How the UK’s regulatory framework protects P2P investors


The peer-to-peer (P2P) lending market was established in 2005, when Zopa became the first platform to connect individual lenders directly with borrowers. Since then, the market has evolved rapidly, as have the regulations underpinning investor protection – and this looks set to continue.

In the UK, the sector has been overseen by the Financial Conduct Authority (FCA) since April 2014, when it took over the regulation of consumer credit from the former Office of Fair Trading. In November last year, LendingCrowd became the UK’s first P2P lender focused on the SME market to move from interim to full FCA authorisation.

The FCA has introduced clear rules aimed at safeguarding P2P investors. However, technology is accelerating the pace at which businesses adapt to the changing economic landscape, and financial watchdogs in the UK have also been adapting their frameworks to ensure that regulation and investor protection are appropriate to the risks associated with the investment products.

For example, client money must be protected and firms have to meet minimum capital standards. Resolution plans must also be in place to ensure that, if a platform collapsed, loan repayments would continue to be collected for investors.

Gaining authorisation from the FCA added credibility and trust in what remains a relatively young marketplace. It has also meant that regulated platforms such as LendingCrowd have been able to launch Innovative Finance ISAs after gaining ISA manager status from HM Revenue & Customs.

These developments demonstrate that the UK remains at the forefront of the P2P industry – in contrast with other countries such as the US, where regulation has seemingly not adapted as quickly, perhaps leading to negative sentiment towards the sector.

One example is a report from the Federal Reserve Bank of Cleveland, which raised eyebrows early in November when it compared the US P2P lending industry to the subprime mortgage market. The paper has since been withdrawn – researchers said they were revising their findings after receiving “several questions about the composition of the underlying data”.

Various observers suggested the Cleveland study had contradicted analysis from the Chicago Fed and Philadelphia Fed, which argued that the use of financial technology and alternative sources for gathering information on creditworthiness could provide “significant value to consumers and small business owners”.

That sentiment was echoed by the Bank of England in its latest financial stability report, which showed that the P2P sector continues to grow rapidly in the UK as lenders evolve and diversify their models. The flow of business lending accelerated to about £1 billion during the first half of this year, almost double the level seen two years previously, and the Bank said: “P2P lending could improve financial stability by providing an alternative source of finance for consumers and small businesses.”

Noting that monitoring of the market “remains important”, the Bank also said that the FCA continues to review the regulatory framework for P2P platforms, pointing to the watchdog’s interim feedback report, published in December 2016, which “raised concerns around information quality, inconsistent disclosures and insufficient wind-down procedures for some firms”. The FCA’s final report is expected to be published during 2018.

The continued evolution and strengthening of the regulatory regime is highly likely to support increasing interest among financial advisers and wealth managers looking for a suitable alternative for their clients’ investments. The introduction of the IFISA, combined with robust and transparent credit data on borrowers, means that more practitioners are opening their eyes – and those of their clients – to the opportunities on offer.

At LendingCrowd, we take seriously the duty of care we have to our investor and borrower clients. Our in-house credit team, who have more than 80 years’ combined experience, ensure that only established and creditworthy businesses are able to borrow through us. However, reward rarely comes without risk, and savvy investors know they should not put all their eggs in one basket – by holding a diverse portfolio of assets, they can reduce risk on their investments*.

We are one of the few P2P platforms that still offers an active, self-select, model alongside passive products. Our active Self Select Account enables investors to hand-pick their loans, while our passive Growth Account automatically spreads their investments across as many businesses as possible, which means the impact is reduced if a business cannot repay its loan. Both accounts can be held within the LendingCrowd ISA wrapper, providing tax-free* returns.

To thank the investors who choose us to help fund the expansion plans of exciting home-grown success stories, LendingCrowd is running a promotion to give investors £200 cashback when they lend £5,000 or more before 3 January 2018 (terms apply).

The UK’s P2P lending market is maturing and moving into the mainstream, as shown by the introduction of the IFISA. As well as offering healthy returns for investors, the sector generates real benefits for the economy by providing access to finance for small businesses who may struggle to secure funding from banks.

Debates over the regulatory framework may continue, but the ongoing focus by the FCA on the appropriateness of existing regulation can only serve to further strengthen outcomes for investors and borrowers on P2P platforms.

*Capital at risk. Tax treatment depends on the individual circumstances of each investor and may be subject to change in future.