The former chairman of the Financial Services Authority has come under fire from peer to peer lenders after saying they will make the “worst bankers look like lending geniuses”.
Speaking on the Today programme on 10 February, Lord Turner said he strongly suspected that financial losses on P2P lending, which will emerge within the next five to 10 years, will make “the worst bankers look like absolute lending geniuses”.
Lord Turner, who was chairman of the FSA until the regulator’s 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 the sponsor is doing a degree of credit underwriting or credit analysis, which isn’t there, then that has to be constrained.”
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 who are 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 that 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.
Lenders operating in the space were swift to criticise Lord Turner for his comments.
Christian Faes, co-founder and chief executive officer of LendInvest, said: “I don’t think we can trust the person who presided over the worst financial meltdown in history to tell us who are or aren’t lending geniuses. His comments also do the FCA a disservice.”
Christine Farnish, chair of the P2P Finance Association, said: “P2P lenders don’t just lend to anyone without any credit risk underwriting. They take credit risk underwriting extremely seriously, actually have exactly the same information at hand, and do the same sort of analysis as the banks do, if not more.”
Adviser view
Adrian Kidd, financial planner at London-based Radcliffe & Newlands, said: “It is great that people invest in causes they believe in, but they need to do full due diligence.
“For me, the worry would be that people are not doing other things first. They should be funding Isas or savings plans for kids and not using that money to go into this sort of thing. I don’t have a problem if you’re using surplus finance.
“It does feel like it’s small investors who, inevitably, will come off the worst because they don’t do the full screening. The initial red flag comes with a headline number.”
