Why alternative finance deserves mainstream status
Richard Martin of Central Union Partners on why regulation makes it right for the government to force banks to raise alternative finance awareness
Enthusiasm for peer-to-peer (P2P) lending is at an all-time high, pushing the alternative finance industry within sights of a £1bn value last year.
Measures drawn up by the Financial Conduct Authority (FCA) to regulate the sector were introduced on 1 April but have garnered criticism from commentators for being too restrictive and going against the ethos of crowdfunding.
I see the regulations as a welcome addition to the P2P landscape and believe they create a more reliable industry – rightfully boosting its reputation and drawing in a larger, fresh crowd – while preventing the sort of unfettered growth that could damage or diminish the sector.
With banks still reluctant to lend to small and medium-sized businesses, P2P lending offers an attractive alternative with great potential. This is exactly why it needs protecting. Online platforms are not an invitation to play fast and loose with investments, so I am pleased to see regulations that encourage caution and reward experience among investors.
This caution should extend to the investment platform chosen by borrowers and investors. It is essential that platforms can differentiate between businesses with high covenant strength and those that are more risky and offer a lower probability of repayment. This comes down to the platform’s expertise within the sector and the quality of due diligence being performed on the investment opportunity.
How alternative finance is growing up
The P2P sector has a tremendous advantage over traditional banking as it is not weighed down by complicated compliance systems. P2P platforms typically carry out due diligence very quickly. For example, most new loans sit on platforms like ours for hours or days, rather than weeks.
This is essential for young, loan-hungry businesses determined to expand and grow their product portfolios. The industry is concerned the new regulations will prevent these businesses from securing finance, yet a sound, investable business should not have any difficulty in this regard. What the regulations will do instead is discourage a rush of borrowers and investors blind to potential risks.
Since 1 April, all investment platforms must present clear, understandable information for customers that does not downplay investment risk. This is a good thing.
The expansion of the P2P sector has established the need for some underlying coherence connecting different platforms. This should in turn foster healthy competition among them. The FCA has done much to shift the perception of crowdfunding and P2P lending away from its ‘alternative finance’ label, instead formalising and legitimising an industry that has grown at an exponential rate.
The growth of P2P lending should only be encouraged, but we should not shy away from talking about the possible risks – the failure of a platform or a loan “going bad” would do much more reputational damage to this burgeoning sector than any of the regulations brought in by the FCA.
This legislation was a necessary inclusion to a sector at risk of allowing investors to get ahead of themselves. It should not be seen as restrictive – it should be applauded.
Richard Martin is director of Central Union Partners, specialising in property and renewables financing via peer-to-business (P2B) lending.