Peer-To-Peer Lenders May Need To Comply With Banking Regulations

It was reported that alternative financiers may need to conform to the same regulations that banks have to adhere to.

In a conversation with the Treasury Select Committee, the chairman of the FCA (Financial Conduct Authority), John Griffith-Jones said that due to the fact that peer-to-peer lending is a growing business, it will have to behave more like banks and will need to comply with the same regulations.

Griffith-Jones accentuates that this is a significant move in the right direction as risk needs to be effectively dealt with. “While one wants to encourage alternative sources of lending, one doesn’t want to open up risk,” Griffith-Jones says.

“Sooner or later these platforms will tend to offer packages rather than lending to individuals. At that point, they become awfully like a bank, and I think it’s very important for the regulator not to allow regulatory arbitrage in the system,” he added.

CityAM also made mention how the FCA chairman is on the ball on this matter, which is continuously being reviewed, but is currently questioning when the right time to intervene would be, as peer-to-peer lending gains popularity.

Since the financial crisis, the alternative financing method has picked up the slack of trust that was lost from the traditional lenders who were not allowed to lend huge amounts.

At the moment, peer-to-peer lending sites are facilitating transactions between a single borrower and a single lender, as CityAM explains. However, the Financial Conduct Authority is expecting more of a move towards investment in a portfolio style where lenders lend to more than one borrower and pool their risk.

In the current situation, peer-to-peer lenders only account for a small amount of the UK’s lending and are regulated but not at the same level as retail banks, although this could be subject to change in the near future.

Most firms with some sort of peer-to-peer or crowdfunding activity have what is known as an ‘interim’ status licence issued by the FCA and have to complete a full licence application which has already started and can take up to twelve months to be approved.

What is interesting is that when the final applicant has completed and submitted their full licence application, what will the FCA do next should they want to enforce or tighten rules with more stringent changes before they consider and re-open a window for new applicants?

This sector is gaining a fast momentum and the FCA are very busy indeed!