Borrowers and their intermediaries now no longer have to be at the mercy of traditional lenders.  The disruptive Peer-to-Peer (P2P) industry is proving to be formidable alternatives to high street banks and more traditional financial services players.  

Peer to Peer lender providers form a bridge between individual lenders (or investors) and individual or business borrowers.  There are four sectors within this market:
•    Consumer lending (Zopa and Ratesetter dominate this market)
•    Business lending (Funding Circle is the leading player)
•    Property lending (Assetz Capital, Wellesley and LendInvest are the leaders); and
•    Invoice Finance (Market Invoice and Platform Black are the leaders)

In one of the most comprehensive research projects of its kind into this sector, Nesta and University of Cambridge found that the UK alternative finance market has provided over £1 billion worth of business finance to over 7000 SMEs as at the end of 2014, equivalent to 2.4 per cent  of cross national bank lending to SMEs based on Bank of England 2013 baseline figures.  If current growth (288 per cent increase between 2013 and 2014) rate continues, this market could reach £4.4 billion by the end of this year.

Intermediaries can no longer ignore this sector, especially for their clients looking to finance their business or property deals.  Despite surging growth, this market is still at its infancy, offering huge potential for intermediaries that carefully position themselves at this early stage in the cycle.  The right strategy could yield much higher returns, business diversity and a growing market share.

Many still however view this market with caution, either because of lack of knowledge or the perceived risks involved in venturing into this sector.  SMEs are most fearful about data security, lack of regulation, perceived high interest rates and longevity of the platforms.  Investors are cautious about the perceived high-risk nature of P2P lending.

The newly introduced regulations for the P2P sector will go a long way to allay fears.  On 1 April 2014, the Financial Conduct Authority (FCA) introduced bespoke regulations designed to bar unscrupulous players (as all firms will need to be approved before they are allowed to operate) and hold the platforms to a much higher standards to ensure investor and borrower are protected.

Platforms already operating before April 2014 would have required an interim permission  (or approval from FCA) to continue trading.  These platforms will need to go through full authorisation at some point this year.   Failing this stage will mean they can no longer continue any credit related activities.  

Any platform launching starting after April 2014, needs to go through full FCA authorizauthorisation before they can conduct any credit related activities.  Platforms must disclose their regulated status and intermediaries and borrowers should confirm that they are dealing with “legal” platforms.  You can also confirm their status by checking the Financial Services or Consumer Credit Registers maintained by the FCA.

10 Key features of the regulations:
1.    They have to hold a minimum or £20,000 (increasing to £50,000) of capital aside to deal with platform failures.
2.    They must have a plan for the orderly wind down of the platform if they fail.
3.    Platforms are required to have robust systems and controls and a competent and ethical Board and senior management.
4.    Comprehensive staff training plans will need to be in place.
5.    Financial promotions are strictly regulated, ensuring they are fair, clear and not misleading strictly govern financial promotions.
6.    The platforms have to guard against money laundering and fraud.
7.    Client money must be handled in a responsible manner.
8.    Full disclosure is required to ensure transparency and adequate information to allow investors to make an investment decision.
9.    Platforms will have to provide reports to the FCA and their clients.
10.    There are strict standards and timelines within which complaints must be resolved.

With the advent of the regulations, intermediaries, borrowers and investors alike can venture into this sector with confidence, provided they carry out their due diligence and choose the right platform for their needs.

No doubt there will be many questions that need to be answered before some players get the confidence to venture into this sector.  Please email [email protected] to get these questions answered or learn more about how best to enter into this sector.