The peer-to-peer debate
In some ways I was glad to read comments made by former City regulator Adair Turner about what he sees as the danger posed by peer-to-peer lending. I’ll explain why in a moment.
But first, those comments: in an interview with BBC Radio 4’s Today programme, Lord Turner counselled caution on the industry. “The losses which will emerge from peer-to-peer lending over the next 5–10 years will make the worst bankers look like lending geniuses,” he said. “You cannot lend money to small and medium-sized enterprises without someone doing good credit underwriting.” Proper checks were required, he argued, to ensure a company actually possessed the premises, equipment and expertise it claimed.
Peer-to-peer lending is certainly one of the fastest-growing areas of financial services, and is likely to become even more popular once P2P can be included in Isas from April 6. Growth has been remarkable: in a decade, £2.6bn has been lent out by 100,000 Britons in the form of peer-to-peer loans.
As someone who supports this type of lending and believes it has a prominent role to play as part of the wider lending market, you may wonder why I am pleased that Lord Turner made these points.
First, he’s opened up an interesting debate. While I do not agree with the broad brush strokes of Lord Turner’s comments – they simply don’t bear up to scrutiny – I do empathise with his point that not all lenders behave responsibly and diligently.
Some P2P providers such as Landbay are doing an exemplary job and act as a role model for the industry. How so? They apply rigorous credit analysis and best practice financial processes. They also commit to independent stress tests to Bank of England standard. Strict credit underwriting rules apply and these businesses operate with high standards of transparency and business conduct.
Of course, not all who operate in this niche have the same exacting standards and this is where Lord Turner’s views strike the right note.
The answer is to see it holistically and to recognise that, actually, it’s no different from lending undertaken by banks and building societies. With that I see the need for complete transparency; thorough checks and balances have to be made, and the returns must be carefully weighed against the risks. With this in mind, I’m pleased to see that peer-to-peer lenders are now undergoing authorisation by the Financial Conduct Authority, which can only be a good thing.
Going further, I think we will see more independent oversight and surveillance of these entities being undertaken by due diligence and risk analytics firms. These checks will provide solid evidence that a lender is well-managed and controlled and in doing so, they will offer the much-needed comfort that both the consumer and industry needs. Given this added layer of scrutiny, this is a market set to grow.
Not all peer-to-peer lenders are the same. However, we must do more to promote best practice and provide detailed verification to demonstrate that this type of lending is beneficial and provides a viable alternative.
Tony Ward is chief executive of Clayton Euro Risk