Borrowers using peer-to-peer sites are edging closer to a better protected lending and borrowing environment, following new plans outlined by the Financial Conduct Authority (FCA) today.
Currently there are no rules, which peer-to-peer firms have to stick to, unless they are part of the UK trade body – the Peer-to-Peer Finance Association (see our Peer-to-Peer Lending guide for more information).
But the FCA has today put new regulations for peer-to-peer lenders out for consultation. The regulator wants peer-to-peer lenders to:
- Give borrowers explanations of the key features of the loan – including the key risks – before an agreement is made.
- Assess the credit worthiness of borrowers before granting them credit.
- And give a 14 day cooling off period, which will allow the borrower to withdraw if they have a change of heart.
The move comes as the FCA today sets out in detail how it will regulate consumer credit, including payday lending (see the Payday Lending Crackdown MSE News story), when it takes over responsibility for this in April 2014.
The plans are subject to final consultation until 31 December, with the final rules being published in February next year.
A separate consultation on crowd funding, including the lending and investing aspects of peer-to-peer lending, will also be published later in October, which will give a clearer indication of how these sites will be regulated from April 2014.
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What are the current rules?
At present lenders which are members of the Peer-to-Peer Finance Association trade body must ring fence savers' money and have a contingency repayment plan if it goes bust where administrators would prioritise repayments of unlent cash and collecting debts.
The initial members of the association were Funding Circle, Zopa and RateSetter – the largest peer-to-peer lending platforms at present in the UK, with ThinCats joining in July 2013.
However, there are a lot of other sites out there and start-up companies in this area that don't form part of the trade body – the main reason why the FCA wants to enforce regulation to protect peer-to-peer users.
What is peer-to-peer lending?
Peer-to-peer lending takes the age-old process of loaning cash to friends in return for a bit of interest, and expands it to an industrial scale. Websites like Zopa, Ratesetter and Funding Circle unite lenders (savers hunting for a good return) and borrowers (individuals or companies).
That good return can be a whopping 7% interest, trumping the best savings accounts on the market at the moment.
However, unlike banks and building societies where the first £85,000 saved per person, per financial institution in a 'normal' savings account is 100% guaranteed by the Government-backed Financial Services Compensation Scheme (FSCS) if your bank went bust, peer-to-peer companies do not have this protection.
Some peer-to-peer sites do have their own bailout funds for when things go wrong, but regulation in the sector will give consumers using the sites added protection.
See our Peer-to-Peer Lending guide if you’re interested in lending money through the sites.