The rise of the brand new financial industry popularly known as peer to peer lending (P2P) has attracted investors and borrowers from all walks of life away from the traditional and restrictive banking institutions and into the more liberal online platforms. This allows savers to find more people or businesses to invest in and borrowers to get their much needed capital despite their credit ratings. As a result, lenders tend to get higher returns and borrowers are able to meet their financing needs more freely and liberally compared to what they would have to put up with in banks.
But all this free-reign lending and borrowing, coupled with high risks albeit high returns really can cause a lot of trouble for the less experienced that are simply being drawn into the hype. As a result, peer to peer lending can be potentially too risky when left without any form of regulation. While online platforms will always try their best to protect their clients’ rights, standardization of rules is always a concern. So will the P2P industry really see any form of regulation?
According to the Financial Conduct Authority (FCA), the answer is yes. In fact, as of April 2014, they have already expressed their plans on regulating companies and websites that provide loan-based crowd funding platforms.
This isn’t really far from what’s possible, given that the FCA has already managed to regulate investment-based crowd funding, which is a specie of crowd funding (including peer to peer lending) that offers businesses a chance to raise funds by selling their securities or equity. The reason why the investment based crowd funding is already regulated while its loan-based counterpart isn’t lies on the different diversity of risks that come with every activity involved in the latter (since in P2P lending, borrowers make loans for various reasons and on different terms). According to the FCA, 5 out of the 25 companies they surveyed in the market hold on to more than 95% of the outstanding loans.
Regulation, according the FCA, is intended to enhance the accessibility of the market, making peer to peer lending more competitive and divers, providing for as many alternative financing options as possible without sacrificing the protection of the rights which consumers are clearly entitled to.
These regulations include requiring peer to peer lending companies to guarantee the awareness of their investors by providing them with all the information that they need, especially that which will clearly put all the possible risks and other details on the table. In short, P2P lending websites have to make sure that investors are able to make sound, informed choices. They are therefore held liable as trustees of both clients and borrowers they transact with.
But the trust relations doesn’t end there, the regulations stretch out to requiring peer to peer lending companies to take reasonable steps in ensuring the proper management of their firms, as well as having some sort of reserve in case of financial difficulties.
In a nutshell, whatever these regulations might be, they are designed to make sure that those who move out of the traditional banking systems and into peer to peer lending know what they’re getting into.
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