The chief operating officer of peer-to-peer platform Relendex, Max Lehrain, has concerns about the Financial Conduct Authority’s crack down on P2P lenders and crowdfunding platforms.
Following concerns that investors could be taking on more risk than they realise, last summer the FCA proposed tougher rules for the P2P industry, which has grown dramatically in the past decade as banks retreated from high-risk lending.
The FCA said it was worried that a rise in interest rates could trigger a spate of defaults on many of the high-risk loans that P2P lending websites facilitate.
As a result, the FCA proposed that P2P lenders need to publicly disclose their actual rates of return, default rates, and loan risk and duration.
It has also proposed restrictions on marketing, meaning P2P platforms will only be able to send financial promotions to sophisticated or high-net worth investors.
The regulator also proposed P2P platforms should only be able to market to those who confirm they will receive regulated investment advice and to those who agree to not invest more than 10 per cent of their net investable portfolio in P2P agreements.
Mr Lehrain, who has moved from a tax consultancy, to investment consultancy, to a pensions management company over the past 30 years, agrees that P2P should never be considered as an alternative to a cash investment.
However, he believes independent financial advisers should still offer the opportunity for their clients to invest in P2P, while making clear the risks these investments pose.
Mr Lehrain says: “There are billions of pounds invested into cash Isas, returning 1 per cent or less.
“I am not suggesting what we do is a direct alternative for that, but it is relatively secure and surely needs to be considered as part of a portfolio by Isas and direct investors alike.”
When pushed on just how secure P2P is – this type of investment is currently not subject to Financial Services Compensation Scheme protection – Mr Lehrain says there are issues in the small and medium-sized enterprise space and it remains to be seen how P2P performs in an economic downturn.
Mr Lehrain says Relendex has only ever defaulted on one loan, which has been estimated at £594,000 and is currently being recovered.
He says: “The recovery process is underway, and while we expect to make a full recovery, this may take some time.”
But he insists problems such as defaults should not prevent this product from being on adviser’s radars.
He adds: “I love that we have new problems to solve that have not been addressed before because it is a new market.”
But he has doubts about the viability of the FCA’s recommendation that clients should not invest more than 10 per cent of their net worth in P2P investments.