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UK peer-to-peer lenders talk up regulation after Lending Club ruckus
[LONDON] The online US lender Lending Club would be in breach of financial rules had it knowingly sold on loans in Britain that an investor did not want, industry and legal experts said on Tuesday.
The biggest American "marketplace lender", which sells consumer and small business loans on to investors, stunned shareholders on Monday with news that an internal probe had shown how loans that it sold on had failed to comply with an investor's criteria.
The company's founder and chief executive Renaud Laplanche resigned, and three other senior managers were fired or quit as Lending Club shares tumbled.
Britain has one of the biggest peer-to-peer or P2P lending sectors in Europe, with online platforms such as Funding Circle and Ratesetter bringing borrowers and lenders together.
Barely a decade old, the UK sector has loaned 6.4 billion pounds (S$12.65 billion) so far: tiny compared with the high-street banks, but offering small companies and individuals an alternative source of cash to put business ideas into practice.
Sector officials said on Tuesday they were watching how events at Lending Club unfold, saying the news pointed to an isolated matter involving an institutional customer rather than a systemic flaw affecting many small investors, which would trigger regulatory change.
The US Treasury Department said on Tuesday that online lenders should support more transparency, but stopped short of calling for new rules.
Top platforms in Britain say they are already regulated comprehensively. "The sector in the UK is more regulated and it has put quite a lot of emphasis on transparency, with all loan books published," Rhydian Lewis, chief executive of RateSetter, the second largest UK platform, told Reuters.
The industry in the United States has faced more pressure to grow and is skewed toward institutional investors and the wall of money they bring, rather than the small investor sums that UK platforms handle, Mr Lewis said.
Lawyers and industry officials said that, in the United States, Britain's Financial Conduct Authority has pioneered specific rules for P2P lending platforms, which need authorisation by the watchdog.
"The regulatory regime established in the UK by the FCA for marketplace lending platforms is the only one in the world which has been designed specifically for our business model," Samir Desai, head of Funding Circle, Britain's biggest P2P lender, told Reuters.
The United States and other countries regulate P2P under existing consumer and business lending rules fashioned for banks and other lenders.
The two-year-old FCA rules require a platform to fully explain the level of risk in an investment, said Jean Price, counsel at Linklaters law firm.
"If firms are abiding by the FCA rules and guidance, what happened at Lending Club shouldn't happen here. Lenders should be made aware of the specific nature and risks of entering into a P2P agreement," Ms Price said.
Apart from specific rules for P2P lending, the FCA also has overarching conduct of business and client best interest rules, Ms Price said.
If a platform went bust, lenders could get redress for unsuitable advice from Britain's Financial Services Compensation Scheme. The Financial Ombudsman can also hear complaints from borrowers and lenders against a platform, and award compensation. The FCA itself had no comment.
Adair Turner, who headed Britain's markets watchdog during the financial crisis, ruffled industry feathers in February when he warned that the P2P sector could be the source of big losses as the sector grows rapidly.
But few expect any knee-jerk reaction from regulators in response to Lending Club unless any deep-rooted industry-wide problems are uncovered.
Policymakers are keen to see P2P and other parts of the fledgling "fintech" sector create jobs and take on the banks that have long dominated consumer and business lending.
Britain's government even launched an "Innovative Finance" savings product last month that allowed investors to put money into P2P lending tax-free.
For now, the FCA says it is struggling to keep up with the number of applications from P2P lenders, and is currently ploughing through more than 80. Even the big players such as Ratesetter and Funding Circle are still operating under interim permission until they obtain full authorisation later this year.
But RateSetter's Mr Lewis, also a board member of the Peer-to-Peer Finance Association (P2PFA) trade body, said breakneck growth in new loans had slowed to 5-10 per cent a month as regulation beds in.
He said this would make "big consolidation" inevitable as smaller platforms struggle to find business.
Industry officials note that so far it has been at listed platforms that problems have been uncovered: Lending Club in the United States, and TrustBuddy, a Swedish P2P platform that suspended operations last year.
"Platforms are well aware of the importance of prudent growth and a good capital mix," the P2PFA said in response to Lending Club's news.