Monday 31 October 2016 12:01 am

Ex-FSA head: maturing P2P industry could cause regulatory headaches

Increasing complexity in the peer-to-peer lending industry will be a “flashing red light” for regulators, according to Lord Adair Turner, the former head of the now-defunct Financial Services Authority (FSA).

The comments, made in an interview published today by Peer2Peer Finance News, a new industry publication, add to his warning earlier in the year that potential losses from peer-to-peer lenders could “make the worst bankers look like absolute lending geniuses”.

The peer-to-peer lending industry has emerged in recent years as a growing alternative to traditional sources of finance, in which investors seeking high returns are matched with companies through online platforms. This can allow companies to seek investment from sources other than high street banks.

Although Lord Turner said that peer-to-peer lenders are “a useful part of the system” he cautioned that regulators should be concerned by any move towards complex securitisation – when debts are packaged together as financial instruments to be sold on. The “real flashing red light” would be the emergence of instruments such as structured investment vehicles (SIVs), he warned.

The possibility of sales of complex instruments to non-expert investors would be “concerning”, said Lord Turner. “I don’t think that’s happening to any significant stage at the moment, but it probably will because what we know is that these financial systems continually mutate and continually evolve, and the process of searching for new ways of profit will create new risks.”

UK investors have lent a cumulative £6.5bn up to the third quarter of 2016, according to data from the Peer-to-Peer Finance Association (P2PFA), an industry body which includes some of the biggest UK peer-to-peer lenders, such as Zopa and Funding Circle. The figures show that the sector transacted £700m in new loans in the third quarter of 2016.