The UK Peer to Peer Finance Association (P2PFA) has released a commissioned study on the economics of the peer to peer lending market in the UK. The independent assessment, provided by the economic consulting firm of Oxera, analysed the risks, costs and benefits of peer-to-peer lending and provided an objective account of how P2P business models work. The study focused specifically on the eight-member platforms of the P2PFA – each held to high standards of transparency and operation – which collectively comprise over seventy-five per cent of the UK market.
Reinder van Dijk, Partner from Oxera, called peer to peer lending a “real innovation” bringing benefits to both borrowers and investors;
“The existing regulatory regime in the UK has been successful in enabling the P2P market to develop to where it is today. As the sector continues to mature, regulation will need to evolve alongside it to ensure consumers continue to achieve the benefits made possible by this new model.”
According to the report;
- P2P lending has created additional competition and choice in the market for loans and investment;
- P2P lending provides new options for retail investors, opening up access to risk-and-return from an asset class of consumer and business loans with net returns of between 4% & 8%;
P2P lending platforms conduct credit-risk assessments using industry best practice and deliver outcomes consistent with those of traditional lenders;- P2P platforms are incentivised to manage credit risk well because borrower defaults result in the loss of ongoing servicing fees (which comprise a significant proportion of a platform’s income);
- The P2PFA member platforms provide a level of transparency which empowers investors to assess performance against expectations;
- P2P lending does not create systemic risk, and platforms are well-placed to weather a downturn in the credit cycle – borrower defaults would need to increase at least threefold to reduce average interest rates to investors below zero; and
- The current regulatory framework is proportionate and targeted, though opportunities to strengthen the regime exist in some areas.
- Most investors have a good understanding of the associated risk
P2PFA Chair Christine Farnish released a statement alongside the study;
‘This landmark study into the economics of P2P lending provides important insight into the state of the market in the United Kingdom, and also addresses concerns which some have expressed about the understanding of investors, the business models of platforms and the regulatory framework. The Report provides clear evidence on the robustness and resilience of the sector. We hope it provides a useful input to policy-makers and regulators. The Report emphasises the crucial importance of ensuring that retail investors are well-informed – particularly as the number of those participating expands – as well as making sure that platforms themselves undertake sound credit-risk management and adhere to high standards of business conduct. Whilst P2PFA member platforms are required to commit to unrivalled levels of transparency and robust operating principles, it is clear that the regulatory regime has scope for further development so as to ensure that exemplary levels of confidence can be maintained for this increasingly significant part of the alternative finance landscape.”
Nick Harding, CEO of Lending Works and a P2PFA member platform, said he was delighted the report recognized P2P lending as a transparent and fair investment alternative for consumers.
“It’s fantastic that such a credible review of the peer-to-peer lending industry has provided overwhelmingly support for the our products and businesses. It’s my belief that one of the most powerful aspects of peer-to-peer lending is the competition that it has brought to the market, and this report validates that viewpoint.”
Kevin Caley, founder and Chairman of ThinCats – another P2PFA member, echoed the positive sentiments. Caley said he hoped the findings of the report would contribute to a groundswell of support for a sector that is now well and truly coming of age.
“For all its success, there remain number of challenges that the industry and its regulators need to address, and this report captures the sincere effort made by the eight members of the P2PFA to overcome these challenges, and cement the innovative lending model as a mainstream investment proposition in the UK. In so doing, the Oxera Report provides a candid view of the economic impact of peer-to-peer lending, the risks associated with investing, the extent to which investors are aware of these risks, and goes some way to debunk many of the myths and misunderstandings that have stuck to the sector over the years,” stated Caley.
“It highlights the many innovative approaches to managing risk and return, and varying levels of intermediation in the platform design.
The crowdfunding and peer to peer lending industry is in the midst of a regulatory review. The Financial Conduct Authority presented a report, along with a call for comments, this past July. At that time, Farnish stated;
“Peer-to-peer lending platforms have a proud record of embracing regulation. The Association’s platforms are committed to the highest standards of business practice … The challenge for this Review will be to make sure that the regulatory regime develops in a way that focuses on the risks to consumers, and any risks to the wider financial system, of peer-to-peer lending. If platforms are to continue to be able to compete with powerful, large incumbents, then the regulator must strike the right balance and ensure that regulation is proportionate to the risks posed’.”
As with any large bureaucratic agency, there is a diversity of opinions as to what needs to be changed and what does not. The P2PFA is being proactive in its positioning by providing an independent “evidence-based report” to buttress its position. The 76-page report, embedded below, also includes an assessment of potential market failures – derived in part from questions raised by Andrew Tyrie MP, Chairman of the Treasury Committee. Now the question remains as to what, exactly, the FCA will do with this report.
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