According to an article in FT Adviser (14-11-19), many professional advisers are now saying that the new FCA rules, which come into effect next month, don't go far enough and that all non-advised sales of P2P products should be banned. Given that most IFAs won't touch P2P with a proverbial barge-pole, it would be the death knell of the sector if they were to get their way.
Lendy, and more recently, Funding Secure, have played right into the hands of the sceptics with their high-profile collapses and, of course, it's important that lessons are learned, both in terms of the regulatory oversight that platforms should be subjected to, and how investors are attracted.
But is it right to kill a whole industry because some people have lost their stakes in pursuit of high returns?
We come back to the whole issue of risk and reward and whether it's reasonable to expect a near double-digit return on your money without an element of risk at a time when real interest rates on cash deposits are negative. Most people would say it's not. To suggest that the majority of the population that engages in P2P investing - including those that had money in Lendy and Funding Secure - thinks differently borders on the patronising.
The platforms already have to comply with a lot to make sure their investors understand the risks: FCA rules on advertising at the beginning of the process, suitability checks on the investors they attract, and now the 10% rule. Added to this are the voluntary disclosures platforms make about lending volumes, returns and default rates.
An investor with a well diversified portfolio of investments, enough liquidity for their short-term needs and a clear understanding of the risks involved in different types of investment should surely have the right to invest a modest proportion of their wealth in a regulated P2P platform if they want to. Indeed several advisers would grudgingly admit they would be wise to do so.
We've covered in a previous blog why it's almost impossible for an IFA to advise on P2P and still remain within the rules that govern their activities. The FCA has to be careful here. If it's not, it will create a catch-22 situation where it regulates that advice must be given, but that there is nowhere for that advice to be found.
“One more slip and the outcry could be such that the FCA has to exercise, not just a firm hand, but a suffocating one.”
I don't believe the FCA deliberately intends to regulate P2P out of existence. There are several very well managed platforms out there spanning B2B lending, B2C lending and property (which has proved the most vulnerable). These platforms are delivering sensible, risk-adjusted returns to investors, and performing an important role in the economy by providing borrowers with choice - one of the primary objectives of the Government in the aftermath of the financial crisis in 2008. The FCA will see that too.
P2P, though, needs to take great care - or even more care, if you prefer. The FCA is in a tricky position: it is judged on how it protects the most vulnerable, not the majority. One more slip and the outcry could be such that it has to exercise, not just a firm hand, but a suffocating one.
If retail money disappears, the platforms will have to rely exclusively on money from institutions - and there the revolution will end.
Neil is a Chartered Marketer and Fellow of the Chartered Institute of Marketing with many years' experience in marketing, brand and communications.
CEO / The Marketing Eye
by Neil Edwards, 4 minute read
by Neil Edwards, 3 minute read