as informed as possible about the nature of their investments.

Andrew Tyrie’s letter to the FCA on behalf of the Treasury Select Committee is perfectly reasonable and I have no doubt the Regulator will provide a full and well considered response in good time. This will no doubt include some of the facts, such as net returns for investors after default being in the range of 5%-7% since the inception of the industry, the never before seen level of transparency in financial services and the resilience of the sector to economic shocks – even against the most stringent scenario laid out by the Prudential Regulation Authority (PRA).

The Regulator will certainly have our full backing if even more improvements can be made to help investors.

As an industry, we do not criticise the Daily Mail or the media at large for advising caution, but we do implore it to examine the facts and make a more rounded assessment on behalf of its readers.