Using strong language, former finance supremo Lord Adair Turner has said that losses on P2P lending will “make the worst bankers look like absolute lending geniuses.”
Speaking on the Today programme this morning (10 February), Lord Turner said he strongly suspected that the losses on peer to peer lending which will emerge within the next 5 to 10 years will make “the worst bankers look like absolute lending geniuses.”
The chairman of the Financial Services Authority until its abolition in March 2013 said: “A group of people are going into a lending process on a technical platform without anybody really doing ‘go out and kick the tyres’ credit analysis.
“You cannot lend money to small and medium enterprises without somebody going and doing good credit underwriting, which is understanding where are these premises that the guy says he’s got?
“What are the machines he has got? Does he or she know what they are doing? This idea that you can just automate that on to a platform. It has a role to play but it will end up producing big losses.”
Asked whether the FCA was “asleep on the wheel” in regards to P2P lending, Lord Turner said: “There is to a degree an element of conduct where there has to be a bit of buyer beware/caveat emptor.
“Obviously if people are mis-selling in the sense of, if there are people who are running peer-to-peer lending platforms, who are pretending that as it were the sponsor is doing a degree of credit underwriting, credit analysis, which isn’t there, then that has to be constrained.”
Lord Turner also warned against public advertisements.
He said: “We should be very careful of the advertisement for it. We should make sure there is clear warnings within it.
“We need to encourage people to only participate in it if they have money which they can afford to lose. This should not be a core part of the investment strategy of somebody who needs to be certain and able to conserve capital, and we need clear warnings of that.”
His comments came after the FCA proposed earlier this month that advisers will not be able to charge commission on peer-to-peer lending agreements.
Consumers looking to use the incoming Innovative Finance Isa for certain P2P lending agreements should receive information on issues, including the potential tax disadvantages of the loan not being repaid, the regulator has said.
The regulator proposed to “add further guidance on the information firms should provide to consumers, which will apply when P2P agreements are to be held in an Innovative Finance Isa wrapper”.
The Innovative Finance Isa is set to be introduced from 6 April.
P2P lending is one of the fastest growing financial services, with the industry doubling in size last year alone.
Christine Farnish, chair of the P2P Finance Association, said Lord Turner’s statement was surprising.
She said: “Adair is normally an evidence-based person and very analytical. What he has said about P2P lending flies in the face of facts.
“P2P lenders don’t just lend to anyone without any credit risk underwriting. They take credit risk underwriting extremely seriously and actually have exactly the same information at hand and do the same sort of analysis as the banks do, if not more.
“P2P platforms look at two years’ worth at least of audited management accounts, they look at the business analytics, they have very sophisticated analytical software, they understand credit reference data, they use exactly the same credit reference data that the banks use, and they phone their customers up to check that what they’re saying is really the case.”7
