Fintech’s conversion into banking is drawing closer. The UK’s Financial Conduct Authority said on Friday it was mulling tougher rules for crowdfunders. Stricter regulation is good for investors. Yet it also means more loan-based platforms might follow peer-to-peer group Zopa in seeking a banking licence.
The FCA thinks there is “evidence of potential investor detriment” in peer-to-peer lending, where online platforms match lenders directly with borrowers. It’s worried the risks might be obscured because P2P groups trumpet their use of provision funds, which aim to compensate lenders in the event of a default. Another risk is that firms’ resolution plans wouldn’t allow them to unwind loan books safely if they collapse.
New rules under consideration would force firms to strengthen these wind-down plans – one idea is to have them specify a backup provider to administer loan repayments after a collapse. More prescriptive risk disclosure, and the extension of mortgage-lending standards to providers offering home loans, are also being mooted.
Stricter regulation would help investors in a sector often criticised for opacity and encouraging individuals to take on excessive risks. It might also be welcomed by the biggest platforms, many of which reckon higher compliance costs are outweighed by the greater legitimacy implied by regulatory stringency.
But the FCA’s move will also accelerate the trend of peer-to-peer companies acting more like traditional lenders. Zopa announced in November it would seek a banking licence, while the FCA notes more platforms offer bank-like “maturity mismatch” services, where investors are sold products that allow access to funds over a shorter period than the loans they are invested in. It says it will consider rules to remove or reduce such “regulatory arbitrage” where consumers could get stung.
Banks have the advantages of cheap, sticky customer deposits, a central-bank backstop and the ability to use their balance sheets to manage mismatches in maturity length between loans and investments. With interest rates likely to rise in 2017, boosting net interest margins and profitability, the attraction of a bank balance sheet will grow. Add to this the prospect of FCA rules that treat peer-to-peer lenders more like a bank, and the platforms have an even greater incentive to become one.
Request a free trial of Breakingviews here.