Tuesday 10 December 2019 4:59 pm

DEBATE: Will the FCA’s new rules make peer-to-peer investing safer?

Anthony Morrow is chief executive of OpenMoney.
Rhydian Lewis
Rhydian Lewis is chief executive of RateSetter.

Will the FCA’s new rules that came into force this week make the peer-to-peer investment sector safer?

YES, says Rhydian Lewis, chief executive of RateSetter.

The FCA has raised the bar in key areas such as risk management, governance, and disclosure. Peer-to-peer (P2P) is not a savings product, but it should be a low-risk investment, and these new rules (which came into force on Monday) will make investing safer.

The new rules elevate the regulation of the P2P sector to be on par with other mainstream financial sectors and put an end to any lingering sense that the industry is lightly regulated.

This is likely to prove a watershed moment. It took other financial sectors decades or even centuries to establish themselves, and this higher standard of regulation is a milestone for P2P. It means that people can invest with the confidence that this is a properly regulated industry.

For ages, banks have exclusively enjoyed the value from investing in loans. P2P makes those same returns available to investors, and via these new rules, the FCA has confirmed that this is an opportunity available to all. 

NO, says Anthony Morrow, chief executive of OpenMoney.

Like any maturing sector, P2P is inevitably attracting more regulation. But just because the new  self-certification rules make it look safer, it doesn’t necessarily mean the sector is now safe. 

Indeed, as long as P2P continues to promise investors above-average returns, then it will carry above-average risk. 

Whether you should avoid P2P lending altogether depends on your own risk profile and your attitude to loss. These are complicated products that are presented to investors as “cash-like”, but in reality they are anything but. 

The business model of P2P firms remains unproven during the course of a full business cycle. That’s why even for experienced investors, P2P should only ever form a small part of a larger, diversified portfolio.

Recent, well-publicised issues in the sector suggest that even a fairly moderate slowdown in the economy can cause many P2P lenders considerable difficulties. Just how sustainable the sector is in the face of a wider economic downturn remains to be seen. 

Then there’s the issue of liquidity — or lack of it — in the sector, and the absence of any depositor protection.

Putting all this together, P2P still adds up to a high-risk investment — which investors should only enter into with their eyes wide open. My view is that, given the problems the sector is facing and with fairly benign conditions, these products should only be “sold” with advice to ensure that only appropriate people invest.

Main image credit: Getty