Tag: FCA

The FCA’s tailored regulation of P2P Lenders is for the benefit of everybody

Author
Angus Dent
Date

A theme that has begun to emerge in alternative finance article headlines at the moment is that there is a perceived love-in between the FCA and peer-to-peer lending, with George Osborne an enthusiastic Cupid-like figure matching the two. The regulatory body has come in for criticism from the old guard that believe the old scourge of the banks has gone soft on the new “tech” whizz kids on the block. This isn’t helped by the frequently-cited, well-intentioned-but-slightly-undermining quote by economic secretary to the treasury Harriet Baldwin that government and fintech share a “beautiful friendship”.

George Osborne

 

Yet there are incongruities between news article headlines and article content. Take John Thornhill’s article, published in the Financial Times last week, which began with the suggestion that “a watchdog with the ‘right touch’ sounds ominously like one with a ‘light touch’ “, before proceeding to make some very reasonable points on why the FCA applies slightly different regulatory procedures to start-ups and small cap businesses than it does to centuries-old banking institutions. Throwing the same rule book would crush every start-up under a mountain of excessive regulation and process, and would negate much of the innovation sorely needed to replace the antiquated banking practices. The FCA’s “approach” should be commended as forward-thinking- let’s remember that it really is just an approach at the moment as the majority of the platforms are still in the midst of the lengthy and detailed regulatory process that certainly doesn’t feel light touch.

The revelations coming from the States regarding Lending Club have done nothing to dampen criticisms of the FCA/peer-to-peer perceived cosiness either. Yet it is the willingness for the FCA to work directly with peer-to-peer lending platforms that has, and will, prevent the blatantly reprehensible behaviour that wasn’t detected initially in the States; there, the industry has been regulated under a blend of existing consumer and banking regulation that has proven to be unsuitable. Working to tailor the regulation to the peer-to-peer sector will prevent swathes of old-fashioned banking malpractice carrying over to modern finance. Renaud Laplanche, by acting in his own self-interest, assumed a guise firmly rooted in the past, not endemic to the burgeoning P2P sector that prides itself on transparency and openness.

Every platform will now be keen to highlight the differences between themselves and Lending Club, although there will have been many who, this time last year, would have been perfectly happy to seek comparison with one of the biggest players in the global sector. However, if all must be tarred with the ubiquitous “Fintech” brush then there is one obvious point to make from a UK peer-to-peer lending view. We are very much the “fin” side of the portmanteau as true providers of alternative finance – the “tech” only applies to the platforms used to facilitate loans. Unlike Lending Club- which initially positioned itself as a social networking service and developed an algorithm called LendingMatch to identifying common relationship factors such as geographic location, educational and professional background, and connectedness within a given social network to match lenders with borrowers- UK platforms are not primarily algorithm-driven and rely on due diligence processes at least as thorough as those of the banks to vet borrowers. But the Lending Club debate shouldn’t necessitate these explanations- this is (possible) criminal activity from a senior management team undoubtedly out to furnish their own pockets. The FCA will continue their stringent, tailored regulation of the industry to prevent this happening over here, regardless of the baseless accusations that they’re cutting corners to appease the government.

 

Disruptive Fintech, the FSCS and the World Economic Forum: busting some Peer to Peer Lending myths

Author
Angus Dent
Date

Barely a day goes by without some media coverage on the Peer to Peer Lending sector. The good news is that knowledge of the sector continues to grow, to such an extent that the standard sporadic “What is Crowdlending” articles indicative of a nascent sector are being replaced by up to date reporting of relevant industry news. Coupled with increased coverage in mainstream print and digital media has come an increase in independent industry reports. This year has seen (to name only a few) Citi’s “Digital Disruption” report, KPMG’s “Pulse of Fintech” and the annual Nesta Alternative Finance Guide, all using statistical data to shed light on the trends and outlook for peer to peer lending.

However, the news concerning the application of the Financial Services Compensation Scheme (FSCS) to peer-to-peer lenders is an example of a grey area that can emerge from misleading reporting. The FT Adviser article by Laura Miller published on 18.4.16 and titled “FSCS reveals how it will consider P2P claims” gives an accurate representation of what the FSCS has said in its report, but fails to deduce the significance (if any) behind a potential ruling. The FSCS was brought in to protect the savers who put their money with banks, who in turn would lend out the money without the discretion of those savers. Peer to peer lending gives individuals the chance to choose to whom their money is lent, on what terms and rates, and how much. They know the risks and mitigate these risks accordingly by lending to many projects, and even across many platforms. Now for a platform such as RateSetter, which chooses where the money is dispersed, the news that the FSCS will cover up £50,000 of defaults may come as good news, although their provision fund covers this anyway. There is also an issue with the wording- the FSCS will pay out only if “bad advice” is deemed to have been given. I don’t need to tell you why such woolly language is wholly unsuitable for financial compensation schemes. The FSCS was set up to apply for the banks and it should stay that way- instead of massaging an unsuitable solution to fit peer to peer lending, another form of protection could be made available to lenders over P2P platforms. The less said about FT Adviser’s choice of interviewee, the better- another case of an IFA dinosaur using scaremongering tactics. He chooses to neglect the fact that P2P platforms’ due diligence on potential borrowers is as thorough as the banks- ArchOver even has the benefit of a second opinion from the credit insurers.

