Yesterday I wrote about the ongoing debate between Lord Turner, former chair of the FSA, and my mate Greg. It’s about peer to peer lending.
The gist: Greg loves his peer to peer lending account. He’s been making around 7% interest from making bundles of loans to businesses. He’s getting exactly what the peer to peer lending website promised him in the first place. Why wouldn’t he be happy!
Lord Turner reckons the whole peer to peer thing is a house of cards. He thinks “The losses which will emerge from peer-to-peer lending over the next five to 10 years will make the bankers look like lending geniuses.”
Now, if you’ve been following the fascinating world of prudential bank regulation over the last ten years you’ll know that Lord Adair Turner has made a couple of mistakes in his time.
Keith, a reader, put it, “Is that the same Turner that 10 years ago advocated ‘light touch’ regulation before the banking fiasco erupted?”
The very one, Keith!
But to be fair to Lord Turner, he’s not talking completely out of his hat. P2P lending may be a great idea. But unlucky investors have been burned by dodgy P2P platforms before. And there’s a chance it could happen again, on a bigger scale.
Something is stirring
Greg’s not alone in his love of P2P lending. P2P lending and fintech in general has never been more popular. The entire peer to peer industry made £3.15bn in loans last year, compared to 75m in 2010.
And a quick look at the Google searches for the term fintech tells you that something big has started to happen:
That chart is bang up to date. It shows that even in the last three months or so, there’s been roughly a 66% increase in the number of searches for fintech.
That’s fantastic news for P2P and fintech fans. More interest from the public means more money on the platform which will attract more and better borrowers, which will attract more and better investors, and so on in a virtuous cycle.
But in the short run, all this growth sometimes causes trouble. When a line of business in the financial industry grows very quickly, what sometimes happens is that risk management standards slip. The business sometimes prioritises growth over safety. The sort of thing we famously saw in the mortgage back security business in the US in the mid 2000s.
To stop this from happening, the government has rowed in behind the P2P lending sector. It’s offered to regulate P2P lenders, which will reassure borrowers and lenders that their P2P platform is trustworthy.
The industry has welcomed the chance to be regulated because there’s been an explosion of P2P startups. That’s caused problems. With hundreds of new platforms it’s hard to tell who to trust. And in the last couple of years, a bunch of them have collapsed – Quakle, Squirrel, Big Carrots and Encash. 114 companies have already applied to be regulated by the FCA.
There’s another good reason why lenders are rushing to get regulated. On April 6th, the government will allow a new “innovative finance” ISA. The new ISA will give investors tax-free returns on up to £15,240 invested in crowdfunding platforms. But in order to offer an innovative finance ISA, the P2P lender will need to be FCA regulated.
As things stand the FCA is struggling to process all of these applications in time. Even the biggest P2P sites such as Funding Circle, Zopa and Ratesetter have not been waved through. Those companies must be salivating at the thought of getting at the market for tax-free savings…
It all makes for exciting times for P2P investors. They’re already enjoying decent returns. In a few months, assuming the FCA regulates their platforms, they’ll get a bit more peace of mind and more importantly they’ll be through paying taxes on their investments.
And it comes after the decision last year to allow P2P lenders to offset bad loans against their income tax. That was another great help – according to James Meekings, a co-founder of funding circle, it made investors 25% better off.
I sat down today to talk about the risks with fintech, but the story got away from me! There’s an awful lot to say about this subject. I’ll come back to it again tomorrow.
Thanks to all who wrote in yesterday, I got loads of great comments. If you’ve any experience with fintech, good or bad, let me know! [email protected]