Mis-selling fears over P2P lending

The list of financial products which have been mis-sold in recent years is extensive, including: mortgage endowments, payment protection insurance, interest rate hedging products, card protection insurance, risky investments (especially in banks), annuities and packaged bank accounts.

Now some experts are predicting that peer-to-peer (P2P) lending could join the list.

P2P lending is a rapidly growing market. P2P firms act as an intermediary between wannabe borrowers and individuals wishing to lend. Individual lenders are attracted by the chance to earn returns that outstrip those available on savings accounts, while borrowers are attracted by the chance to borrow at lower rates than might be available on bank loans.

Trade association the Peer to Peer Finance Association (P2PFA) announced that P2P lending at the end of the first quarter of 2014 was £1,207 billion, compared to £491 million at the end of the same period in 2013.

It is the use of P2P lending as an alternative to a savings account which has aroused the interest of the regulator, the Financial Conduct Authority (FCA). It is concerned that some P2P firms are marketing their offering as a risk-free way of saving, and are sometimes even using the words ‘savings’ and ‘savers’ in their marketing communications. Lending via a P2P platform is in fact far from risk free, as the borrower could default on their repayments, and customers in this market sector do not have access to the Financial Services Compensation Scheme in the event of financial loss.

Firms can therefore expect the FCA to devote additional resources to reviewing P2P marketing material. Firms may therefore want to carefully check their own marketing material, possibly with the assistance of an expert third party consultant.

The FCA has said of the issue:

“The quality of the information provided to consumers in marketing is something that we concentrated on, and we have been working closely with peer-to-peer firms on this issue.

“Our supervisory teams regularly review the marketing of regulated firms, and where there are concerns they can ask for materials to be withdrawn or changed.”

Christine Farnish, chairman of the P2PFA, largely agreed with the FCA, suggesting that rogue firms could “bring the whole sector into disrepute”.

Ms Farnish added:

“You might get back a bit more than a bank, but it is more risky because people might default on loans. Even with responsible credit rating, you can still get things that go wrong. So you can’t assume you’ll get your capital back.”

P2P lending became regulated by the FCA on April 1 2014, at the same time as the FCA assumed responsibility for all areas of consumer credit. In many cases, the P2P firm is required under FCA rules to carry out the same duties a lender would, even though the firm does not actually lend money. For example, P2P firms have a responsibility to carry out creditworthiness assessments, and provide certain pre-contractual information.

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.