THE “peer-to-peer” lenders that claim to offer an alternative to the established high street names are set to challenge the banking mainstream after it emerged that they are to be formally regulated.
Peer-to-peer (P2P) services including Zopa and RateSetter will be fully regulated from April 2014, it was announced yesterday, providing extra security for the growing army of consumers using the sites to bypass traditional lenders.
Regulation would boost the credibility of the sector, according to experts, but there is also the risk it could result in less attractive rates for savers and borrowers.
The popularity of P2P (also known as social lending) has soared since the start of the financial crisis, with consumers lending and borrowing some £400 million through the three main firms.
The firms cut out the middleman – the banks – by allowing savers wanting better cash returns than offered on the high street to lend money to borrowers seeking cheaper loan terms.
Savers can specify the interest rate at which they want to lend, the amount, the interest they want and the degree of risk they are happy to take.
The Treasury has confirmed that the government intends to include regulation of the firms in the upcoming Financial Services Bill. Consultation will begin in January with a view to P2P lending being a regulated activity by April 2014, at the new Financial Conduct Authority (taking over from the Financial Services Authority in April 2013).
The news comes months after the Bank of England tipped the sector to become a credible rival to mainstream banks. P2P lenders claimed regulation would take them a big step closer to that goal.
Rhydian Lewis, chief executive at RateSetter.com, said: “Government has recognised the importance of peer-to-peer finance for consumers, and understood our potential to rival mainstream banking in the future.”
RateSetter is one of three main P2Ps, with market leader Zopa and consumer-to-business specialist Funding Circle.
Savers using the sites can currently secure interest rates far higher than those offered on the high street. The average return at Zopa, which passed the £250m lending milestone last month, is currently 5.5 per cent, but those lending to riskier borrowers can make 9 per cent or more.
However, the fact that they are not currently regulated means that in the event of a firm going bust, consumers do not have recourse to the Financial Services Compensation Scheme, which protects cash up to £85,000. Nor can complaints be taken to the Financial Ombudsman Service. That is likely to change with regulation, but the details have to be set.
P2P lenders self-regulate with the P2P Finance Association and have their own protection, such as ensuring lenders have money spread across multiple borrowers.
The P2P Finance Association claimed regulation would be a “watershed moment” for the movement. The P2P Finance Association has provided clarity and protection for consumers and businesses, but we have always strongly believed that introducing proportionate regulation was necessary to enable the sector to continue to flourish.”
Andrew Hagger, personal finance expert at Moneycomms.co.uk, said regulation would give greater credibility. “No doubt the regulator will look closely at the way the P2P providers mitigate the risk for customers and this is good for both providers and consumers,” he said.
There is a danger that the costs of regulation could impact on the rates that P2P lenders can offer, he added. “It could create a cost burden that dulls the current P2P edge over the banks,” said Hagger.