Posted on: 22 May 2015

What are the risks?

Since peer to peer lending became regulated by the FCA in April 2014, the risks involved have come down. However, each platform has its own leadership team, terms and conditions, investor and borrower vetting processes, lending criteria and much more. So research is vital if you want to minimise your exposure to the risks.

The biggest risk perceived by P2P lenders is that the platform goes bust. FCA regulation means that if a site closes repayments from business borrowers on existing loans will continue. This is because P2P sites have to have insurance to pay for a third party collection agency.

For P2P borrowers, it’s important to carefully work out what fees are applicable to the loan you’re applying for. Transparency of the costs associated with raising money through a P2P platform is getting better, but that doesn’t mean that you’re guaranteed to avoid any nasty surprises. So do the maths once, twice and three times, then check it thrice too, before committing.

The very fact that P2P lending takes place online can potentially blur the lines when it comes to legal jurisdiction. If people from lots of different countries lend you money through your chosen P2P platform, they may have different laws for collecting their debts. The European Commission is still finding its way on this topic.

Finally, as with any borrowing, if security is taken (usually in the form of property, debentures or personal guarantees), these may be at risk if you don’t keep up your repayments.

How is P2P lending regulated and monitored?

Since 1 April 2014 the Financial Conduct Authority (FCA) has regulated the P2P lending market. The FCA has set out a series of standards to which all P2P platforms should now comply, however most are aimed at protecting investors, not borrowers. “The regulation isn’t particularly onerous either,” says Ian Gurney from P2Pmoney.co.uk. To read an unofficial outline of the FCA’s regulatory requirements of the industry,click here.

Unusually, however, regulation has been welcomed by the P2P sector as a whole. “Most industries shy away from regulation,” says Ian Gurney, “but the established platforms understood that regulation would make P2P lending more popular because the public would see it as a more mature alternative to bank finance.”

With just a year of regulation under its belt, there’s still a long way to go before it is water tight, as Gillian Roche-Saunders from Bovill Financial Services Regulatory Consultants explains: “Since the FCA took over regulation of the industry only 12 months ago, the regulator and the existing P2P lending platforms are still finding their feet as to how the Consumer Credit rules apply.” The authorisation process is a long and complicated one, so the FCA has given each platform a date between about June and October 2015 to complete the process. “The Consumer Credit Register authorisation process is the FCA’s way of filtering out those platforms that should not have a place in the market,” continues Gillian. “The process of giving them full authorisation could take six months and there’s likely to be little information available from the FCA during that process.”

For now, small business borrowers shouldn’t necessarily be concerned about a platform that isn’t fully authorised. They can take comfort from the fact that there haven’t been any high profile problems in P2P business lending in general so far. “While the market is still young, each platform is working very hard to get the right loans for the right businesses,” explains Gillian Roche-Saunders, “because the platform’s reputation is at stake. They are being careful to offer the right agreements to protect their investors as much as themselves.”

“The authorisation process through which these platforms have to go to become authorised is rigorous,” says Gillian Roche-Saunders. “The platform needs to make a large and experienced team available, who themselves are scrutinised during the process. So looking at the background of the teams operating the platform will give you a good idea of the quality of that platform overall, and its likelihood of being given full permissions at some point this year.”

However, as competition increases, and there are more entrants into the market, the standards could start to drop. So it’s always worth keeping an eye on the media and finding out about platforms mysteriously disappearing or researching whether P2P lenders or borrowers are dissatisfied with a platform.

So far there haven’t been any public announcements of FCA enforcement action against P2P platforms, but they did recently publish a review of crowdfunding where failings such as deleting negative comments on pitch forums and making the risks of borrowing insufficiently clear were identified.

In addition to regulation from the FCA, the Peer 2 Peer Finance Association (P2PFA) is a trade body originally set up by Zopa, RateSetter and FundingCircle to promote high standards of conduct and consumer protection in the sector. It now has nine members and Christine Farnish CBE is its independent chair. “P2PFA members adhere to a code of conduct which encourages best practice for consumers,” says Christine. “This means investors have more confidence to use P2PFA member platforms to fund loans. The credit checks run by the member platforms on business borrowers are thorough and the pricing of the loan will be more accurate to the risk level it represents.”

View our full Peer to Peer Lending Guide or browse through the content below to learn more.

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