By Roger Aitken for Forbes
Campaign for Fair Finance (CFF) founder Dr Roger Gewolb has welcomed the intervention of the UK Financial Conduct Authority’s (FCA) new chief executive Andrew Bailey as an investigation gets underway into peer-to-peer (P2P) lending, a relatively new internet-based way of obtaining a loan. It comes amid concerns in the US and UK about how safe the sector is and protections afforded to consumers.
His comments and the recent intervention of the FCA and the UK’s Treasury Select Committee follow a UK media flurry driven by reports of a scandal involving Lending Club, a US-based P2P lending company and the world’s largest. It seems a world away since the US operator’s initial public offering (IPO) in late December 2014 at $15 a share that valued the then eight-year old company at $5.4 billion (bn).
Gewolb is now stepping up campaign efforts for greater consumer protection, oversight and transparency of this burgeoning industry, whilst helping it grow at the same time.
The P2P lending market in the UK grew to over £2.3bn in 2015 from £1.2bn of new lending in 2014 according to data sourced directly from P2P platform loan books and proprietary BondMason research. It has been predicted that while the rate of growth will slow, a further £1bn to £1.5bn will be added in 2016.
“We want crowdfunding and peer-to-peer lending to succeed,” states Gewolb, a British American financier and consumer protection advocate. “We need an alternative to the tired old banks, but they need better oversight without regulating or legislating them out of business.”
With peer-to-peer, a web-based P2P company (‘platform’) will match an investor with people and/or companies who want to borrow and the P2P promises to pay a higher return than a bank.
The way it basically works is that if an investor has some money to invest and the bank interest rates are at an all-time low – as they are right now – both the lender and borrower can effectively work together through the platform to bypass traditional banks and both parties benefit.
The borrower often gets the loan quicker and the lender earns more interest than depositing their extra cash in a bank account. That said, there are some issues.
“It’s potentially risky,” says Gewolb, who heads up the not-for-profit Campaign for Fair Finance and actively lobbies the UK finance industry and government to improve how customers are treated and ultimately to improve fairness throughout. “You’re effectively crowdfunding your savings, lending your money to complete strangers,” he points out.
One might do worse than listen to comments from Gewolb, a former merchant banker by profession, originally from Chicago but who has been based in London for many years. His CV is impressive, having advised the Bank of England and the UK Treasury on asset finance policy. Currently he is a member of an advisory group to the UK Law Commission, which is based at the Ministry of Justice.
In addition to being the chief founder of the UK non-prime motor finance industry and a UK consumer finance authority, he has interviewed the Archbishop of Canterbury on issues around fairness within the world of finance. As a financial commentator, he has also conducted his own interviews with other leading UK figures and politicians including former British Prime Minister Gordon Brown and Lord David Hunt.
But it’s not just the non-prime, financially challenged and the unemployed who really struggle to find credit, says Gewolb, but ordinary folk too.
Indeed, while it might be years – almost a decade, in fact – since the last financial crash, it’s worth noting that 43% of the British public still cannot find £300 (c.$390) for an unexpected emergency, according to the Money Advice Service, which offers a free and impartial advice service. Interestingly, says Gewolb, this almost identical to the same measure in the United States.
Treasury Select Committee Hearing
Turning to Andrew Bailey’s first grilling before the Treasury Select Committeeearlier this week on Wednesday 20 July, the new CEO of the FCA, a main UK financial regulatory body that operates independently of the government, said that he was actually concerned about the way peer-to-peer lending is sold to consumers. And, he believes lenders get very close to promising investors they will get their money back, plus the interest they have been promised.
However, this cannot in fact always be guaranteed in all instances as P2P lenders are not protected by the UK’s government-backed Financial Services Compensation Scheme (FSCS). Any funds lent through a P2P website are not covered by the FSCS, which by contrasts with safeguards traditional bank savers have for up to £75,000 (c.$100,000).
Furthermore, while a number of P2P platforms do provide comprehensive warnings about this deficiency to their lenders/investors, many are concerned that these are not fully heeded or understood.
