Bloodless revolutions are rare. The one taking place right now in the finance sector is a case in point.
The High Street banks are sat firmly on the ‘naughty chair' for, amongst other things, not lending to small business, ripping off retail clients through worthless PPI policies, charging high rates of interest on credit, but giving only the barest minimum to savers, and, oh yes, for embarrassing the Government and the Bank of England.
The fact is they stand guilty by proof or perception of a whole host of misdemeanours. The Government's response has been to encourage competition in the finance sector in an effort to bypass the banks and convert private savers into lenders to small businesses and consumers. With the gates wide open, new financial entrepreneurs have emerged - mostly via the internet - and interest-starved investors have been handing over their hard-earned cash in search of returns that have been north of 5% per annum - sometimes considerably higher.
Most of the newcomers are literally that - new. P2P platforms are regulated by the Financial Conduct Authority (FCA), but none of them holds a banking licence and the Financial Services Compensation Scheme (FSCS) does not apply.
Experienced investors have been able to accept responsibility for their own decisions by carrying out due-diligence themselves. Looking into the backgrounds of the alternatives on offer, assessing their own capacity for risk and possible loss, establishing which products are subject to formal controls and those that are not, and then making their decisions accordingly is elementary to them. They also see it as basic common sense to spread risk across a number of investments rather than commit to one. For them, it's not rocket science and the plethora of new opportunities in everything from consumer loans to aircraft finance has been a boon.
The real ‘game-changer' though will come when Chancellor George Osborne makes good his promise to create an ISA designed specifically for people who want to participate in P2P lending. For high-net-worth individuals to speculate and win or lose is one thing, but it's quite another when ordinary members of the public are drawn into investments they should never be in by the ascribed kudos of it being an ISA. The popular press is guaranteed to take up the cause of "innocent victims" if anything goes wrong.
With this Sword of Damocles hanging over it, the Government has entered into a consultation, which will run until mid-December, on how the ISAs should operate.
The likelihood is that ISAs will either be created by the platforms themselves (and focused totally on investments on that platform) or existing ISA providers will operate them (giving the potential for a broader range of investments). If it's the former, the FCA will be duty bound to make sure that the purveyors of these products are in a position to meet the high level of expectation that exists for consumer protection. This inevitably means that only the largest players, which can offer some prospect of a broadly distributed investment within a single platform, will pass.
The rest of the industry could be left staring hungrily through the gates as the retail investment money rushes to the select few. For them, it is going to be a case of courting the existing ISA providers and persuading them to recognise their platform and give them the tax wrapper they need. And these ISA providers are going to be pretty demanding. With brands to protect, they are not going to want poor returns and shock losses any more than the individual purchasers.
Let's be clear, the onset of P2P ISAs is good for the industry and is a landmark in its maturation. Like any change though, it won't be without its consequences. Maybe everything will turn out fine, but experience tells us that there will be those who flourish and others who flounder, not just amongst the investors, but amongst the platforms.