There's nothing more controversial it seems in P2P than whether investors should have the right to make up their own minds. Why, it is argued, should anybody be excluded from the chance of earning decent returns on their money if they're happy to take on the risk?
The FCA, we know, takes a different view. The starting hypothesis is that the average investor doesn't appreciate the risk of these products and is vulnerable to marketing that persuades them to make investments they don't understand.
And it is imposing increasingly stringent steps to make sure this doesn't happen.
Soon, we will have the 10 per cent rule, one of a string of regulatory changes from the FCA designed to protect investors. In simple terms, it says that an investor can't have more than 10% of investable wealth in P2P or alternative debt based products.
But it's not going to end there.
In a report published earlier this month (2 August), the House of Commons Treasury Committee said it wants to extend the remit and the powers of the FCA to address activities operating on the "regulatory perimeter", noting that such firms have caused serious harm to consumers. Take a bow Collateral UK, London & Capital Finance, Lendy et al. SME lending is mentioned specifically.
Sitting between the investor and the investor hungry platforms is the IFA community, that part of the financial services ecosystem which is voluntarily engaged and paid for by investors to advise and protect them and their money.
IFAs have endured more than their fair share of regulation in recent years and have long said an uncompromising 'no' to peer-to-peer lending and alternative debt based investments in general. We've blogged about this in the past and the reasons given have ranged from it not being possible, or at least cost effective, to assess and compare risk, to PI cover not giving the protection needed. Some have been more forthright and said they simply don't like the product.
Let it be said that fintechs have boldly tried to shift mind-sets with propositions that have sought to overturn these objections - Goji and Orca spring to mind - but while pockets of success have been achieved, the industry remains unmoved and these businesses have ultimately refocused their offerings.
So, in the final analysis, are IFAs right?
Let's take a look at it from the adviser's side.
The role of a professional adviser is to match a client's investable wealth with their needs and appetite for risk. Sometimes risk needs explaining and a good adviser will question a client in depth to gauge their true tolerance.
Once understood, the adviser will recommend a portfolio of investments. Sometimes, it will be entirely bespoke to the client, on other occasions it will be based on a model portfolio, but in all cases, it must be appropriate.
More often than not, the portfolio will be a collection of funds, with a proportion retained in cash. In constructing this - and then managing the portfolio relative to its performance and the changing needs of the client - the adviser is earning their fees.
The majority of clients will come out of the assessment process with a medium to low appetite for risk (4-6 on a scale of 1-10), but there will be some with a more aggressive attitude. These are the ones where it might be argued they should be advised to put a proportion of their wealth into alternative debt products that could yield 7% and above.
For the adviser, it's not that easy.
The FCA PROD rules, which were introduced in January 2019, mean that advisory firms must now prove the products they recommend deliver good outcomes, meet the needs of an identifiable target market and are sold to the right clients.
This means that there has to be an extremely robust and auditable due diligence and product selection process in place to ensure that the recommendations are entirely suitable for the client and meet the identified investment objectives and risk profile.
Once invested, the adviser must then monitor this part of the portfolio with the same diligence as the funds.
Advisers are understandably concerned about endorsing products where a harmonised and recognised due-diligence, selection and monitoring process isn’t in place. Why? Because they are held accountable for their recommendations for the remainder of their lives. There is no stop-gap or time limit when it comes to consumer complaints against Financial Advisers. That’s a pretty onerous responsibility for anyone to bare.
Added to this are the practical implications. If an adviser only has a small handful of clients invested in alternative debt or P2P products, it becomes inefficient from an operational perspective to manage them. Maybe profit and productivity shouldn’t get in the way of the advice, but the fact is, in the real world, it does.
Given all this then, we can understand why many advisers are saying it's easier not to offer advice on debt based investments and focus on the bulk of the client's wealth to deliver the secure retirement or other life goals that they have been set.
The key phrase here, though, is "the bulk of the client's wealth", namely, not the totality. Many investors will hold back a sum of money for leisure, rainy days or even a bit of speculation. This non-advised money is the part of the wallet that platforms should be targeting and is likely to sit comfortably in the 10% range.
The answer is not to look to IFAs for lenders, but to concentrate on direct marketing strategies that allow savvy investors to make up their own minds. There are plenty of investors out there who are comfortable with assessing their own risk and managing a portfolio of higher yielding investments on the perimeter of their total wealth. Auditing of the 10% rule is likely to be based on self-declaration until an industry standard is developed, but our expectation is it is already being regulated around this level by the investors themselves and is unlikely to lead to any noticeable contraction in supply.
Direct investor origination isn't easy, and it's competitive, but it is achievable with a clear proposition and a long-term commitment to marketing.