The Treasury Select Committee chairman has warned government tax incentives like Isas, which aim to promote the crowdfunding and peer-to-peer sector, might push some consumers into inappropriate products.
On 1 June, Andrew Tyrie wrote to the Financial Conduct Authority calling for closer scrutiny of the peer-to-peer lending and crowdfunding market.
He called on its former chief executive Tracey McDermott to set out how the regulator would deal with the risks around P2P, which entered the mainstream investment arena with the launch of the Innovative Finance Isa in April.
Answering Mr Tyrie’s questions in a letter published today (4 August), Ms McDermott said the regulator has been watching the crowdfunding sector closely and acknowledged the sector poses risks to consumer protection.
She made it clear that crowdfunding investors are not protected if they lose their money simply because the underlying investment fails, but that Financial Services Compensation Scheme protection will apply if the P2P platform fails to meet its obligations.
Last month, the FCA began a review into the sector after expressing concerns that allowing P2P investment through tax wrappers like Isas and pensions might create a change in the investor base towards retail investors, who do not fully appreciate the risks involved.
P2P lending - or debt-based crowdfunding - is considered less risky than investment-based crowdfunding, as investors lend to people or established businesses who will repay the cash, plus interest.
Investment-based crowdfunding, however, works more like equity, with early stage companies offering shares in their business in exchange for a loan to invest in their business.
Ms McDermott said the FCA considers crowdfunding a high-risk investment activity, pointing to rules which mean this type of investment cannot be promoted to investors who have not received financial advice.
The regulator has been assessing both P2P and investment-based crowdfunding firms on whether they are making the risks clear to consumers, with Ms McDermott stating that since 2014, nine out of 10 crowdfunding promotions were withdrawn or amended.
By comparison, 12 out of 27 P2P promotions have been amended or withdrawn over the same period.
She also said the financial watchdog “remains cautious” about the risks posed to consumers by P2P firms and said the sector will continue to be supervised - particularly when it comes to promotions - as it moves further into the mainstream.
Responding to the letter, Mr Tyrie said while government policies to promote the crowdfunding sector may have the right intention, government tax incentives “may be encouraging some consumers into the use of inappropriate products”.
Andrew Bailey, the FCA’s new chief executive, said risks arising from P2P loans depend in part on the underwriting standards of platforms.
He pointed out that - since the sector is still relatively young - there is limited evidence on how such loans behave over a credit cycle and how the sector will respond to a higher interest rate environment.