P2P Platforms: The UK Government Invests £85 Million Where Regulators Has ‘Concerns’

A report back in December last year claimed that £85 million worth of taxpayers money has been invested by the UK government into a lending industry where financial regulators identified to be a “potential investor detriment” – the peer-to-peer lending sector.

In a FOI (Freedom of Information) request made by Business Insider, it shows that the state-owned British Business Bank (BBB) has invested £60 million on Funding Circle, £15 million on MarketInvoice, and £10 million on RateSetter.

The Financial Conduct Authority (FCA), Britain’s finance regulator, highlighted in its report its concern on the rising complexity of the P2P market. The FCA writes in its report that due to the desire of firms in maintaining their confidence in platforms, it somehow led to giving nontransparent information that may put investors to risks.

Although the FCA didn’t mention any specific firms in its report, it highlighted certain practices such as the intercession of peer-to-peer lenders to influence loan performance and lending to provision funds.

Peer-to-peer lending platforms are marketplaces for loans, where a borrower and a potential investor agrees to a deal that would benefit both of them. The BBB invests on platforms that agree on extending its loans to small businesses. It began investing on Funding Circle and MarketInvoice in 2013 and RateSetter in 2014. BBB undertook extensive due diligence on each platform before committing the money. However, FCA CEO Andrew Bailey told Business Insider: “It’s a fast-moving, evolving industry. Some of the directions in which it’s going off are posing some quite big challenges in terms of transparency and fairness.”

John O’Connell, Chief Executive of the TaxPayers’ Alliance, stated his comment in an email:

“The broader question is why taxpayers are funding loans, to begin with. There are so many answers on how to increase lending from commercial banks, but the Government stepping in with a taxpayer-funded alternative should not be one of them.”

Back in 2012, the government of the UK set up the British Business Bank with £1 billion worthof funding in the hope to increase funding of small and medium enterprises (SMEs). It does not finance SMEs directly, rather it teams up with partners and intermediaries to extend funding.

A spokesperson for the British Business Bank told Business Insider that the peer-to-peer lending sector may possibly become a successful delivery model for small business finance.

“Investing in these, and other kinds of platforms is a vital part of our remit to foster a more diverse small lending market for smaller businesses; indeed more than 10,000 smaller businesses across the country have already benefited from our partnership with Funding Circle,” the spokesperson added.

“One of our four strategic goals is to manage taxpayer resources efficiently and within a robust risk management framework. The return across the British Business Bank programs between 2015-16 was over 2%.”

The CEO of Funding Options, Conrad Ford, told Business Insider that the British Business Bank is now aiming to invest on a more traditional lending businesses.

“The kind of people getting financing now are very broker-led, traditional asset finance businesses. It’s really quite marked how that’s where the money is going right now,” said Ford.

Funding Options, a small business finance marketplace, is one of the three platforms chosen by the BBB for the bank referral scheme which demands traditional banks to refer small businesses to alternative financing sources if ever banks reject them for loans.

My comment: There clearly has been a need, a demand for the alternative finance channels to help SME’s and business funding due to the main stream banks’ lending policy changes that have evolved over the last ten years or so (since the credit-crunch). The UK is a leader when it comes to financial technologies, innovation and the cutting edge processes in what is clearly a sophisticated market.

This government is committed to seeing this enormous potential fulfilled – to ensuring the UK is the best place to start and grow a digital business and that includes automated electronic financial products with the likes of peer to peer lending and equity crowdfunding platforms.

There are clear policy procedures and guidelines the FCA publishes and all forms of money lending from all forms of business enterprise and innovative products should be fully regulated and backed by government legalisation – so why should regulators have concerns if they along with other controlling bodies can govern and police the financial rules?