Growth in the peer-to-peer (P2P) lending sector has led to increased regulatory scrutiny, with the Financial Conduct Authority (FCA) today publishing detailed proposals on how it hopes to better educate and safeguard consumers against the risks involved.
What is peer-to-peer lending?
P2P websites such as Zopa, Ratesetter and Funding Circle provide an online platform where consumers can lend money to eligible borrowers.
They are not like traditional banks or building societies because, in effect, control of borrowing and lending sits with the consumer, and the P2P website only creates an online space where lenders and borrowers can be matched. The P2P website, also known as a platform, makes its money by taking a percentage of what is borrowed and what is lent.
This means that in many instances investors can generate higher returns than those offered by a bank or building society account while borrowers can often find lower loan rates.
But it also means that there are greater risks involved. Although P2P lenders have systems in place to check a borrower's credit history, investors must remember that their funds are not covered by the Financial Services Compensation Scheme. This means that if a borrower refuses to pay, you risk losing what you lent out.
Currently, regulation of peer-to-peer lending falls under the remit of the Office of Fair Trading, but from April next year it wall fall under the FCA's control.
This means the FCA has proposed a number of measures that it hopes will educate consumers on the potential risks involved with peer-to-peer lending.
• Information about the P2P platform must be clearly presented and easy to find so customers know with whom they are dealing.
• Lenders will be able to see the credit status of borrowers before the loan is approved.
• Customers must be made aware of the risks involved.
• P2P platforms must have resolution plans in place that mean, in the event of the platform collapsing, loan repayments will continue to be collected so that lenders do not lose out.
• Any comparison of a peer-to-peer loan interest rate with a regular savings account interest rate must be fair, clear and not misleading.
• A 14-day cooling off period will allow both borrowers and lenders to withdraw from the contract without penalty if either changes their mind.
"Consumers need to be clear on what they're getting into and what the risks of crowdfunding are," said the FCA's director of policy, risk and research, Christopher Woolard.
"Our rules provide this clarity and extra protection for consumers, balanced by a desire to ensure firms and individuals continue to have access to this innovative source of funding."
Read our guide on peer-to-peer loans
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