Rt. Hon. Andrew Tyrie, M.P.,
Chairman: Treasury Select Committee,
House of Commons,
LONDON SW1A 0AA

2 June 2016

Dear Mr Tyrie,

I welcome the Treasury Select Committee’s interest in the regulatory approach to risks and opportunities represented by the alternative finance sector, further to your letter of 1 June to the Financial Conduct Authority and the Prudential Regulation Authority. Ensuring that there is an effective and efficient regulatory environment and a process for informing consumers is a priority for the Peer-to-Peer Finance Association.

The alternative finance sector – incorporating, amongst others, peer-to-peer lending and crowdfunding – does, as you acknowledge, bring opportunities as well as risks. It is important that consumers are able easily to differentiate between the various levels of risk in the multitude of alternative finance investments and make informed decisions which reflect their own preferred exposure: for example, an equity-based crowdfunding product for a start-up enterprise carries a very significantly-greater level of risk compared with most peer-to-peer lending products. In consequence, there are different regulatory regimes in operation between peer-to-peer lending and crowdfunding platforms, reflecting these divergent risk profiles.

Peer-to-peer lending has delivered a number of useful innovations in customer service and credit risk management, good value products, as well as cost and product transparency. It has also brought much needed competition to the retail banking market, and opened up this form of loans to retail investors, who can now enjoy directly the returns provided by these assets; previously, this was the exclusive domain of financial institutions.

Peer-to-peer lending platforms have embraced the need for an effective, risk-based regulatory regime that protects consumers. From the outset, we were pro-active in lobbying for proportionate regulation to provide an appropriate level of consumer protection, and have been regulated by the Financial Conduct Authority since 2014. Peer-to-peer lending platforms are fully regulated: for investors, in the same way as other investment managers, and for borrowers, in the same way as banks. We look forward to the conclusion of the appropriately rigorous Financial Conduct Authority authorisation process before too long.

We recognise that a process of familiarisation for consumers is an essential part of the long-term future of peer-to-peer lending. Individual platforms should be responsible for ensuring that consumers are cognisant of the risks involved in their products. The Peer-to-Peer Finance Association requires member platforms, through our operating principles, to meet high standards, not least in terms of levels of transparency and consumer education. Platform websites are audited frequently, and we provide feedback. All members are required to publish in full the details of their loan books to ensure that investors are able to hold platforms to account on credit assessment.

I note your observation in the press notice accompanying your letter that ‘greater regulation is not necessarily the answer’. I agree that there are dangers of over-regulation which could result in the effective exclusion of retail investors, defeating one of the key features of peer-to-peer lending

where people can lend to other people and businesses efficiently and directly. It is critical, therefore, that the regulatory regime strikes the right balance between protecting consumers and enabling competition to stimulate innovation.

Ultimately, platforms exist only because they create value to consumers on both sides of the platform: this addresses the issue of financial inclusion and competition in the banking sector. Investors are able to earn stable, predictable returns that outperform other investment products, whilst borrowers can access fast and flexible finance.

The opportunities which alternative finance offers to the economy could be undermined by platforms or products which do not embrace the need to value quality and long-term consumer confidence over short-term growth.

We remain committed to working pro-actively with the Government and regulators to ensure that the regulatory framework for peer-to-peer lending is fit-for-purpose, enabling consumers to benefit from the choice of innovative, good value investment products.

Should it prove helpful, the Association would welcome the opportunity to meet with you or your Committee to discuss the matters which I have raised in this letter, or any of those which arise from your letter of 1 June.

I hope this is helpful. Yours Sincerely,

Christine Farnish

Independent Chair: Peer-to-Peer Finance Association

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Please click the below link for the pdf letter from the P2PFA to Andrew Tyrie MP.

160602 – letter to Andrew Tyrie MP (on TSC questions)