Peer to peer lending? You’d be wise not to bank on it

Outlook

Lord Adair Turner, the former chairman of the UK financial regulator, has issued a grave warning on risks building up in the burgeoning peer-to-peer lending industry. (2009 Getty Images)

Adair Turner talks a lot, but he’s often worth listening to. Take his latest outing on the BBC, in which he took a swipe at the booming peer-to-peer lending industry: the former boss of the Financial Services Authority warned that in the next five to 10 years its losses could “make the worst bankers look like lending geniuses”.

Now, Lord Turner may be indulging in a little hyperbole (he’s always been eminently quotable), but the dangers are all too real. The industry was born out of two problems: the first is near-zero interest rates. The second is the scarcity of credit available to businesses that need it.

Match one with the other and hey presto: you’ve solved both problems. Moreover, there are huge margins available to businesses that can harness technology to build platforms that do that. A fact that has not gone unnoticed by hedge funds and private equity outfits, among others.

So far it seems to be working fine. Savers and the businesses they’re lending to have been well served. According to Government figures, corporate insolvencies were last year running at their lowest level since 1989. Credit, where obtainable, has been relatively cheap, the economy has been growing at a decent clip, wage rises have been outstripping inflation. Happy days! No wonder the University of Cambridge found, in a 2014 study, that some platforms were boasting default rates of 1 per cent (although some were very much higher).

However, other indicators suggest that the UK economy is heading into choppier waters and that a global slowdown is starting to bite. Interestingly, restructuring outfit Begbies Traynor recently suggested that the number of companies in distress, as opposed to those in insolvency proceedings, is rising, and quite quickly.

If it’s right, those 1 per cent default rates won’t last for long, even for those platforms that have financial Harry Potters on the board. It should be remembered at this point that one of the causes of the last financial crisis was a hunt for higher yields, which led to the booming popularity of securities backed by dodgy mortgages that offered them.

P2P lending is still relatively small by comparison, but it is growing, and very quickly. Bankers, meanwhile, are already starting to package up and sell on its loans.

The Financial Conduct Authority is in the throes of a review of how it is regulated. If I was in Andrew Bailey’s shoes, I’d have getting a progress report close to the top of my list of things to do after having taken possession of the chief executive’s office.