As Zopa lends £400m, regulators move in on P2P
PEER to peer lenders will come under greater scrutiny from regulators starting next year, the Financial Conduct Authority (FCA) announced today.
Yesterday, the UK's first peer to peer lender, Zopa, announced that it has lent £400 million since its launch in 2005 and a quarter of that in just the past six months.
But as the sector grows, the regulators are growing nervous.
Investments in peer to peer sites can be risky and money is not covered by the FSCS compensation scheme.
The regulator fears that consumers, many of whom may be inexperienced when it comes to taking financial risks, could be harmed if lenders don't have adequate protections in place.
Today the FCA announced the specific measures it will take to protect consumers, beyond what it announced in March this year.
Protection grows peer to peer
Zopa has put its huge increase in investors down to measures designed to protect consumers' money. The company holds a Safeguard fund to cover savers (investors) against loss of capital or interest if the borrower goes into default.
By putting peer to peer investment on a par with ordinary savings accounts Zopa have won over thousands of consumers frustrated at the poor returns available on savings through the high street banks.
Few savings accounts now even beat inflation, while peer to peer sites are offering returns of between 4 and 7%.
Other firms have also seen rapid growth.
Funding Circle, a small business lender, announced earlier this week that, just three years after its UK launch, it would be opening up to borrowers and lenders in America.
Crowdfunding companies like CrowdCube and Seedrs, which allow consumers to invest directly in companies in exchange for equity or shares, have also grown up over the past few years.
It is these more direct approaches that the FCA is more concerned about.
The very first company Crowdcube helped people to invest in - Bubble and Balm, a cosmetics business - recently went out of business, leaving 83 investors that had put in between £10 and £7,500 each out of pocket.
"Inexperienced investors... may not appreciate the differences between traditional investments or deposits and the riskier crowdfunded loan agreements and investments," the FCA's consultation paper notes.
Many of the larger peer to peer lenders - like Zopa, RateSetter and Funding Circle - already meet many of the requirements set out in today's FCA consultation.
Cooling off: As expected, peer to peer investors will get a 14 day cooling-off period during which they'll be able to change their mind about the deal without facing a penalty.
Credit checking:Investors will also have to be more thoroughly checked by the peer to peer site: those that hold more than 10% their portfolio in unlisted shares or unlisted debt securities won't be able to make a new investment.
Risk communication: As mainstream lenders do, peer to peer sites will need to give investors an a run down of the loan's key features before they sign up.
Peer to peer sites will also need to offer signposting to money management and debt help resources.
Communicating risk may be especially important to peer to peer and crowdfunding sites since so few offer FSCS protection to their customers.