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New rules hasten shake-out in UK P2P market as firms exit retail lending

Tough new rules for peer-to-peer lending in the U.K. that came into force Dec. 9 are likely to flush out some weaker players, amid a pullback from retail lending by some firms.

The U.K. Financial Conduct Authority has brought in a raft of new measures aimed at protecting retail investors from taking excessive risks and improving the stability of P2P firms.

These include capping the amount that retail investors can invest in P2P at 10% of their total assets; quizzing would-be investors who have not received professional advice on their knowledge of the market; and improving disclosures about how loans are performing.

The rules, outlined earlier this year, may have put off some new market entrants: More P2P firms withdrew applications to the regulator for authorization than submitted them between June 21 and Nov. 7, according to figures obtained by financial services consultancy Bovill.

The FCA began regulating P2P firms in 2014, and in the first four years it did not reject a single application, according to Bovill.

'Timely intervention'

For Frank Brown, managing consultant at Bovill, the FCA's tightening of P2P rules is a "timely intervention."

"This should be seen as a good course correction for the industry," he said in an interview.

The clampdown comes several months after the collapse of Lendy, a P2P platform that allowed retail investors to fund loans for property development. The company had been on an FCA watch list since the beginning of the year due to concerns about a high level of nonperforming loans.

After finalizing the new rules in June, the FCA sent a "Dear CEO" letter to the heads of 65 P2P firms in September, warning them to stop selling unsuitably risky investments the members of the public, among other things.

Some smaller platforms may find it tough to comply, but larger P2P lenders should not have any problems getting up to speed, Brown said. And the industry may be entering a period of "natural consolidation," with some of the smaller and less well-run companies naturally falling away, he said.

But M&A may be unlikely.

"There's a view that some of the P2P companies are over-valuing their platforms, and that makes them less attractive to buyers," Brown said. "Unless valuations get a bit more realistic, I don't think we'll see any M&A."

Disorderly exits

U.K. P2P firm Funding Circle Ltd.'s share price has performed poorly since it debuted on the London Stock Exchange in October 2018. From an initial offer price of 440 pence, its shares now trade at about 100 pence.

And the future of the wider market is likely to see some companies wound down — some in on orderly fashion and others in a disorderly fashion, Brown said.

The new rules could help flush out companies that have poor standards, according to Neil Faulkner, managing director of 4th Way, a specialist ratings and research agency that covers the P2P market.

They are a step forward for investor protection, and could help improve the image of the sector, he said. The FCA-mandated investor tests will force people to understand certain features of the investments that they often otherwise may not.

Platforms that have already brought in such tests have seen some encouraging results, according to Faulkner.

"Anecdotally, existing investors have been passing the new tests in advance in high numbers. One platform told me last week, for example, that 87% had already passed their test," he said.

But they could mean that investor sign-ups fall, because some investors will interpret the tests and temporary investment limits to mean that peer-to-peer lending is riskier than the stock market, Faulkner said.

Shift to institutional clients

In this context, it is likely that more P2P firms will shift their focus to institutional clients, he added.

A growing number of platforms have announced their exit from retail P2P investment. ThinCats said Dec. 9 that it was exiting retail P2P and instead focusing entirely on the institutional market. Real-estate focused P2P lender Landbay Partners Ltd. said Nov. 28 that it was exiting retail investment to focus solely on institutional capital, which makes up 97% of its investments.