By Farah Khalique
The news that the Financial Conduct Authority has been inundated with applications from peer-to-peer (P2P) lenders throws a spotlight on how such platforms are regulated, and what new and growing companies should be aware of when considering this financing route.
The UK watchdog began regulating P2P lenders and crowdfunding platforms in April last year, introducing stronger rules. Borrowers are given a 14-day cooling-off period during which they can cancel their loan agreement, free of charge. P2P lenders must check that investors that stump up more than 10 percent of their investible assets are sophisticated, or at least have been advised on their decision. These lenders are also subject to minimum capital requirements, relative to the size of their loan book.
The FCA is having to regulate a relatively new industry, and one which continues to evolve – it’s inevitable that regulation will need to adapt as the industry grows.
Rate Setter, the UK's largest P2P lender, hired Simon Pearse earlier this year in a new role as its head of compliance, to ensure the company is compliant and has a say in setting the regulatory agenda.
"The FCA is having to regulate a relatively new industry, and one which continues to evolve – it’s inevitable that regulation will need to adapt as the industry grows," says Pearse.
The P2P industry represents a tiny, but growing, market share of the overall lending market. The UK's investable wealth pool has been estimate at £1.4 trillion, yet the P2P market makes up just a few billion pounds of that.
"There is certainly room for more competition in lending," says Pearse.
The concept of peer-to-peer is now spreading from straightforward lending to other areas of finance like currency exchange, with providers including Kantox and TransferWise.
Customers can trade currencies directly with one another, thus cutting out costly bank and broker fees. But the reality is that, when an internal customer match cannot be found, these platforms still rely on the banks to complete trades.
Sami Doyle works in business development at Trust My Travel, which provides foreign exchange solutions for travel companies, including coach firm Grayline.
"We would like to go over to a P2P disrupter but [they are] still reliant on a banking network, why not go to a bank in the first place?"
P2P FX may still in its infancy but, like P2P lending, it is fast catching on.
Farah Khalique is a freelance business and financial journalist, with a keen interest in writing about non-bank financing solutions that can help SMEs grow their business. She has written extensively about banking scandals and has made TV appearances on Sky News and The Wall Street Journal Live to comment on topical issues including money laundering and bankers’ bonuses. Follow her on Twitter @FarahKhalique