The abundance of peer-to-peer lenders offering high yielding loans has been getting the attention of regulators.
Many peer-to-peer lenders target unsophisticated retail investors, who can invest as little as £100. And yet, there is a relatively high cost to on-board small investors, because platforms have to handle customer calls, and anti-money laundering requirements.
There have been dozens of failures, but the closure of Lendy has shocked the industry. The high-profile peer-to-peer lender accrued more than £160m on its loan book, and by the time the administrators were called, £90m was believed to be in default.
Many firms are being supported by equity injections (crowdfunded by retail investors), but given their high cash burn, it is simply a matter of time before they too fail.
Some providers offer woefully inadequate provision funds, which give a false sense of security. When Collateral collapsed last year, it emerged that they did not have the correct regulatory permissions.
Profitability aside, there is a fundamental issue with most peer-to-peer firms.
They are just a data intermediary between borrowers and lenders, rather than a financial intermediary. They earn fees based on volume of transactions, regardless of the underlying loan performance, whereas financial intermediaries, such as banks, have obligations to repay depositors when loan investments go bad.
Without this alignment of interest, the level of due diligence performed during the underwriting process is limited, and the onus is on the investor to understand the risks and read the terms and conditions.
But many investors do not bother reading the small print, which is usually signed electronically at the click of a button. Investors are often unaware of the risks.
Clearly, more needs to be done to protect investors. Recent regulatory changes to protect investors include a cap on investor wealth in such investments.
However, minimum standards of underwriting criteria should be introduced by the Financial Conduct Authority, such as valuation methodology and borrowers solicitor requirements, so that risks are managed.
In Germany, for example, a banking licence is required by all lending firms. Obtaining this is a more thorough process to check that the lenders systems and staff are appropriate.
Default rates are currently artificially low, because at the end of a Read More – Source
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