P2P is all about risk and return
Andrew Bailey, the head of our regulator, the Financial Conduct Authority, appeared before Members of Parliament at the Treasury Committee earlier this week. Amongst other things the session covered the topic of peer to peer lending, and specifically whether platforms have sufficient incentive to ensure that their underwriting is robust. You can watch the session here.
At RateSetter, we have deliberately aligned our long term incentives as a platform with the interests of investors. Ultimately, if we don't manage credit well, we don't have a business. But we’ve gone well beyond reputational considerations and have put our money where our mouth is. For more than two years we have reduced our own upfront income at the point that loans are written, and instead spread more of our revenues over the course of the loans. If we write bad loans, our future income is hit – it’s as simple as that. Writing loans responsibly is therefore squarely in our own interests as well as those of our investors.
Asked about how similar peer to peer lending is to a bank deposit, Bailey gave a great definition of a deposit – it hinges on the giving of a guarantee of safety – adding that peer to peer lending is more akin to an asset management product. We agree. RateSetter doesn't and can’t give a guarantee – it’s an investment, not a savings account (a theme that Rhydian has spoken about recently). And in exchange for that level of risk investors expect a reasonable level of return. We are always clear that while our Provision Fund has an outstanding track record, it is not a guarantee for the future, and investors can still lose money. In short, P2P is all about risk and return, it’s as simple as that.