Lord Adair Turner, former chairman of the Financial Services Authority, has sparked controversy by saying that problems lie ahead for the peer-to-peer (P2P) lending sector.

Speaking on BBC Radio 4’s Today programme, Lord Turner said:

“A group of people are going into a lending process on a technical platform without anybody really doing ‘go out and kick the tyres’ credit analysis.

“You cannot lend money to small and medium enterprises without somebody going and doing good credit underwriting, which is understanding where are these premises that the guy says he’s got?

“The losses which will emerge from peer-to-peer lending over the next five to 10 years will make the bankers look like lending geniuses.”

Christine Farnish, chairman of the trade association, the Peer-to-Peer Finance Association, rejected Lord Turner’s suggestions by saying:

“Anyone who has followed our industry closely will see that this morning’s comments fly in the face of the evidence. Since the industry began, defaults on loans are low, measuring between 2% and 3%.”

“We only lend to creditworthy consumers and established small and medium sized enterprises. Strict credit underwriting rules apply to all our members and this should not be confused with higher risk forms of crowdfunding or lending to sub-prime customers.

“All members of the P2PFA operate with high standards of transparency and business conduct. This includes publishing their full loan books on their websites and providing clear information on all fees and charges to both investors and borrowers. I would challenge anyone to find this level of transparency in any other part of the financial services market.”

The Association expects the sector to double in size every six months, especially as April 2016 will see the launch of the new Intelligent Finance ISA, where P2P loans can form part of a tax-efficient savings portfolio.

Despite Lord Turner’s predictions, the four largest P2P firms: Zopa, RateSetter, Funding Circle and Market Invoice, have so far been able to pay compensation from their ‘reserve funds’ to any customer affected by a default. P2P customers do not have recourse to the Financial Services Compensation Scheme.

Although Ms Farnish has dismissed the former FCA chair’s warnings, Neil Faulkner of 4thWay, a risk rating agency, noted that of the major players in the industry, only Zopa was around during the last economic crisis, and that the P2P industry could encounter difficulties if it started taking on riskier and riskier borrowers as economic conditions worsen.

Funding Circle co-founder James Meekings has predicted that his firm could manage an economic crisis in which bad debts increase by 65%. He remarked that his firm was a lower risk operation as it did not accept start-up companies as customers, and that the average Funding Circle firm had been trading for eight years.

Mr Meekings invited Lord Turner to attend his firm’s offices, where he would “see a world where we do look at every loan. We have better people looking at small business lending than banks do.”

Whether P2P firms agree with Lord Turner or not, they need to be aware of the need for responsible lending at all times. They are required to comply with most of the Financial Conduct Authority’s rules that apply to lenders – such as assessing the affordability and creditworthiness of all applications – even though P2P firms do not themselves lend money.

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.