P2P regulation both welcome and necessary
One of the charges often made against the traditional banks is their collective unwillingness or inability to provide access to funding for smaller businesses and start-ups. And, in spite of the historically low interest rates, the banks have also failed to offer savers an attractive return on their investments or to provide a bridge between willing lenders and borrowers across the corporate market place.
This has left the door wide open to competition from clever entrepreneurs and ambitious non-banking institutions, who have been quick to seize the opportunity and bring innovation to this previously protected world. These unique conditions have sparked a veritable revolution, with a host of new unfamiliar financial vehicles and products to fill the gap – some are designed to appeal to individuals and others to businesses looking to secure a decent return for their clients. This burst of activity has meant small companies and start-ups suddenly have access to much needed funds with which to support their growth aspirations.
The majority of the new businesses are internet based, most fall outside of the regulatory bodies and nearly all require a crash course in the latest ‘market speak’. ‘Peer to peer’ (P2P) lending and ‘crowdfunding’ are two examples of developments in alternative finance that actually do fall within the remit of the regulators – significantly, the description ‘bank’ is nowhere to be seen. The most important factor though, is that the financial markets are working again, in a new and innovative fashion.
The problem that investors and borrowers have whilst the revolution is under way, is distinguishing between the various options available and identifying which is most suitable for their individual circumstances. It is not only about the promised returns, but also about risk and security of the underlying investment or loan. The regulators are trying to keep pace with developments and, with reference to crowdfunding, the Financial Conduct Authority (FCA) has found that only two out of the five main types of crowdfunding – loan based and investment based- are subject to regulation. On its official website the FCA has offered the sage advice that “You should only invest money you can afford to lose”.
However, as an FCA regulated Peer to Peer lending platform, the directors and shareholders at Proplend welcome regulation as being only a good thing. If the market is to survive and evolve beyond a small window of transient opportunity, it will need responsibility and transparency in equal measure.
The market will require that platforms must hold minimum levels of capital of £20,000 (increasing to £50,000 on 31st March 2017) or a percentage calculated on the outstanding loan amount of the platform. In addition, in case of platform failure, programmes must be created to protect investors/lenders. Clients’ money will also have to be ring-fenced in special accounts – Proplend holds client funds in segregated accounts with Barclays Bank – and dispute procedures introduced.
We welcome such measures as a sign of growing maturity that can only benefit the UK’s increasingly exciting financial market place. All hail the revolution.