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Beware These Questionable P2P Lending Practices
Research by Cambridge University shows the UK is now storming ahead of its European neighbours in its acceptance and use of alternative finance, with the market swelling to £1.9bn in 2014.
Although this growth is great, its speed, together with the newness of the sector, means that regulation has lagged behind, leaving investors in some alternative finance platforms more exposed than perhaps they should be.
Waking up to this risk, the Financial Conduct Authority (FCA) recently conducted a review of the regulation governing crowdfunding and P2P lenders. Within this the regulator identified some recurring issues which, unless rectified, may lead to some consumers losing faith in the alternative finance sector.
The four things the P2P industry needs to fix
1. Misleading information
The FCA found that in many cases the information available was misleading. Some platforms downplay the level of risk for investors, claiming that no capital has been lost, or by positioning risk warnings below more attractive performance information on their websites.
2. Unbalanced information
Besides highlighting misleading information, the FCA also labelled much of the information provided by P2P lenders as unbalanced – benefits are over-emphasised while risks are downplayed. As many products offered on P2P platforms are unsecured, investors could have little or no protection in the event that the company defaults or becomes insolvent.
3. Forecast default rates
Another problem exposed by the report was the quoting of forecast default rates – a risky practise for platforms and a poor indication of security for investors.
Of course, if the actual default rate turns out to be lower than that forecast, then that’s great, and shows the platform is doing a good job.
However, there’s a real danger that the actual rate could turn out to be higher. If this is the case, and investors are justified in stating that the platform mislead them, it could give investors a right to recourse against the platform.
4. Questionable credit ratings
In addition, the credit ratings that many P2P lenders use can be questionable.
These are sometimes based on no more than an online credit check, the risk being that these systems can be ‘gamed’, and platforms may inadvertently provide investors with misleading information.
The FCA’s guidance is that all communications must be fair, clear and not misleading at the point an offer is made to investors, the platform has a responsibility to uphold these standards in any information provided, including credit ratings.
Clearly, if it is important to a platform’s investor base and to their business model that they provide credit ratings, then they should be sure to put a healthy margin for error into the figures they choose to make public.
Despite these points, investors can be reassured, as increased scrutiny will only improve transparency in the sector.
With a wider FCA review due to take place next year, it’s within alternative finance platforms’ best interests to take a mature, responsible approach to communicating the realities of their offerings, something which must be a benefit to investors in the sector.
About Chris Maule
Chris Maule is CEO and founder of P2P lending website UK Bond Network, which will very shortly appear on 4thWay's comparison tables.
Prior to launching UK Bond Network, Chris ran the bond desk for Cornhill Capital, which he also personally set up.
Before joining Cornhill, Chris worked for various investment banks in both front and back office positions, including HSBC Investment Bank, Morgan Stanley Quilter, and Mellon Bank.
Chris has a track record of successfully developing innovative financing structures, as well as raising substantial capital for businesses in both the equity and debt markets.
Chris holds the Certificate in Private Client Investment Advice & Management from the CISI.
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