Peer-to-peer lending in Britain is an "accident waiting to happen," a former head of the body that advises the U.K.'s main financial regulator on consumer affairs has warned.
The sector could prove to be dangerous if the regulator does not fully understand risks involved in peer-to-peer lending, and fails to intervene early to contain them if needed, John Howard said during a panel discussion at Credit Strategy's Credit Summit event in London on March 15. Howard was formerly chairman of the consumer panel at the Financial Services Authority, which was replaced by the Financial Conduct Authority in 2013. The panel still advises the FCA on the interests and concerns of consumers.
He said he is worried that the regulator could repeat the mistakes that led to the payment protection insurance, or PPI, scandal, in which millions of customers were missold inappropriate financial products.
"The regulator knew a long time ago that PPI was an enormous problem, but they did not intervene early," he said.
Howard said that he would advise the regulator to "step in" now.
Peer-to-peer lending via platforms such as Zopa Ltd., MarketInvoice Ltd. and Funding Circle Ltd is growing in popularity in the U.K., with the total number of outstanding loans rising to £3.26 billion at the end of the fourth quarter of 2017, compared with £2.96 billion at the end of the third quarter.
New lending in the fourth quarter totaled roughly £837 million, up from £733 million in the third quarter, according to data from the Peer2Peer Finance Association, an industry body.
Interest in peer-to-peer lending in the U.K. is growing as borrowers who have become disillusioned with the mainstream banking system look for alternatives, according to panelist Alex Ellerton, partner at Grant Thornton.
"Trust in banking is starting to improve, but it's still low," he said, speaking during the same panel discussion.
Howard also warned that U.K. lenders will be increasingly asked to do more to ensure that they consumers understand what they have signed up for when they borrow money, Howard added.
"You have to recognize that you will be increasingly asked to step up to the plate and make sure you are doing everything you can to make sure that people who are borrowing money understand what they are doing," he said.
A large number of adults in the U.K. have poor literacy and numeracy skills, and would struggle to understand documents from their bank, he said.
Increasing use of technology to analyze customer data could help lenders to underwrite loans better, but it will not entirely solve the problem of borrowers being given inappropriate or risky loans, Howard said.
