Chris Philp MP, (Conservative, Croydon South), asked the FCA to 'err on the side of caution" and provide stronger protection for investors in peer-to-peer lending. CityAM reported that the FCA had "warned p2p lenders they may face the same rules as banks" and the risk and regulatory consultancy Vedanvi reported that "Marketplace Lending could attract Basel III type Rules".
The Q + A formed part of Wednesday's session of the Treasury Select Committee. We didn't see any evidence of a change in direction on the part of the regulator. Our impression was that the FCA's Chairman and its acting CEO played a 'straight bat' to a series of questions from Mr Philp.
We watched it all on ParliamentTV, and if you open the video link to the committee session, you can watch it with us and make up your own mind.
Chris Philp is one of the smartest of the new MPs elected in May. He has a first in Physics from University College, Oxford and has founded more than one business. His personal website styles him as an 'Entrepreneur and Dad'. He begins his questions at around 15:14:25 on the video (we have fast forwarded it for you) by stating his concern that peer-to-peer lending is growing very rapidly, and he fears it may be 'the next big regulatory or financial services scandal'.
"These are risky products, and you need to know that, going in."
Tracey McDermott, the acting Chief Exec of the FCA, answers in a way that pleases us. She rejects Mr Philp's call for a 'sinking fund', and emphasises that investors need to go into crowdfunding "with their eyes wide open." She sees the regulator's role as ensuring that platforms are truthful and transparent about the risks inherent in their products, and that they don't mislead their customers, for example by comparing them to deposit accounts.
Another Crowd wants the regulator to protect investors from fraud, deception and criminal conduct. We don't expect them to be protected from risk, or from ignorance about risk, or the consequences of their own decisions. It's the duty of the press, professional advisors, platforms, and the investors themselves, to ensure that investors' decisions are properly informed.
The Member for Croydon South asks (at 15:18:50) for people to be protected from scandal by putting a regulatory safety net under risky investments, specifically to protect investors who don't understand the risks they are taking on. It's not a message we expected to hear from a free market Tory entrepreneur.
We object to the scaremongering stories that are so common in the daily newspapers' coverage of alternative lending, but they do have one advantage: they frighten away the ignorant and the risk-averse. As the reader comments on this piece in last weekend's Daily Telegraph show, the fear of peer-to-peer is spreading like wildfire through our quality press.
Ms McDermott explains the FCAs position from about 15:20:30. There is a very good reason why peer-to-peer lending is not protected by the Financial Services Compensation Scheme (FSCS). It's to focus investors' minds. "These are risky products, and you need to know that going in." Well said, Ms McDermott.
At this point, John Griffiths-Jones adds to Tracey McDermott's reply, and makes the statement that attracted press attention. We think he restates the FCAs position as we understand it: light-touch, pragmatic regulation, with no loopholes for regulatory arbitrage, updated to reflect what the platforms in the market are actually doing.
"At this point, they become awfully like a bank"
Our ears pricked up when he said: “at that point, they become awfully like a bank". No, he doesn't say “they become awful - like a bank" but we heard some mixed messages that left us feeling confused.
“I think sooner or later these platforms will tend to offer packages rather than lending to individuals" says Mr Griffith-Jones.
That is a prediction; a forward looking statement, about industry trends and it may or may not happen. Also, some platforms are already doing this: many offer a managed portfolio service. Is this really something that merits the regulator's intervention, or Basel II type rules? We hope not.
On the one hand, we hear the regulator saying they want platforms to be truthful and transparent about risks, so that investors can take risks they feel comfortable taking. That's a message we like. But on the other hand, we hear the message CityAM heard - that they will get tough if peer-to-peer lenders start doing things like ... you know, designing new products with different risk-return profiles. We hope the FCA will keep its hands firmly on the wheel, and heading in the right direction.