Britain’s former top financial watchdog has distanced himself from his comments made earlier this year that “losses which will emerge from peer-to-peer lending over the next five to 10 years will make the bankers look like lending geniuses.”
Peer-to-peer lenders, also known as marketplace lenders, are online platforms that let people invest in individuals or companies by lending money to them directly. Leading platforms include Funding Circle, Zopa, and MarketInvoice.
Speaking at peer-to-peer industry conference LendIt Europe on Tuesday, Lord Turner said the comment was made in an offhand manner to a BBC journalist after he thought the interview had ended.
He also clarified his comments, saying he was speaking about individual investors making a credit assessment about who they lend to.
Lord Turner says he told the BBC: “Individual peer-to-peer lending would probably produce losses which would make bankers look like geniuses, and I still believe that that would be the case and would be a problem for the direct lending industry if that was indeed the model of how direct lending worked.
“But in fact, individual investor credit assessment now plays only a very minor role in the growing direct lending market… only a small percentage of investors now directly select specific portfolios of loans, and even those investors rely crucially on the platform’s centralised credit assessment of the relative riskiness of different loans.”
Turner was the Chairman of the Financial Services Authority from 2008 until it was abolished in 2013 to make way for the Financial Conduct Authority.
Lord Turner said he has looked more closely at the industry since the comments and now believes there is “some merit” in the claim that the industry “could add a “spare tyre” to the credit supply system, making credit crunches less likely.”
He added that direct online lending is “likely to become a stable, significant and useful part of our total credit supply system.”
This contrasts with Deloitte’s read on the industry earlier this year, which concluded the industry was likely to be “not significant” in the long run.
But Lord Turner cautioned that peer-to-peer or marketplace lenders must remain simple and transparent, highlighting the fact that the securitisation of loans in the run-up to the financial crisis was hailed as a possible “spare tyre.” Lord Turner says complexity and maturity transformation undermined these claims, and peer-to-peer must avoid this.
“What will worry prudential regulators is if, under the influence of competitive pressure and the continual process of financial innovation, the simple transparent models of today morph into more complex and opaque systems,” Lord Turner said.
“Provided this does not occur, my judgment is that the direct lending industry will grow and play a useful role, alongside tightly regulated banks, in our overall credit supply system.”
What will worry prudential regulators is if… the simple transparent models of today morph into more complex and opaque systems
However, while Lord Turner changed his position on peer-to-peer lending, he questioned the peer-to-peer and fintech narrative that it is reinventing the wheel when it comes to finance.
The former regulator said much of the talk around fintech is “hype” and said peer-to-peer lending’s approach to underwriting loans was not that different.
He said: “Credit assessment is not radically different in approach to that already deployed by the incumbent banks.
“This hierarchy of different credit approaches has been in place for many years, and I am not convinced that the growth of direct non-bank lending or the use of information technology by challenger banks will radically change it.”
The Financial Times’ Kadhim Shubber argued convincingly in the wake of Lord Turner’s initial comments that peer-to-peer is largely a marketing concept and these days online lenders aren’t doing much different to traditional financial firms, save for doing it all online.
Lord Turner said the best startup banks and online lenders could hope for was to offer better customer services than the banks.