An economic slowdown caused by uncertainty over the UK’s looming departure from the European Union could hit the peer to peer (p2p) lending market.

There are fears that a downturn or a full-blown UK recession will mean more borrowers default on their loans and investors are less keen to lend their money.

“We don’t know what will happen, but if people see their standard of living fall or they lose their jobs this could have a negative effect on the market,” says Peter Renton, chairman and co-founder of the LendIt Conference, an event dedicated to the p2p and online lending industries.

He adds: “P2P lending providers may also find it harder to recruit the staff they need from within the European Union.”

Nevertheless, Renton believes there is no reason why the industry should not continue to prosper post-Brexit.

“This market has matured and is still expanding, but for it to continue to flourish in the UK we need borrowers and lenders to still get a good deal,” says Renton. “Borrowers need better terms than those offered by traditional banks and lenders need to see a greater yield then they would get from other investments.”

 

Regulation

 

The industry has reacted with surprise to the news that the Financial Conduct Authority (FCA) is taking another look at how P2P lending is regulated.

New rules were introduced two years ago to control the crowdfunding industry and the FCA is considering whether further changes are needed.

It is concerned that loan-based crowdfunding might be confused with other business models such as asset management.  There is also a worry that investors who want to get their money out within 30 days may be unable to because of fluctuations in a provider’s liquidity.

The FCA will also consider whether investors require more consumer protection and fully understand the risks. Investors need to be confident, for example, that providers are carrying out thorough checks on each borrower’s creditworthiness.

“Current regulation is working and we hope the FCA does not come down too heavy-handed on the industry,” says Renton. “It is possible that the FCA is facing pressure from the banks because they feel that the playing field is not level when it comes to regulation.”

 

Market potential

 

P2P lending currently accounts for a relatively small percentage of loans to consumers, small businesses and for property funding.  However the number of lending platforms is likely to grow as more people view this as an alternative form of borrowing.

The barriers to enter this market are relatively low because p2p platforms do not, for example, have the legacy IT operating costs linked to banks’ branch networks.

If the market does slow down or it becomes more crowded, providers will have to work harder to differentiate themselves to gain and retain market share.

Among the ideas already introduced are investor protection schemes where a fund reimburses the lender if a borrower defaults. Other schemes allow investors sell their loans on a secondary market if their own financial situation changes.

“P2P lending has good consumer awareness but there is still more to do,” says Renton. “We are seeing traditional banks start to react and the next step for them will be to build their own platform, partner with an existing p2p platform or acquire one.”

The growth internationally of p2p lending was demonstrated earlier this month when LendIt hosted its first Fintech conference in China.

More than 50 international speakers attended the event in Shanghai to discuss p2p lending as well as payments, blockchain, insurance and wealth management.

The three largest markets for p2p lending are the UK, USA and China, with LendIt being a US-based conference business holding events in all three markets.

LendIt Europe will also be returning to London this October 10-11, bringing together Europe’s P2P lending platforms, banks, investors and regulators at Europe’s largest online lending conference and expo. For more information visit www.lendit.com/europe, and save 15% with VIP code UKFintech16VIP.