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Why increasing regulation of peer-to-peer lending may be a good thing

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Excitement around peer-to-peer lending has reached fever-pitch with would-be lenders and borrowers growing at prolific rates. 

As a result the Financial Conduct Authority is set to introduce measures to regulate the sector, causing a reaction by some commentators and platforms who feel that this approach could be heavy-handed at best. Yet, as someone active in the sector, I can’t help but feel that the FCA’s intervention should be welcomed.

While the funding gap left by banks retrenching from SMEs and medium-sized businesses definitely needs plugging, it is important that lenders and borrowers approach the peer-to-peer lending sector with due care and attention. 

The covenant strength, or likelihood of repayment, for different loans varies widely and so it is a positive that the FCA is encouraging caution and a certain degree of investment knowledge before enabling individuals to take the plunge and snap up loans.

I would also urge both borrowers and lenders to think carefully when selecting the platform on which to place their business or their money.  It is vital that the investors behind chosen platforms can differentiate between money lent to a business with a solid business plan, operating history and management, (and therefore stronger likelihood of success), versus a riskier counterpart where there is more danger than opportunity.

This is ultimately determined by two key things: how well qualified the platform operator is in the sector to be able to make the distinction; and the quality of the due diligence being performed on the lending opportunity. 

While “boring” due diligence is a necessary evil, the big advantage of the peer-to-peer sector is that it can still perform this but in a faster, more expedient way than the banks whose compliance systems are often slow and cumbersome.

An interesting feature of some sites is the ‘crowd’ due diligence, which can be extremely effective. Such speed is critical for ambitious, loan-hungry companies seeking to expand their business and grow their product portfolios. The average time most new loans sit on platforms like ours has dropped from weeks to days – or even hours in some cases. 

The introduction of the FCA’s regulations on 1 April should not prevent solid businesses from securing finance, rather the regulations should discourage a herd mentality in which lenders and borrowers are blind to potential risks. Like any market, once it gets “hot” there can be the looming risk of trouble.

I say all of this because the last thing that small businesses or the funding sector need is for one of these platforms to “fall over” or a loan to “go bad”. The associated reputational damage would simply pour more cold water over the sector than any of the regulations planned by the FCA.

No one wants regulation for regulations sake, but the peer-to-peer sector needs its checks and balances just like any other. Thus it will become a true force for good.and, in my view, a permanent part of the small business lending market.

Richard Martin, director, Central Union Partners

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