Member Article

The rise of peer-to-peer lending

In the wake of the financial crisis, the overwhelming failures of the bankers left a significant vacuum of consumer confidence in the world of lending and investing. The subsequent decline of interest rates in the UK has done little to restore the faith of the public in these high-street behemoths either.

Yet that is where peer-to-peer lending has ably stepped up to the plate. Online platforms seek to match those looking for a good return on their money directly with those in need of a personal loan. Funds are then matched directly between the two parties courtesy of these platforms, and on a one-to-one basis in terms of pounds. That means there can, by definition, be no issues with fractional reserve banking/lending - something that played no small part in the downturn of 2008.

Of course, the obvious risks are that the borrower doesn’t pay the loan back and/or if the platform fails. Unlike the case of banking, there is no cover from the Financial Services Compensation Scheme in such instances. Yet platforms mitigate these risks significantly with measures of their own. They uphold strict standards of credit underwriting, thus ensuring that only the most creditworthy applicants are approved for loans. In addition, it is now mandatory for UK platforms to keep a risk-weighted, topped up provision fund to cover any arrears and/or defaults on loans. And in the case of Lending Works, this is taken a step further by having a separate insurance for defaults as a result of things like borrower illness, accident, unemployment or death; and even darker forces such as fraud or cybercrime.

It is thus no surprise that most firms are now authorised and regulated by the FCA, while Government has acknowledged the importance of peer-to-peer lending by creating a separate ISA to provide its investors with a means to shield returns from tax. The UK’s major platforms have also formed an industry body, known as the P2PFA, which further regulates its members and obliges them to uphold a stringent set of ‘Operating Principles’.

The industry is now worth more than £5 billion, and is in a great state of health. In these difficult economic times where good-value investments are hard to find, and unscrupulous lenders are rampant, it’s great to see such solid and rewarding alternative available to consumers. Could they pose a challenge to the bankers? Perhaps not in the near future. But it will increase competition, and if that rouses a more consumer-friendly response on the high street, then that can only be a good thing for the UK public.

This was posted in Bdaily's Members' News section by Mike Todt .