Peer-to-peer lenders, regulation and small businesses

Adam Tavener looks at the impact of regulation on peer-to-peer lenders and why it shouldn't be seen as detrimental to innovation.

The regulation facing peer-to-peer lenders may not be a bad thing

The regulation facing peer-to-peer lenders may not be a bad thing

I have been nothing if not consistent in my view of the likely path peer-to-peer platforms would take in the light of increasing regulatory interest and some high-profile questioning of their particular business model. It is tempting to take an entirely negative view of the effect of ‘full fat’ regulation on any particular business sector, and it’s true, the rules can appear poorly thought through, unnecessarily burdensome on both parties, and very much a cold dead hand snuffing out innovation and creativity.

I would counter this with a couple of wins, however. Critically to peer-peer-peer platforms, regulation undoubtedly increases consumer confidence. While those of us who live with it on a daily basis get used to the language and treat it a bit like the weather; sometimes pleasant, sometimes less so, the average retail investor does recognise that, or at least believes that, a regulated business carries an implicit stamp of approval, as if the government itself has endorsed the proposition. This is very helpful when building a base of retail investors, something all peer-to-peer platforms need to do, and thus a ‘brand alignment’ with the FCA may be no bad thing.

The next is a more general circumstantial ‘get’. Rulebooks, solvency requirements, transparency et al do absolutely drive up minimum standards for those already in play, but they also have the effect of becoming a significant barrier to entry for new propositions wishing to compete with the established players. With all the hundreds of millions invested in peer-to-peer businesses by their backing shareholders this would seem to be a welcome aspect of regulation, serving, as it does, to make it that bit more difficult for new boys to come along and start eating your expensively-won lunch.

Protecting the value of big brands

In the same vein I believe that not only is it the only way forward for the industry, but will significantly protect the value of the big brands over the coming years. For example, my own business has been regulated since regulation began. Over the years the successive regimes have become tougher and more powerful. Although at times painful, the result has been a far higher level of consumer confidence in products such as our own pension-led funding proposal for SME owners, since they understand that we operate with permissions conferred not just by the FCA but also by HMRC. This comfort is an important factor in helping individuals make significant decisions, and its commercial usefulness should not be underestimated. The pre-regulation environment was, if memory serves, an absolutely appalling mess of greedy deception, mis-selling and consumer detriment. It is reasonable to speculate that if rules hadn’t been introduced when they were, the whole savings culture in the UK would have very quickly resembled that of Albania, with ‘under the mattress’ being the only place people really felt safe in placing their money.

So, some upfront pain is involved, and yes, a business needs to fully embrace regulation as part of its internal culture, not just as an exercise in compliance. Some simple hints at getting the culture right could be as straightforward as telling your teams that if it doesn’t feel right it probably isn’t, and to think at all times, ‘is this treating the customer fairly? Do they really understand?’.

Once a business adopts a compliance culture as an essential part of its overall internal and external language it has effectively stopped fighting against the regime and instead adopted the ethic that the regulator wants from it, hopefully starting at board level. Entrepreneurial directors with nimble, agile minds will then very quickly adapt to the new environment and the business opportunities and reputational safeguards that this confers. As mentioned previously, it is my firm belief that full regulation is both an opportunity, but more importantly, a vital component in ensuring that peer-to-peer has a real future and realises its full and rather wonderful potential in the sphere of UK retail financial services.

Investors Compensation Scheme

I have one important caveat, however. It should not be denied that investors have a shared responsibility for the decisions they make, assuming that they have not been subject to misrepresentation or deception. One very unsuccessful aspect of the broader regulation of retail financial services has been the Investors Compensation Scheme ICS). The banking sector, for instance, uses the phrase ‘moral hazard’ to describe a circumstance where an organisation is encouraged to behave recklessly since the consequences of its actions would be ameliorated by some kind of safety net. Therefore, prior to the banking crash, the Bank of England described itself as the lender of last resort, and was pretty tough on terms of assistance.

For retail investors, however, the existence of the ICS, the Financial Ombudsman service and the rest has led to a ‘no loss’ mind-set which can make savers and investors less cautious than they should be with their decision making. This has been exacerbated by the growth of the national claims culture where any loss you have taken must be someone else’s fault, no matter that your original decision was based on greed and the promises of wildly unrealistic returns.

This ‘no loss’ mindset is deeply unhealthy for any industry as investor awareness and caution is by far the best protection against the many cons and scams that proliferate. I would go so far as to say the ICS has allowed scams to flourish as people become lazy and unwary. Surely not what was originally intended, and definitely not a regime that should be foisted on the P2P sector, as it always ends up with the honest players picking up the tab for the dishonest. And, since the cost is always passed on to the customer, the cautious and diligent investor is paying for the lack of care shown by the unwary.

Overall I think that peer-to-peer really does understand and embrace the benefits of proper, ‘grown up’ regulation and has an opportunity to blend its populist ‘little guy’ appeal with best practice to ensure its reputation for transparency and good outcomes persists. A bright future, I’d say.

Adam Tavener is chairman of Alternative Business Funding and Clifton Asset Management.

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