Peer-to-peer lending: investors call on FCA for more regulation

The Financial Conduct Authority is facing calls for greater regulation of the peer-to-peer lending industry, following a chain of high-profile collapses in the sector.

A group of investors is demanding a public inquiry into how the FCA handled the demise of FundingSecure. The regulator stands accused of an 'apparently atrocious lack of supervision of the industry' by the FundingSecure Action Group, who were left millions of pounds out of pocket by the failed site.

The collapse of FundingSecure is one of many in a high-profile series of winding-downs that have dogged the reputation of the peer-to-peer lending industry, leaving investors asking serious questions about its future.

Recently it emerged that a peer-to-peer property lending business that had raised tens of millions of pounds from investors has been put into administration. The board of House Crowd found out that their chief executive had taken an unauthorised loan. Reports revealed The House Crowd has been in administration since February 2021 and that investors are owed £52.7 million in capital and interest.

Administrators had originally said that the insolvency was 'not expected to have a material impact on investors/lenders'. However after closer assessment of the group, many expert commentators now fear investors are likely to suffer capital shortfall.

Eleanor Stephens, our recovery and insolvency expert, who advises on corporate insolvency and administration, provides her view:

'It is also worth noting that these loans are not covered by the usual £85,000 protection given under the Financial Services Compensation scheme, even though they are FCA regulated firms, so you take a real risk of not getting your loan money back if the company you are loaning to isn't able to pay it. There is a real risk of no return should it all go wrong but, conversely, a risk of high return should they be successful.

If you are considering investing in one of these companies, look at them carefully to see what risk analysis they undertake on the companies seeking their loans. Obviously, the more stringent the better. Look at whether they have their own guarantees or funds in place should the loan not be returned, but bear in mind that if the peer to peer company goes into an insolvency process, as an unsecured creditor, you are unlikely to get a full return if the worst were to happen. Do as much due diligence as you can, both on the peer to peer company, and on the borrower to minimise your risk as far as possible. Split your risk by using a variety or P2P companies, that way if one gets into trouble, you haven't lost everything.'

Do you need considered advice about peer-to-peer lending? Our corporate solicitors have advised hundreds of ambitious businesses on starting and scaling up. For legal advice that’s agile and founder-focused, get in touch with our expert advisers.