Mr Bailey also even warned that he felt there were similarities in the way UK’s P2P lenders operate to those of Northern Rock, a British savings bank that crashed mightily and had to be bailed out by taxpayers’ money during the financial crash of 2008. One wonders if it could all happen again.
The FCA previously stated late this March that it was “keen to promote effective competition” in this market and were taking a “proportionate approach” to regulation. This, the regulator said, “recognizes the need for consumers to be adequately protected and have the information they need.”
Peer-to-Peer Track Record
Recently, other questions have been raised about how safe P2P lending actually is. Highlighting matters, Funding Knight, a UK P2P website platform that promised investors returns as high as 12% for lending money to small businesses, was rescued by investment firm GLI Finance earlier this July after falling into administration (a British form of ‘Chapter 11’). Hundreds of people had feared that they would lose all of their money when the company simply ran out of cash.
In the US, it was a scandal over P2P lending company and platform Lending Club, which is headquartered in San Francisco, that set the ball rolling for the latest investigation in the UK. Earlier this year, Lending Club experienced problems around difficulties in attracting investors.
The company’s board became concerned over French CEO and founder Renaud Laplanche’s disclosures, which resulted in a large stock price decline and Laplanche’s resignation this May. The provider claimed $15.98bn in loans had been originated through its platform up to 31 December 2015.
Stepping Up Campaign Efforts
Gewolb agrees that investors are often “not fully appreciating the risks” and is now stepping up his call for increased transparency, disclosure, independent oversight and consumer protection in the sector.
“Peer-to-peer is effectively lending your money to complete strangers in return for higher interest rates,” he says. “It’s all very tempting when you are offered a better return on your investment at a time when bank rates are at an all-time low. But what if it goes wrong…what if the P2P company and/or its borrowers cannot repay you?”
The financial entrepreneur and expert on non-prime lending adds: “P2P could turn out to be a clever innovation that gives the banks a run for their money. Certainly, we at CFF want the P2P lending industry to grow and prosper, as we desperately need complementary digital alternatives to traditional and challenger banks. But investors need to be fully aware of the potential risk factors – and they can be considerable.”
These companies are not banks with cash dispensers on the wall where you can access your cash at any time. As Gewolb puts it “they are in the risky loans market” and sometimes lending to people who the banks may have already turned down. And, as he says: “If these clients are too risky for the banks, are they safe enough for your money?”
Gewolb stresses vigorously too that: “The P2P platforms are clearly competing for bank deposits from the public, and yet they are running without anything near the strict supervision, transparency, independent oversight and protection that banks in the UK are subjected to as a matter of course.”
To worsen matters, P2P loans in the UK now also qualify as ISAs (a form of tax efficient wrapper) since changes announced in former Chancellor of the Exchequer George Osborne’s final Budget earlier this year. Here Gewolb is concerned that this sort of government blessing may lull some or even many investors into a false sense of security.
“As things stand, the P2P loans market is relatively untried, untested and not vigorously regulated. Who is looking out for the consumer if it all goes wrong?,” asks Gewolb. He has a point.
“That’s why I’m calling urgently for more transparency and oversight of this new industry and strong consumer protection, should the worst happen.”
In terms of “stepping up” the CFF’s initiatives directed towards the P2P industry, Gewolb said during a telephone interview that the next step involves getting all the various stakeholders together who are involved in the industry to make it work better and safer and, at the same time, not cast too heavy or costly a regulatory burden on this fledgling industry.
Dangers of Over Regulation
While Gewolb says he is “very pleased” that the Treasury Select Committee and now the FCA are investigating the peer-to-peer market and with Andrew Bailey’s comments to the Treasury Select Committee, he still expresses some caveats. In particular, the Chicago-born lawyer urges extreme caution in “over-regulating and over-legislating” the market.
The Campaign is further ramping up its dialogue with both the regulators and the industry players. “We are here to help,” explains Gewolb. “Whilst we want the industry to survive and thrive, we fear that to date there is not the requisite amount of transparency and independent oversight needed.”
“At the same time we are concerned that there could be over reaction by the regulators and the industry could be regulated out of sight,” argues the campaigner. As the Chinese proverb goes ‘Be careful what you wish for – You just might get it’.
First appeared at Forbes