Which leads me onto the World Economic Forum report written in conjunction with Oliver Wyman. The report warns that consumers could face big losses from peer to peer lenders; “even if alternative sources of credit are monitored appropriately, many actually shift risk to the end consumer – which has the potential for sizeable losses to be directly incurred by average investors who may not understand the product or its associated risks.” The FCA regulation that will come into place for peer to peer lenders should help dispel some of these fears. Investors already are well aware of any risks involved in lending over platforms, as there are risk warnings at every stage of the process. And the FCA will do more to ensure that investors need to be HNWI or educated investors to invest with large single payments, despite in doing so slightly undermining the democratic processes of lending.

Peer to peer lending gives people a chance to throw off the shackles of the bank and escape from the miserable interest rates on offer, or paying the 1% management fees that wealth management charge for riskier investments into the likes of equity markets (for a poor return in the current climate). All this with the benefit of credit insurance, provision funds, the confidence in joining a crowd of institutions (family offices, schools, councils, banks etc.) and other individuals in lending to a business. And these individuals should not be patronised or considered naïve- the general demographic is very much aged 55+, ex-directors and professionals who are careful with their savings and conduct their own checks on who they are lending to. Yes, there has to be a certain amount of trust and research done on the peer to peer lender chosen- they do that as well.

And it isn’t just critical articles concerning alternative finance that are oft inaccurate- some of the “pro-Fintech” articles seem to be barking up the wrong tree as well. Take Matthew Lynn’s comments in the Telegraph this week, for instance. I share his enthusiasm for fintech’s potential, but it really isn’t about bashing the banks- as has been said many times before, banks and fintech platforms will work together in the future for the benefit of borrowers and lenders alike. Banks will continue to lend alongside individuals and smaller institutions on the ArchOver platform, at the same rates and same terms- it really is all about democracy. The banks will learn a lot from working with fintech, just as fintech can benefit from the wealth of experience and vast networks the banks have.

 

In response to Scaremongering and book Promotions…

Author
Angus Dent
Date

Lord Turner certainly knows how to grab a headline. Speaking with all the authority of someone who knows a thing or two about disasters – he presided over one himself as the former head of the disastrous and now defunct Financial Services Authority (FSA) – he is now predicting that the P2P crowdlending market is destined to come to grief because of poor credit risk processes that are indigenous to the sector.

Predictably, the business Press have been only too eager to seize upon his gloomy assertions, made during an interview with the BBC, on the usual premise that bad news makes better headlines than good news. Don’t let the facts get in the way of a good story, etc….

His most explosive proclamation was that: “The losses on P2P lending that will emerge within the next five to 10 years will make the bankers look like absolute lending geniuses …..”

The first thing to point out is that, in terms of size, the UK’s P2P lending market is, for all its undoubted success, minuscule compared to the size of the whole market place; the major banks still control 90 per cent of lending to SMEs. The second point is that the credit risk processes in P2P lending are at least as thorough as they are with the majority of the banks. Indeed, many of the lending officers in the P2P sector used to work for banks in the days when they actually lent money to SMEs.

In ArchOver’s case, the process is actually far tougher because borrowers over our platform are obliged to cover their loan against default through credit insurance. No bank that I know does that as a matter of strict policy.

However, more important still is the fact that all P2P loans are matched; they have a set duration at a fixed rate agreed between borrowers and lenders. This sort of arrangement is in direct contrast to the banks which ‘borrowed short and lent long’ – precisely the toxic combination that led to liquidity problems and contributed hugely to the banking crisis.

Criticism is one thing, but scaremongering on this scale, especially from someone who should know better, is neither appropriate nor helpful. It is made worse by a blatant distortion of the facts.

 

What should the FCA do now?

Author
Angus Dent
Date

With the appointment of Andrew Bailey as CEO of the FCA there has already been some speculation as to what changes will be made. He certainly faces a tough challenge; Parliament will debate this week whether to give the regulatory body another vote of no confidence. Here are some thoughts from the alternative finance perspective on what his appointment holds in the short and long term.

  1. Bailey will be welcomed as a CEO if he is willing to listen and promulgate policy, unlike some of his predecessors. Martin Wheatley and his infamous “shoot first and ask questions later” policy immediately springs to mind: the regulator needs to maintain a moderate tone despite its eagerness to be the antithesis of its defunct predecessor, the FSA.
  2. Bailey needs to keep in mind that over-regulation and restriction of trade could strangle the City and, whilst some may disagree, the FCA needs to help facilitate business as much as possible. Britain needs to remain attractive to investment and business; a move in the wrong direction would be catastrophic for the economy.
  3. Policy needs to be well thought through and as lucidly set out as possible to avoid the half-baked ideas that have dogged the regulatory body’s attempts to keep up with a changing world. I would wager that the FCA is better off slightly behind the curve if it means avoiding botched legislation that would present serious obstacles in the future.
  4. The process of applying to be FCA regulated, something that the P2P lending industry is going through at the moment, is incredibly clunky. Yes, the regulators need to be as thorough as possible, but there is room for acceleration. Answering questions on applications should take days rather than weeks, and processing applications should take less than the 6-12 month projected time frame. All it takes is a clear plan, which will come from better leadership and management.
  5. Back in November, Sir Hector Sants (pictured below), former chief executive of the FSA, suggested that the FCA should be stripped of its punitive power as the regulator failed to ensure that post- financial crisis regulation produced a level playing field. Outsourcing the task to an independent body would free up resources to focus on what the FCA was set up to do; Bailey could do worse than heed Sants’s key recommendations.