Stock markets lurched up and down, with the FTSE slumping below 6,000 for the first time since the start of 2013, wiping out a mind-boggling £74bn of value in just one day; the price of commodities like oil and metals tumbled, which although bad news for investors had the consolation of reducing prices at the petrol pumps.Meanwhile, the returns for P2P investors as rates have remained relatively steady in line with their historical trends.
Several commentators have drawn parallels with the market volatility of 2008, the memories of which remain very fresh, and there has been debate within the last few weeks about what options the Bank of England can deploy if the UK’s economy starts to slow down. Unfortunately I don’t have a crystal ball to predict the future, but if the general rule of thumb is that recessions tend to occur roughly every 8-10 years it’s easy to understand why people are worried – the last recession started seven years ago.
So what might an economic downturn mean for the P2P industry? Only one P2P platform was in operation in 2008, but now there are many platforms and the likelihood is that not all would comfortably make it through similarly tough times. There are actions our industry can take in the present, relatively benign period to ensure that we are ready for an economic downturn – and better prepared to protect investors – whenever it might arrive.
It is good news that the P2P sector has been fully regulated since 2014 and is now in the process of being brought into full authorisation by the FCA. We welcome this - regulation means that consumers can be more confident in the way that peer-to-peer platforms are being run, but on its ownit doesn’t guarantee success nor eliminate the risk of making bad decisions and going out of business.
We therefore need to go beyond the requirements of regulation to ensure the robustness of our platforms. For example, responsibility towards protecting investors can be proved by building a diversified and high quality loan book. My business, RateSetter, only offers loans to creditworthy applicants – typically this means justone in five applicants. Using affordability criteria to assess loan applicants can provide more comfort that borrowers will be able to continue with repayments if times get tougher. The overall result is that we have achieved a consistently low level of defaults over the last five years, as can be seen from the default statistics that we publish on our website, along with our full loan book.
Another important way in which platforms can bolster themselves for the future is by building up their Provision Funds so that they are able to handle an increase in missed payments or defaults. P2P investments are not covered by the Financial Services Guarantee Scheme and investors’ capital is at risk, so RateSetter pioneered the introduction of the Provision Fund to protect investors from non-performing loans – and this has ensured that no individual RateSetter investor has ever lost a penny. We have prudently and actively grown our Provision Fund each and every year and we will continue to do so. It now stands at over £16m, the largest in our sector and sufficient to cover our expected level of defaults 1.6 times over.
P2P is proving to be a positive disruptive force within finance, delivering a better deal for investors and borrowers. But the sector’s rise has come at a time when the economic environment has been generally benign - we can’t be complacent. Demonstrating our validity and sustainability during tougher times too will be key to determining the long-term future of our industry.
