The Peer-to- Peer Finance Association has published an independent assessment of the economics of peer-to- peer lending sector undertaken by economic consulting firm Oxera.
The study was commissioned to inform debate through the provision of an in-depth interrogation of how P2P lending works and associated public policy issues. The evidence-based report analyses the risks, costs and benefits of peer-to- peer lending and provides an objective account of how P2P business models work. The study focused on the eight platforms which comprise the membership of the P2PFA.
The evidence provided in the study shows that:
- peer-to- peer lending has created additional competition and choice in the market for loans and investment;
- peer-to- peer lending provides a new option for retail investors, opening up access to risk-and- return from an asset class of consumer and business loans with net returns of between four and eight per cent;
- platforms conduct credit-risk assessments using industry best practice and deliver outcomes consistent with those of traditional lenders;
- platforms provide levels of transparency which empower investors to assess performance against expectations;
- peer-to- peer lending does not create systemic risk, and platforms are well-placed to weather a downturn in the credit cycle – borrower defaults would need to increase at least threefold to reduce average interest rates to investors below zero; and
- the current regulatory regime is proportionate and targeted, though opportunities to strengthen the regime exist in some areas.
The study also found that most retail investors have a good understanding of the risks of peer-to-peer lending, including capital and liquidity risk, and the importance of diversification. However, the high levels of transparency provided give investors access to a significant amount of information to process. Therefore, more could be done to ensure effective communication of this information further to improve investor understanding.
The Chair of the Peer-to- Peer Finance Association, Christine Farnish said: ‘This landmark study into the economics of P2P lending provides important insight into the state of the market in the United Kingdom, addressing directly some concerns which have been expressed about the understanding of investors, the business models of platforms and the regulatory framework in which this business is transacted. The Report provides clear evidence of the robustness and resilience of the sector and also addresses directly a number of assertions that have been made about the riskiness of P2P lending. We hope it provides a useful input to policy-makers and regulators’.
She continued: ‘the Report emphasises the crucial importance of platforms ensuring that retail investors are well-informed – particularly as the number of those participating expands – as well as making sure that platforms themselves undertake sound credit-risk management and adhere to high standards of business conduct. Whilst P2PFA member platforms are required to commit to unrivalled levels of transparency and robust operating principles, it is clear that the regulatory regime has scope for further development so as to ensure that exemplary levels of confidence can be maintained for this increasingly significant part of the alternative finance landscape’.
Reinder van Dijk, Partner from Oxera, added: ‘P2P lending has been a real innovation in the market for credit, bringing benefits to both borrowers and investors. The existing regulatory regime in the UK has been successful in enabling the P2P market to develop to where it is today. As the sector continues to mature, regulation will need to evolve alongside it to ensure consumers continue to achieve the benefits made possible by this new model’.