Financial Regulator Gives B- Grade to P2P Lending

The Financial Conduct Authority published its first report since it took over regulation of P2P lending.

It visited five of the larger P2P lending websites to “assess the governance, management and controls of five market participants to understand the risk that the sector poses to our statutory objectives.”

It reported that:

“Overall, we were encouraged by what we found during our visits, including a good understanding of credit risk and robust anti-money laundering and Know Your Customer checks. The firms visited all placed an emphasis on ensuring that consumers interested in lending to individuals or businesses had access to clear information, which would allow them to assess the risk and understand who will ultimately borrow the money.”

P2P lending in the UK has got off to a fantastic start, with the majority of the companies involved falling over themselves to be transparent, and to ensure they have the skills and cash they need to make it a success for them, their borrowers and their lenders.

It's not all going swimmingly

However, the regulator has not always been satisfied with how P2P lending companies are marketing their products.

The regulator reports that most P2P lending services have been understating risks, cherry-picked information and downplaying warnings.

In particular, some P2P lending companies had been giving the impression that they are like savings accounts, which gives potential customers the impression they can't lose money.

Plus, they hadn't been properly explaining how P2P lending is taxed. (See our guide How is Peer-to-Peer Lending Taxed.)

The regulator added that it contacted each firm about their weaknesses and that: “All the firms we wrote to were keen to comply and most made the required changes with immediate effect.”

Overall, I think this is a B- from the regulator

The regulator concluded: “We recognise that it is still early but, at present, we see no need to change our regulatory approach…either to strengthen consumer protections or to relax the requirements that apply to firms.”

Thank goodness we're not in China, where nearly 300 P2P lending companies failed last year alone.