In an interview today on BBC, Lord Adair Turner, former Chair of the FSA (predecessor to the FCA), shared his opinion on banking and the financial industry in general, including a discussion on the burgeoning peer to peer lending sector. Lord Turner, it appears, is not much of a fan.
Turner, a former banker, consultant and author, is of the belief that incredible losses are just around the corner for investors in P2P loans. He did not mince his words, stating;
“The losses which will emerge from peer-to-peer lending over the next five to 10 years will make the bankers look like lending geniuses.”
Hyperbole aside, making bankers from the last decade look like geniuses will be a tall task indeed.
Turner states the banking system, in general, is in a considerably safer position than on the eve of the financial crises, but he believes the fundamental problem is both public and private debt. “We are stuck in a very deep economic malaise and we need radical policies to get out of it, said Turner.”
This “chronic malaise” is something that Turner is uncertain if there is a clear path of escape. But apparently he believes traditional banking loan underwriting is more effective than highly data driven P2P / marketplace lending loans.
“You cannot lend money to small and medium sized enterprises without someone doing good credit underwriting,” commented Turner regarding P2P lending.
As one would expect, P2P industry leaders disagree. Rather vehemently.
Christine Farnish, spokesperson and leader of the UK Peer to Peer Finance Association (P2PFA) corrected Lord Turner;
“Anyone who has followed our industry closely will see that this morning’s comments fly in the face of the evidence. Since the industry began, default on loans are low, measuring between 2-3 per cent. We only lend to creditworthy consumers and established small and medium-sized enterprises. Strict credit underwriting rules apply to all our members and this should not be confused with higher risk forms of crowdfunding or lending to sub-prime customers.
All members of the P2PFA operate with high standards of transparency and business conduct. This includes publishing their full loan books on their websites and providing clear information on all fees and charges to both investors and borrowers. I would challenge anyone to find this level of transparency in any other part of the financial services market.
Our most recent figures show that the P2PFA has collectively lent more than £4.4 billion as an industry. This is built on strong operating principles as an industry and our ability to challenge the existing ways of lending and borrowing.”
Louise Beaumont, of GLI Finance and champion of all things supporting small enterprise, defended the service that online lenders have provided for the critical SME sector of the UK economy. But Beaumont also cautioned on industry growing pains.
“The alternative finance industry has played a vital role in delivering finance crucial to SMEs through a period when traditional banks left their long-suffering customers out to dry. The dual forces of market retrenchment and the slashing of existing credit facilities put the very lifeblood of UK plc at risk with only entrepreneurial drive and innovation protecting our economy from irreparable damage.
As in any nascent industry, this explosion has not occurred without casualties and we’ve seen instances of mispriced risk, poor governance and in some cases outright fraud. More consistent regulation is undoubtedly needed and the industry has long campaigned for this making significant strides in its implementation. Quite rightly standards are being driven up and this sector shakeout will leave only the most serious and sophisticated players.
It’s vital regulation keeps pace with the sectors’ development to protect all its stakeholders and the industry is working hard with the FCA to achieve this. Only through this process can we overcome the structural and attitudinal barriers that exist to create a credit ecosystem that is complementary to traditional banking and truly supports economic growth.”
Lord Turner is challenging today’s orthodoxy which attests to the fact that updated digital practices can improve much of what has beleaguered traditional financial firms. The empirical data generated to date by P2PFA members clearly contradicts Lord Turner’s perspective. Perhaps Lord Turner chooses not to let the facts get in his way?