P2P Trade Body Disbands and Replaced by Lenders
The self-regulatory peer-to-peer trade body known as the Peer-to-Peer Finance Association (P2PFA) has dissolved. It will now be replaced by the biggest lenders in the space including Lending Works, Zopa, RateSetter and Funding Circle.
This news comes after a string of regulatory changes in the consumer finance industry introduced by the Financial Conduct Authority, who took over from the Office of Fair Trading in 2014.
Peer-to-peer lending involves lenders acting as ‘middlemen’ between people looking for short term loans and investors looking to earn a return on an investment – often with returns as high as 12% or 15% depending on the amount of risk that they take on.
The peer-to-peer lending industry is estimated to be worth £2 billion in the UK, but has seen the casualty of some big names go into administration in recent years too.
The existing peer to peer lenders will form a separate industry body, replacing the existing regulator that was in force since 2011. The new group will be part of a wider fintech group that will represent companies in their industry.
Why is the existing trade body being replaced?
Following the news that the existing P2P trade body is to be replaced, Innovate Finance said that this was because the P2PFA had ‘achieved its objective of providing adequate protections for consumers.’
It also follows the recent news of additional peer-to-peer lending criteria being implemented in December 2019.
The new group of lenders are the leading members of the 36H Group, as well as a part of Innovate Finance. They have approximately 250 members in total, and also represent other fintech firms such as Dozens, Moneyfarm and Atom Bank.
What are the new FCA regulations?
The regulations for the peer to peer section created by the Financial Conduct Authority (FCA) mean that casual investors are now banned from being able to put any more than 10 percent of their assets into the sector.
The new FCA regulations also require peer-to-peer lending platforms to thoroughly assess the level of knowledge and expertise of investors before they make a P2P investment.
Some argue that this could potentially pose problems for lending platforms, who may decide to close completely if they will be losing huge investment.
How do peer-to-peer lending platforms work?
Peer to peer lenders receive money from investors and then distribute the cash to borrowers in exchange for a return on their investment.
The lender acts as broker or middleman between a high street borrower and an investor and returns range from 5% to 15% per annum, depending on the level of risk. For those looking to invest in good credit customers, the return is often lower because the chance of repayment is high. If you invest with bad credit customers, the risks of default are potentially higher, but the rewards may deliver a return of up to 15% per annum.
In terms of regulation, the peer-to-peer lending platforms are monitored by the Financial Conduct Authority, but they are not a part of the Financial Services Compensation Scheme.
This means that if a borrower defaults on payment (and this is expected of at least 20% of customers), investors are not necessarily compensated.
Most lending platforms will have their own compensation scheme in place including procedures, separate funds and a customer services team to collect on bad debt.