P2P lending

Peer-to-peer (P2P) or marketplace lending saw a meteoric rise in 2015 and helped raise awareness of the concept of financial technology (fintech) in the minds of investors and financial industry watchers. It’s not hard to see why. The innovative concept of P2P lending has been touted as posing a major threat to banks due to the greater accessibility to loans at more competitive interest rates.

More recently, however, the picture hasn’t been quite so rosy for the P2P lending industry. At the end of 2015 in China, there were 2,600 P2P lenders, up from just 880 in January 2014. However, over the course of 2015 and into 2016, nearly 1,000 Chinese online lenders went out of business. One of the highest profile shutdowns was a P2P lending platform that was found to be fraudulent, leading to the arrest of 21 company executives in February 2016. According to reports, over 95 percent of funding projects listed on the platform were found to be fake, resulting in $7.6 billion stolen from roughly 900,000 investors.

Another breaking story was the news that the founder and CEO of a major U.S. P2P lender had resigned in May 2016 after an internal review found that an institutional lender had been sold loans that did not meet the specified criteria. While this was hardly a case of major fraud, the resignation caused many industry observers to express concern over the sustainability of P2P lending.

Is it time for regulators to take a closer look at marketplace lending?

Tale of Three Countries

Let’s take a look at the approaches taken by regulators in countries where P2P lending companies have been highly active: China, the U.S., and the UK.

Even before the fallout in February 2016 that resulted from serious fraud in the country’s P2P lending community, China’s regulators were already getting stricter. Back in July 2015, regulators issued guidelines for online lenders to address what it described as a “lack of thresholds, lack of rules, lack of supervision”.

In addition, two new sets of comprehensive regulations regarding P2P lending were issued in December 2015. One notable requirement from the first set of rules will require P2P lending platforms to separate their own funds from those of lenders and borrowers. The second set of rules places a ban on payment service providers opening accounts for any institution providing financial services, including online lending.

With many of these new regulatory reforms expected to take effect beginning in July 2016, the Chinese government is aiming to establish greater stability and transparency for P2P lending in the country.

Like China, lawmakers in the U.S. have been giving P2P lending closer scrutiny as well. In April 2016, three U.S. senators sent a letter to the Government Accountability Office (GAO) requesting that it conduct a new assessment of P2P and other forms of alternate lending and provide a report. The last GAO report on the industry was released in 2011, and due to extensive growth and change in P2P lending, the senators believe that regulators need updated guidance on how to provide oversight.

“Observers have questioned what the appropriate role of federal regulators should be in supervising fintech companies that provide small business capital and consumer lending,” the senators wrote in their letter to the GAO.

With all of the uncertainty arising as a result of the events occurring in China and the U.S., P2P lenders in the UK have been quick to allay fears about the industry in their country. They have made it clear that regulations in the UK have been written specifically for P2P lenders, whereas rules in the U.S. were retrofitted into the existing framework.

The Financial Conduct Authority (FCA) is the UK regulator overseeing P2P lending. Since 2014, it has had rules in place that require an online lending platform to provide a full explanation of the risk involved when investing.

“If firms are abiding by the FCA rules and guidance, what happened [in the U.S.] shouldn't happen here,” said Jean Price, counsel at law firm Linklaters. [tweet_dis excerpt="Lenders should be aware of risks when entering #P2P agreement via @trulioo #fintech"]“Lenders should be made aware of the specific nature and risks of entering into a P2P agreement.”[/tweet_dis]

Long Road Ahead

As regulators face the new reality of P2P lending going mainstream, they must deal with the challenge of striking a balance between looking after the best interests of lenders and borrowers and encouraging continued innovation for loans.

“We now see that P2P lending is experiencing its share of growing pains,” said Jon Jones, President at Trulioo. “Savvy online marketplace lenders are learning the hard lessons that will prepare them for success in the long run. Greater transparency and accountability is key to earning and retaining the trust of investors and borrowers.”