Over the last decade, a myriad of alternative financial services has popped up, allowing consumers to break from the chains of the traditional banking system. Because they have given entrepreneurs and cash-strapped consumers an excellent substitute to the institutions that have turned them down, crowdfunding and peer-to-peer lending have morphed into trillion-dollar industries, satisfying an immense global demand.
The U.K. is one of the biggest markets for P2P (peer to peer) lending and loan-based crowdfunding, representing more than $3 billion of the international market.
But what started out as a grassroots endeavor aimed at helping average folk has quickly blossomed into a sector that involves hedge funds and asset managers. And now the big British banks want to kick out the smaller outfits by tapping the state for some muscle.
FCA Cracks Down on P2P Lending
Following up on a February 2015 report about loan-based crowdfunding, the U.K.’s Financial Conduct Authority (FCA) has proposed reining in the industry by toughening up rules, introducing new regulations, and protecting consumers from unscrupulous outlets.
As part of a 156-page review, regulators note many users were victims of poor and inadequate lending practices, such as horrid customer service and products that are unsuitable for consumers. It further feared that many organizations could have conflicts of interest because these entities might maintain a business model that engages “in practices that create a financial incentive for them to facilitate loans in a way that favours the platform or a certain cohort of investors [and] borrowers.”
Should the national economy weaken and interest rates spike, then it could trigger numerous investor defaults, warns the FCA.
The FCA believes it has the answer for these concerns: red tape.
Under its proposed rules, the FCA wants to impose specific requirements on what systems and controls every platform must need to support the outcomes for investors. Financial regulators say platforms must do a better job revealing information about the creditworthiness of borrowers, better prepare for wind-downs, and limit P2P advertising.
The watchdog is also considering mandating these platforms to offer users with correct and clear information about charges and investments to ensure everyone knows the risks.
But one of the biggest proposals in the report is to force FCA-based licensing onto these platforms.
In the end, the FCA says it wants to make sure there is proper remuneration for risks that users take.
“We are largely content that the regulatory framework in place for investment-based crowdfunding platforms is adequate. When a platform advertises a target rate of return, we want that target rate to be achievable, and for investors to understand and be fairly remunerated for the risks they are exposed to.”
The FCA is seeking responses to its public consultation by October 27, with rules going into effect by the end of the year.
The Art of Looking for Trouble
Accountability and responsibility.
Many of the technological developments of recent years have inadvertently incorporated these two concepts into their business models. Like Uber or Airbnb, loan-based crowdfunding and P2P lending facilitate lenders being held accountable for dubious practices and customers being held responsible for making uninformed and poor decisions.
Should a lender continually charge exorbitant rates, bleeding the borrower dry, then that person will develop a putrid digital reputation. If a platform repeatedly fails its users, either by fraudulent borrowers or insufficient security controls, then people will abandon ship. Or, if investors are not receiving their funds, then the website will inevitably crumble.
The market always breeds transparency.
Legendary comedian Groucho Marx said that “Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly and applying the wrong remedies.” Though it should always apply to politics, the joke should also be applied to bureaucracies, most of which routinely try to justify their existence by beating their chests and carrying around clipboards and red pens.
The FCA is attempting to solve a problem that just isn’t there. This is what the FCA does – you only need to look at how it pummeled the payday loan industry into submission, despite a clear market demand, to understand its inherent nature. Like all other bureaucrats, they don’t care about protecting the consumer, they just want to wield their power.
Have you ever used P2P lending or loan-based crowdfunding? Let us know in the comments section!