The collapse of two peer-to-peer (P2P) lending platforms in the last year has seen the financial regulator step up regulation of the sector.
Whilst the sector can still thrive in the longer term, the industry must act to restore confidence before it is overtaken by events.
P2P lending has grown rapidly in the last decade.
Allowing retail investors to invest as little as £1 to individuals and businesses, P2P platforms commonly offer much higher returns than those available in the traditional savings market.
Many platforms promise instant access when individuals want their money back.
P2P businesses typically source the loans, check the borrowers, collect repayments and chase defaults - in many ways, much like a traditional bank.
P2P lending has proved extremely popular, offering investors better returns than they get on cash savings - to which P2P platforms have compared themselves in the past - and borrowers potentially cheaper funding, or funding that they might simply have not been able to access.
Last year, according to the industry’s trade body, P2P platforms facilitated loans worth almost £3bn.
With strong lending in the first half of 2019, the total since the first loan was made in 2005 has passed £10bn.
The returns are not without risk, though - and not just that the advertised rate will not be realised or that money will take longer to be repaid than planned.
The Financial Services Compensation Scheme that protects bank and building savings up to £85,000 does not apply to P2P loans, so your capital is at risk.
As “Money Saving Expert” Martin Lewis puts it: “Peer-to-peer lending looks like savings… acts like savings, but smells like investing.”
There have been a small number of high-profile collapses in the sector recently, with investors still waiting to see how much they will get back.
Earlier this month, the administrators of one recently failed firm announced that only those who invested through the platform in the past four years would even be considered peer-to-peer investors; before that they were lending money to the P2P firm itself, and so join its list of unsecured creditors.
Even those with an interest in the loans still do not know how much they will see, however.
Upping the ante
The Financial Conduct Authority (FCA), which has regulated the sector since 2014, had concerns since the start.
Its investigations launched in 2016 found poor practice among some P2P platforms in relation to information disclosure, charging structures, wind-down arrangements and record keeping.
The continued growth and failures have only added to the calls for change.
Consequently, new rules drawn up in the wake of recent collapses came into force on Monday, 9 December.
When considering the new regulations, it is worth remembering what the FCA is seeking to achieve.