The former City regulator Lord Turner has warned that losses in the peer-to-peer (P2P) lending industry will make Britain’s worst bankers look like geniuses.
Turner said P2P lenders were trying to automate loans that required proper checks on borrowers assets and competence. He said advertising for the lenders should have clear warnings and that only people who can afford to lose their money should take part.
The number of P2P lenders has grown dramatically in recent years as new businesses have sought to copy the success of Zopa, which was the first lender in 2005. The companies seek to take business from banks by matching lenders and borrowers online without the cost of branch networks and thousands of employees.
The sector boomed after the 2008 financial crisis as banks reined in lending and savers looked for better returns with interest rates at record lows. The sector’s loans doubled last year to £4.4bn as the number of lenders increased by more than a fifth, to 128,000, and borrowers almost doubled to 273,000, according to its trade body the P2P Finance Association.
Turner said: “I strongly suggest that the losses on peer-to-peer lending which will emerge in the next five to 10 years will make the worst bankers look like absolute lending geniuses, because I think a group of people are going into a lending process with a tech platform without anybody really doing ‘go out and kick the tyres’ credit analysis.”
“This idea that you can automate that on to a platform, it has a role to play but it will end up producing big losses.”
P2P lenders make money by charging customers to use their service, but lenders and borrowers still expect to get better rates than they would at a bank. The industry’s growth has sparked concerns that P2P is too good to be true and that newer lenders have not been tested by tough economic times.
Zopa started off connecting lenders and consumer borrowers who typically borrowed a few thousand pounds for home improvements, a car or other spending.
Dozens of new lenders have sprung up allowing people to lend to small businesses, and to invest in property. Nicola Horlick, one of the City’s most high-profile figures, launched a P2P lender for businesses in 2014.
Turner chaired the Financial Services Authority from September 2008 until it was disbanded in 2013. Its successor, the Financial Conduct Authority, started regulating P2P lenders in 2014, a development the industry said underlined its mainstream status. Lenders are not covered by the financial services compensation scheme, which guarantees bank deposits up to £75,000.
Asked if the FCA should be tougher with P2P lenders, Turner said individual customers should take responsibility and should beware. But he added that P2P adverts should carry warnings about potential losses.
“They [individual lenders] should only participate if they have money they can afford to lose. It shouldn’t be a core part of the investment strategy of somebody who needs to be certain and able to conserve capital and we need clear warnings of that.”
Christine Farnish, who chairs the P2PFA, said Turner’s views ignored the industry’s record and that default rates on loans were low at 2%-3%.
“We only lend to creditworthy consumers and established small and medium sized enterprises. Strict credit underwriting rules apply to all our members and this should not be confused with higher risk forms of crowdfunding or lending to sub-prime customers,” she said.
“All members of the P2PFA operate with high standards of transparency and business conduct. This includes publishing their full loan books on their websites and providing clear information on all fees and charges to both investors and borrowers. I would challenge anyone to find this level of transparency in any other part of the financial services market.”