Wednesday 3 July 2019 4:42 am

Funding Circle woes are a warning sign for the peer-to-peer lending sector

A former top City regulator was withering in his assessment of peer-to-peer lending, saying three years ago that the likely losses facing the sector “will make the worst bankers look like lending geniuses”.

Adair Turner, who used to chair the Financial Services Authority, may have backtracked on these comments months later, but financial services professionals have been voicing similar concerns about the risk and resilience of peer-to-peer lending since the fledgling sector started gaining popularity.

And now, with the UK’s peer-to-peer poster child, Funding Circle, warning of disappointing growth prospects, such criticism is beginning to look like a prophecy. Funding Circle went public last October at a massively hyped price, and since then the UK’s uncertain economic environment has hit demand for small business loans.

In April, it announced that it would wind down its SME income fund because investors were reluctant to put more money into new credit assets.


Worryingly, the company (valued not long ago at north of £1bn) has not yet made a profit in its nine-year history. This might focus the minds of investors across the sector. Meanwhile, Share Centre analyst Helal Miah has called for the group to tighten its lending standards to protect the business.

Nothing demonstrates the potential dangers of peer-to-peer like the collapse of an entire platform, as we saw with Lendy back in May. Despite having a provision fund designed to safeguard investors’ cash, Lendy customers are still waiting to get their money back.

This is the crux of the peer-to-peer issue. More than £10bn flowed into just eight platforms in the first quarter of this year. Most of this will be people’s life-savings, yet experts routinely warn that many of these investors simply aren’t clued up on the risks.

It’s no wonder that the Financial Conduct Authority is set to prevent retail investors from investing any more than 10 per cent of their assets in peer-to-peer loans.

And while this restriction gives extra protection to investors, it is another sign that peer-to-peer lenders are not yet on wholly stable ground. Until recently, these platforms have had an easy ride – but as anyone who piled into Funding Circle’s IPO will tell you, it still pays to be cautious.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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