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.
I love that we have new problems to solve that have not been addressed before because it is a new market.Max LehrainThe 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.
Mr Lehrain says: “One of the recommendations is a tick box to confirm you are not investing more than 10 per cent – but it is just a tick box. Anybody could say it, but it does not stop them from being exposed.
“Unless they are providing a full picture of their overall finances, how would [we] know if that is the right number or not?” he questions, highlighting that clients do not need to give P2P lenders a full picture of their transactions, as P2P platforms are not advisers.
When reflecting on his past career and coping with other market downturns, Mr Lehrain concedes he has regrets about the conditions under which he had to sell the tax practice Grimston Scott.
The bulk of Grimston Scott’s business back then came from members of Lloyd’s, so the dramatic downturn in the early 1990s hit the business hard and saw the tax consultancy where Mr Lehrain was managing director disposed of as a fire sale.
He says: “Grimston Scott ran really well for nine years, but in 1992 the Lloyds market collapsed. The primary market for my business just stopped, so I had to sell Grimston Scott in non-ideal circumstances.”
But Mr Lehrain is optimistic of what the future holds for P2P.
He acknowledges there is “a fear and lack of understanding” around the P2P sector, but he does not think investing in a huge education programme for financial advisers to better grasp these types of loans is the solution.
Instead, he says Relendex is currently is conversation with Adviser Home – a group that helps more than 12,000 IFAs run, develop and market their business – about the future role that IFAs can play in the P2P market.
“Much larger companies can maybe invest in a huge education programme, but then returns may be affected,” he points out.
“The whole point of [P2P] is that it is cutting out the middleman, not putting the cost back in the middle, even if it is a slightly different format,” he says.
“There is no magic bullet. People will get P2P over time.”
Saloni Sardana is features writer at FTAdviser and Financial Adviser
