This year has seen the collapse of two peer-to-peer lenders in the UK and as tougher regulation sets to come into force on 9 December, regulators will not want to see any further impact on market confidence. Last month, FundingSecure entered administration, following on from Lendy, which
ceased trading in May.
FundingSecure offered pawnbroking loans against valuable items such as jewelery, classic cars and art and facilitated crowdfunded loans for buying and developing property, offering investors returns of up to 16%.

It was reported almost 3,500 customers had invested some £80 million in the peer-to-peer lender, with the investment spread across 486 loans and there are claims the failure was connected to possible loan fraud, where art was pledged that was allegedly sold, as well as a number of defaults. It remains unclear at this time, if investors will receive any of their money back.

Lendy started out by offering bridging loans and later began lending to property developers. It began to see the ‘non-performing loan’ rate increase and a reduction in the amount of new money coming in, which meant the lender then struggled to finance the loans it was already committed to. Apparently, only around £11 million, of the £152 million collectively invested, will be returned.

Peer-to-peer lending is not covered by the Financial Services Compensation Scheme and as consumer champion Martin Lewis has advised, while the high interest rates can be tempting and he has invested successfully in peer-to-peer himself, no one should invest more than they can afford to lose.

Indeed, seasoned investors will be well aware of this, even if the regulator is stepping up action to prevent further failings. In September, the FCA sent a letter to 65 peer-to-peer lending platforms, which told them to ‘act now’ to improve their practices or they would face a ‘strong and rapid’ crackdown.

The regulator believes there is a lack of understanding among some investors and ‘considerably greater risk than they appreciate’. It also has concerns about unclear charging structures and sees dangers in advertising high rates of returns – typically in the region of 10% or more – which can lure in novices seeking to make money on their savings.

This is why from December, there will be a limit on investments in peer-to-peer lending of 10% of investable assets, to ensure no one is exposed to excessive risk. The restriction will not apply to those who have received regulated financial advice. The FCA’s other new rules include:

  • Tighter governance arrangements, systems and controls, showing that platforms
    can support the returns they are advertising, with a focus on credit risk assessment,
    risk management and fair valuation practices.
  • More emphasis on planning and having an effective wind-down strategy if the
    platform fails.
  • Better checks on borrowers to find out their knowledge about peer-to-peer.
  • Peer-to-peer lenders will now have a minimum amount of information they must
    provide investors with.

However, the regulator has emphasised it does not want the rules to be so onerous that they prevent the sector from operating, with Christopher Woolard, the FCA’s executive director of strategy and competition, adding that:

“These changes are about enhancing protection for investors while allowing them to take up innovative investment opportunities. For peer-to-peer to continue to evolve sustainably, it is vital that investors receive the right level of protection.”

So, the intention is that more transparency of what is on offer will increase as will investors’ knowledge and that should the worst happen, that any wind-down will be managed effectively, so as to minimise damage.

The peer-to-peer sector has taken a knock, but for those fully aware of the risks, it also has some positives. For example, SME borrowers particularly like the fact that funds are available in just a few hours, compared to the length of time it can take for more traditional financial lending via banks.

A diverse and dynamic financial services market certainly appears to have a place for peer-to-peer. The coming months will determine if these two failures were merely early casualties and whether the remaining pack continue to operate from a stronger position.