News Article

Bank Lending

What happened to peer-to-peer lending?

By CreditMan Friday, December 6, 2013

Despite assumption that the Chancellor would discuss crowd-funded (or peer-to-peer) lending in the Autumn Budget Statement, it would seem this was not to be. Why has he failed to pick up on this? That’s anybody’s guess, but even if this notion was put into practice and peer-to-peer lending is to be considered for inclusion in a tax free ISA, before going full-steam-ahead, the financial services industry needs to think carefully about the model of lending they are asking the relatively unsophisticated individual consumer investors to enter.

The regulator, (the FCA), has suggested it would regulate the market from next April thereby providing the green light to this relatively small and niche corner of the market to grow. But credit risk is not child's play and pricing correctly for the long term has taxed experts’ minds and has yielded limited success. Crowd-sourced lending is by its nature, a market; markets are good at discovering the price of commodity items which are easily transferable, be that company shares or bushels of corn. Loans to individuals and small companies are not in themselves a commodity. The loans are provided to individuals and small companies that differ widely in ability to repay and also in terms of how they might react in an economic downturn.

Large financial institutions can treat pools of loans as a commodity but only with the backing of robust and comprehensive data and analysis. Sloppy underwriting and inaccurate information can quickly catch even relatively large well capitalised investors out (e.g. think Sub-prime mortgage backed securitisations). To expect individuals to compete with volume players is unrealistic - they will get their fingers burned to the detriment of the industry and possibly the economy. On the other hand if the crowd-funding company is taking on the credit risk it needs to be capitalised like a bank, which will slow its growth and reduce its returns… and lessen its ability to have a material impact on the economy as Mr Osborne may be hoping it will. Will it happen? Let’s watch this space.

Mark Somers, Technical Director at 4most Europe: (