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

Author

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.

Falling Further Down the Rabbit Hole

Author

Angus Dent

Date

3rd August 2016

The rate at which the Bank of England is prepared to lend short-term money to financial institutions looks set to fall below its current historic low of 0.5 per cent to 0.25 per cent, a move designed to stimulate the stuttering British economy. However, I would argue that further suppressing the cost of credit will do little to help British businesses battling Brexit uncertainty. Instead this rather negligible Interest Rate reduction will inflate the debt bubble while further punishing pensioners and savers, thereby diminishing waning economic confidence; thus costing companies dear. So what is the MPC’s rationale?

In Money Creation in The Modern Economy – a paper published by the Bank of England in 2014 – Michael McLeay, Amar Radia and Ryland Thomas explain how commercial banks create money via the provision of loans to households and companies. Contrary to economic theory outlined in most textbooks, ‘rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits’ (McLeay et al., p.1, 2014). It is thus the commercial banks (not the Bank of England) who create money. The interest rate – otherwise known as the ‘repo rate’ – acts as the ultimate constraint to commercial bank’s ability to create money as it determines the price and consequently the profitability of lending. By lowering interest rates, the MPC are reducing the price of credit and thus imploring commercial banks to conjure up more money by writing new loans.

The MPC hope that more ‘fountain pen money’ – money created at the stroke of bankers’ pens – might help to sand over the cracks our decision to leave the EU has created. It will not. Rather, it is a vote of no confidence in the UK economy, an economy currently plagued by uncertainty. What’s more, it proves we have learnt little from the 2008 financial crisis. As Mervyn King (2010) suggests, ‘for all the clever innovation in the financial system, its Achilles heel was, and remains, simply the extraordinary – indeed absurd – levels of leverage represented by a heavy reliance on short-term debt.’ Would raising interest rates be such a bad idea?

ArchOver breaks through the £20m loans barrier – with no defaults or losses.

Author

Alex Taylor

Date

1st August 201626th September 2016

News that ArchOver has succeeded in passing the landmark figure of £20m in business loans in less than two years has confirmed its reputation as one of the UK’s fastest growing crowdlending platforms.

Commenting on the achievement, CEO Angus Dent said: “Naturally we are pleased at reaching £20m because it confirms that our unique ‘Secured and Insured’ business model can withstand the challenges of the market place in even the most difficult times. SME borrowers have been understandably cautious because of the uncertainty created by the Brexit vote, but confidence is slowly returning and our loyal core lenders have been willing to step up to the plate to meet demand.”

“This is the best way to answer critics of the alternative finance sector, particularly since our business model prevents us from lowering lending criteria even if we were tempted to go down that path. Good quality borrowers will always be able to find the finance they require if they know where to look and lenders, faced with the prospect of even lower returns from traditional deposits, will be even keener to secure decent returns on their money in return for an acceptable level of risk. The market is working, despite the criticism and best efforts of the detractors to knock it off course.”

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.