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A senior politician is urging the watchdog to consider tougher regulation of the peer-to-peer market in order to protect consumers, following a series of warnings about the fast-growing sector.
Andrew Tyrie, chairman of parliament’s Treasury committee, has written to the head of the Financial Conduct Authority to say it is “concerned” about whether the watchdog is “paying due attention to the risks”.
“Whether and, if so, to what extent investors would benefit from stronger consumer protection now needs careful thought. Poorly informed investors may be left with a false sense of security about the balance of risks versus returns,” the letter says.
His intervention comes after the government allowed P2P to form part of a tax-free ISA allowance from this year – a move that is set to open up this riskier form of investment to the masses.
Concerns have been raised in the US following a series of failures that have hit some of the largest peer-to-peer lenders.
In mid-May, shares in Lending Club, the biggest US platform, halved after an employee fraud was exposed and its chief executive resigned after a conflict of interest dispute.
P2P lenders operate online, connecting investors — including individuals — to borrowers. The latter range from people seeking a loan for a home extension to small businesses wanting to expand.
Unlike banks, P2P sites do not take deposits and lend themselves, but act as an exchange, making money from fees and commissions. Lenders can receive high rates of interest of about 6 per cent, at a time when bank rates are at a record low.
The sector has expanded rapidly. Tyrie said P2P loans are estimated to have totalled £4.4bn in the final quarter of 2015 — up from close to zero five years ago.
But the UK watchdog only started regulating P2P lenders from April 2014 and several companies are in the process of seeking approval to operate.
Several high-profile people have recently warned about risks in P2P lending in the UK.
Lord Adair Turner, the former chairman of the FCA, said in February that over the next five to 10 years, P2P loans could be the source of losses that would “make the worst bankers look like absolute lending geniuses”.
He was worried that nobody was checking the ability of people and businesses who borrow on P2P platforms to pay the money back, particularly given the higher-risk nature of the borrowers, who include low-earning individuals and start-up companies.