P2P and UCIS – uncanny similarities?

Sarah Davidson

June 22, 2015

Sarah Davidson is the deputy editor of Mortgage Introducer

I’m not usually into making predictions but I have one for you: peer-to-peer property lenders will face regulation restricting retail investors from investing through their platforms before long.

Why? Because the more I hear about peer-to-peer lending platforms, the more they sound like unregulated collective investment schemes.

I’ll caveat that by saying that some are more like UCIS than others. But the majority do seem to operate in exactly the way the UCIS of old did.

While some platforms take retail investors’ cash and allow them to choose a very specific loan secured against a property to invest in, others allow retail investors to buy the equivalent of a unit in the platform’s portfolio of loans.

How is this latter model any different from investors investing in a fund? Apart from the fact that peer-to-peer lenders are less highly regulated, do not have to publish their accounts or credit policies and investors are not protected by the Financial Services Compensation Scheme.

In June 2013 the Financial Conduct Authority published new rules banning the marketing of UCIS to retail investors, restricting their promotion to sophisticated investors only.

As early as 2012 the Financial Services Authority, the FCA’s predecessor, issued guidance to crowdfunders, which offer equity to investors as opposed to debt, suggesting they stop marketing to retail investors.

To self-certify as a sophisticated investor or high net worth individual you have to earn at least £100,000 per year or have net assets (excluding your property, pension rights and so on) of at least £250,000.

The issue has bubbled under the surface since then with the regulator maintaining its review of peer-to-peer lenders and its intention to publish updated rules next year.

This may not come soon enough however with wide-scale pension freedoms introduced in April this year allowing defined contribution pension savers to release their savings in cash.

A survey conducted by Yorkshire Building Society this week found that two in five savers were more likely to look at riskier investments like peer-to-peer lending, while one in 10 said they would “definitely” take more risks.

That research also found that 42% of consumers were unfamiliar with peer-to-peer lending as a term, and three in five said they were unaware that they wouldn’t have FSCS protection if the loan went south.

Earlier this month Tristan Hugo-Webb, associate director of the Global Payments Advisory Service, said fierce competition between peer-to-peer lenders in the UK was likely to prompt one or more of them to take on too many risky loans and lose investors’ cash.

He said: “At some point, one or more of these peer-to-peer lenders is going to take on too many risky loans and go bankrupt which will damage the reputation and standing of the industry. Regulations tend to be reactive and that’s when I can see greater consumer protections coming in.”

There have been strides in self-regulation of this sector, led mainly by the Peer-to-Peer Finance Association, but too many platforms remain opaque about where exactly investors’ money is being invested, what the loan terms are and where the security resides.

Taking on more risk is one thing and it is an investor’s choice. But enabling that investor to make an informed choice is critical.

Unless we see Britain’s peer-to-peer property lenders become a lot more transparent across the board, I suspect the regulator will take the decision away from them and enforce a restriction to market only to sophisticated investors in much the same way they did with UCIS following the £130m implosion of the Connaught UCIS funds in 2012.

Let us hope that a similar fate does not befall retail investors who have invested through peer-to-peer in the hope their savings are safe.

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