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Why peer-to-peer should be regulated
After the recent announcement that peer-to-peer lending is to be regulated, people may ask why an industry wants to be regulated. Peer-to-peer lending has come a long way since 2005 when Zopa started the concept. Lenders have been burnt several times by some of the peer-to-peer companies that followed, with Quakle being one example. This company started arranging peer-to-peer loans in 2010 and ceased in 2011, when lenders found that the lifetime default rate was far more than ten times the estimated 3%. Since then lenders have reported that payments have stopped completely and the company have not responded to emails.
With peer-to-peer lending the contract is (usually) between the borrower and the lender, so the loan is still valid even if the facilitator ceases to exist. However with Quakle, as with most providers, lenders do not have the names and addresses of their borrowers so they may not know who to contact for their money. It may not be cost effective trying to chase the repayments on a £10 loan.
Would regulation have prevented Quakle from failing ? The answer to that question would be no, but regulation may have prevented Quakle from launching with such a flawed business model. Regulation would (or should) have also ensured that procedures were put in place that would take over the servicing of existing loans after a company ceased trading.
Peer-to-peer lending carries risks; namely the risk that the borrower does not (or cannot) repay, and also that the peer-to-peer company facilitating the loan ceases to trade. Regulation in itself probably won't address the first risk, although companies such as RateSetter have come up with an innovative solution to this. However regulation should address the second risk, which is itself a lot harder for lenders to quantify.
Regulation should also be there to protect misleading or false information from being presented to consumers. I myself have attempted to report several such incidents, but the various financial and advertising agencies have stated this is outside their remit. A regulator would (or should) have far more power in this regard to take immediate action.
One of the reasons why P2P Money was created is to allow lenders to compare the various peer-to-peer providers and comparable interest rates after all deductions to make an informed decision on which company to use. Regulation should allow lenders, and borrowers, to have greater confidence in the industry and prevent less scrupulous companies from operating within peer-to-peer lending.