P2P platforms in the UK: FCA is worried knowing that some firms are purchasing each other’s loans

Britain’s Financial Conduct Authority (FCA) has found some unlikely practices made by some peer-to-peer (P2P) lending platforms — they are using client money to purchase loans on rival platforms instead of funding loans over their own platforms.

Andrew Bailey, FCA’s CEO, told Business Insider that they have noticed some platforms not having enough loans at the moment and are using their investors’ money to invest it on other platforms’ loans.

Even so, Mr. Bailey didn’t mention the names of the platforms involved in that practice and only told that he thinks it was still a premature practice and the industry is not yet in a dire situation.

He pointed out some risks associated with this practice.

“But there are a number of risks there. On the one hand, operationally, if there’s too much cross investment you’ve got a split cap investment trust issues. If one fails it could have knock-on effects throughout the other players. And then also investors may not understand the risks they are getting into because if they’ve chosen one platform because they like it they might find they’re exposed to other platforms.”

Because of this, the FCA made their move and released a new report concerning P2P lenders’ and crowdfunding platforms’ regulations, suggesting a more strict regulation on the industry amidst concerns regarding this complicated practice that investors may not understand.

Bailey wants the industry to make a new rule which will give additional requirements or restrictions on cross-platform investment. This issue is highlighted as one of the regulator’s main concerns.

P2P lending, also known as marketplace lending, was made up by British company Zopa in 2005. Its main purpose is it acts as the middleman between potential investors and to ordinary people or businesses who want to get funding using online transactions, cutting out banks who normally sit in the middle. This is a win-win situation where investors get good rates of return while borrowers get quick access to cash.

According to AltFi, over £8.7 billion has been lent by peer-to-peer platforms in the UK since it started and £3.4 billion of that was only made this year alone. Also, Britain’s three major platforms — Zopa, Funding Circle, and RateSetter — have all lent over £1 billion each. But as the industry continues to evolve, business models have also become more complex which is why FCA is concerned with consumers that might be affected by the potential risks associated with this change.

And with the Lending Club incident where its CEO, Renaud Laplanche, who resigned on May 2016 partly because of a failure to properly flag his own investments in the platform, disclosure has become a major issue in the industry.

Laplanche failed to disclose that he already held a stake in a fund that LendingClub was considering investing in. In a report of The Wall Street Journal, it was stated that Laplanche invested millions in that fund so it could buy LendingClub’s loans to boost the demand for the company’s loans. And as stated in a company filing, Cirrix Capital has bought $114.5 million worth of LendingClub loans in the first quarter of the year.

The speedy evolution of the peer-to-peer lending industry displays quite big challenges in terms of transparency and fairness, Bailey stated in a Business Insider interview.

My final thought:

It’s clear that any investor or lender willing to participate needs to firstly understand the product, the firm and of course the risks involved with any sort of crowdfunding or peer-to-peer lending activity and don’t be tempted by that attractive higher ROI or interest rates being promoted – it needs some effort on your part!