Why FCA Consumer Credit Regulation Will Push P2P Lending into the Mainstream

Saving money used to be simple; just opt for one of the most trusted high street banks, regularly invest your cash and speak to your bank manager as required.

This simpler time, otherwise known as the 1980s, was when trust in banks was at an all-time high of 91% and the thought of a bank collapsing was laughable.

Fast forward 30 years and the financial landscape is far more complex; some of the biggest names in banking have suffered a catastrophic demise and research from CEB shows that only 11% of people now trust banks to keep their money safe.

Add to this the fact that we live in a bitcoin, crowdfunding and alternative finance world, it's no wonder that consumers may feel overwhelmed by the savings options available to them.

This is why regulation is so important.

Banks are making money from savers by offering them low-interest returns on their investments and cashing in on borrowers by charging them extortionate rates on their debts.

There has to be a credible alternative to this outdated and quite frankly, unfair situation.

What is P2P Lending?

Peer-to-peer (P2P) offers exactly that, cutting out the banks to allow savers to lend their money directly to consumers and earn good interest rates in return.

The drawback?

There are a number of charlatans out there that have tried to cash in on this burgeoning and attractive sector.

As a result, consumers have had to rely on the promises of the individual providers that their money will be safe in the event of a 'black swan' – a high impact, unforeseen incident such as the financial crisis.

While UK P2P lending has recently exceeded the £1bn (€1.2bn, $1.7bn) mark, there are many savers who still deem the risks associated with the sector to be too high. However, this is set to change now the sector has come under regulation.

The FCA's framework for P2P now requires measures such as contingency plans in the event of the business model failing, a minimum amount of money in the bank to ensure the platform's solvency and that P2P players keep their money entirely separate from their savers'.

These requirements are anticipated to seed significant growth within the sector, with Liberum predicting that the sector will boom from £930m to £45bn in the next 5-10 years.

Consumer confidence will be critical to this.

While regulation may provide a strong platform from which the sector can grow, it is now up to the individual P2P players to step up to the plate and address consumer concerns with the industry.

Security

Security is without doubt the most important issue facing the sector; without this, P2P will never be wholeheartedly welcomed by UK savers.

At RateSetter, thanks to our £3.7m Provision Fund, none of our savers have ever lost a penny.

The key point is that savers must receive immediate compensation in the event of a black swan.

Yes, there will be P2P players who adjust their business models to adhere to regulation, but when it all goes wrong and customers are left waiting until assets are liquidised or shareholder funds are accessed simply isn't good enough.

And as the sector grows, naturally so too will the number of borrower defaults, so the industry must be armed with sufficient measures to protect its savers.

Regulation is a welcome and positive addition to the P2P industry; it will undoubtedly introduce P2P to new audiences and give many consumers the confidence to look towards a genuine alternative to banks in order to make their money work harder.

But we as a sector cannot rest on our laurels. If we work together to bring a wider understanding of P2P to consumers and build vehicles to sufficiently protect their investments, then there is no reason why P2P cannot become a formidable opponent to the banking sector.

FCA regulation does indeed have the scope to bring P2P to the mainstream. Now it's up to the sector itself to make it an irresistible alternative to traditional financial institutions.

Rhydian Lewis is the CEO of RateSetter