The UK’s leading marketplace lenders (MPLs) are split over a proposal put forward by Chris Philp, Conservative MP and a member of the House of Commons Treasury Select Committee, requiring platforms to put up capital alongside investors when providing loans to borrowers.
Philp, elected to Parliament last year and a co-founder of property development firm Pluto Capital, told PDI that the failure of MPLs to include risk on their own balance sheets creates a misalignment of interests with their investors.
“Co-partnering is critical to the industry as it aligns the interests of the MPLs with their investors. When there is no participation or skin in the game, there is no incentive to look at the credit quality of the borrowers,” he said.
A number of MPLs connect investors, typically retail, to both consumer and small and medium-sized enterprise borrowers. They generate revenue from fees rather than interest on the loan. The industry, which harnesses online platforms to provide a quick service to borrowers, developed rapidly following the global financial crisis as banks scaled back their lending to SMEs.
In July, the Financial Conduct Authority (FCA) launched a review of existing industry regulations, first introduced in 2014. A spokesman for the FCA was unable to name a date for publication, but Philp said he would want to see a co-investment proposal requiring MPLs to put up 10 percent of the loan to borrowers included in its conclusion.
“The FCA has applied a light touch to the sector, but I’m concerned that without the right financial incentive, there is a danger of repeating the mistakes from the past,” Philp said.
The proposal has concerned some in the industry and been welcomed by others. Funding Circle, established in 2010, has said such a requirement would place banks in a more favourable position in lending to SMEs.
Samir Desai, chief executive of Funding Circle, said: “Forcing platforms to hold 10 percent of loans would put them at an unfair disadvantage to banks who invest minimal equity in their own loans and are seeking to curtail the sector’s growth, or create a regulatory arbitrage with direct lending funds and asset managers who are not required to invest their own funds in loans they make,” he said.
Instead, the firm said that it would like to see the FCA focus on introducing greater transparency in the market by including requirements on publicly disclosing their performance data. It’s an idea that the FCA has said it would review as part of the consultation and something the firm said would lead to investors becoming more comfortable with the platforms.
Philp’s proposal has not been welcomed by the Peer-to-Peer Finance Association, the leading trade body for the UK MPL industry. In July, Christine Farnish, independent chair of the association, published a letter sent to the FCA saying that the transparency of the lenders’ loan books “obviates any requirement to mandate co-investment” as investors can scrutinise their credit decisions closely.
However, the real estate-focused MPL LendInvest said it is happy that its model of co-investing “chimes well” with Philp's proposal. She explained that the firm “pre-fund loans before making them available to our online platform investors”.
“This is a form of skin in the game and it’s a structure that has worked well for us and our customers for a number of years now. Philp is a serious MP who seems to understand the challenges facing alternative lending and is talking sensibly about them. We welcome his interrogation of the market,” she added.
According to a recent report published by the Cambridge Centre for Alternative Finance, the total size of the European market reached €5.4 billion with the UK comprising around 80 percent of that total.