At the coalface

Paul Smee is steering the helm of the Peer-to-Peer Finance Association at a pivotal time for the industry. He speaks to Andrew Saunders about his new role, best practices and how to negotiate with regulators…

AS A LIFELONG cricket fan, the Peer-to-Peer Finance Association’s (P2PFA’s) new chair Paul Smee has probably had less time to relish the thwack of leather on willow in this summer’s England vs India test series than he might have wished. Because like everyone else in the peer-to-peer lending industry, he has spent a good deal of time digesting the Financial Conduct Authority’s (FCA’s) long-awaited post-implementation consultation paper on the sector, published in July.

It’s a crucial document, he says, not only because of its potential impact on the sector overall, but also because it will inevitably shape the development and future role of the self-regulated industry trade body, whose chair he acceded to in March this year.

“Under [predecessor] Christine Farnish the Association was a pioneer for high standards in the market,” says Smee. “It has set itself up as having the gold standard for disclosure and that’s a very good role for a trade body to have, but we will have to see how that is affected by the fact that the FCA is now coming out with much more detailed and potentially intrusive regulation. The recent 140-odd page document will have some effect on our gold standard and we have to work through what that is.”

Although the Association is still working on its detailed response to the paper, Smee is broadly positive about the FCA’s approach to the sector. “I think they are open to dialogue, there is the opportunity to engage with them on the detail and get it in the right place,” he comments.

The FCA consultation – which is inviting responses until 27 October – is an important milestone in the growth of P2P lending, he adds. The experimental early years of ‘nursery’ regulation which date back to the FCA’s initial involvement in 2014 are giving way to a more grown-up approach akin to that applied in the wider financial services arena.

Like any coming of age it’s a potentially tricky time and the FCA is right to want to handle it with care, he says. “I do understand where they [the FCA] are coming from. The reputation of the industry should go from strength to strength because we are performing an enormously important economic function. But in such a rapidly growing market, any player is vulnerable to a disaster involving another.

“From what I have seen, a lot of people in the industry want to do the right thing, but it’s really important to remember that the reputations of all can be damaged by the actions of one.”

Read more: Here’s what the industry thinks of the FCA review

As the consultation paper makes clear, fears that retail investors may not understand the capital risk involved in P2P products remain high on the FCA’s to do list. So more stringent requirements on transparency and disclosure can be expected – something that Smee believes will be less painful for platforms which are already members of the P2PFA.

“As a trade body we are already saying that to be a good P2P lender you have to be into transparency,” he explains. “So our members will find adjustment to the new regulatory regime considerably easier than those who have gone down a different path.”

But caution needs to be balanced with pragmatism, too. “The agenda you have to keep the FCA to is proportionality. Nobody is going to say that we shouldn’t have a risk strategy, for example. That’s very important and lot of lenders already do. But if [the FCA] then say that the best risk strategy is several hundred pages long and requires tier upon tier of committees, that’s when you get disproportionality.”

Amongst the FCA’s least welcome proposals within the industry are restrictions on marketing to only sophisticated or high-net-worth investors, and the so-called 10 per cent rule, limiting investment in P2P to 10 per cent of an investor’s total portfolio value.  That would bring P2P neatly into line with the rules which already apply to equity crowdfunding – but in a sector such as P2P with its wide variety of business models, neatness isn’t always the best policy, he warns.

“Almost inadvertently they [the regulator] can put barriers in place that make business models very difficult to run, because they want a neat and tidy regulatory system,” asserts Smee. “What we will be saying is ‘OK, we’re not new kids on the block anymore, but we’re also not major financial institutions with 300 years of history, and your regulation should reflect that’.”

Read more: Proposed investor restrictions threaten P2P sector’s growth

Having begun his working life in the Civil Service, most of Smee’s career has since been with trade bodies in the financial sector. He started the Association of Independent Financial Advisers in 1999 and led the organisation until 2004. “That’s a notoriously difficult market with lots of very small firms to represent,” he says.

He then moved on to what was then known as APACS – the Association of Payment Clearing Services – where he oversaw the introduction of the faster payments system. Something which everyone who remembers the time when even electronic bank transfers took three days to clear has reason to be grateful for. “If I want something to go on my tombstone, that would be it – so far,” says Smee.

Next stop was director general of the Council of Mortgage Lenders, where his achievements included the introduction of a series of standard definitions for mortgage fees. “When I am in one of my more pretentious moods, I say that the function of trade associations is to make markets work well, and I think that helped the mortgage market to work well,” he says.

It’s experience that may come in handy in his P2PFA role, as the sector faces calls for greater standardisation of terms – there is no single accepted definition of a loan default, for example – and for ratings systems to simplify the comparison of offerings on different platforms to one another.

“No individual firm will stand up and say it has a mission to standardise terms, but it’s the kind of thing that a good trade body can do well,” he adds.

He was attracted to the P2PFA partly by the prospect of getting back to representing small businesses – “small businesses that are growing and are at the cutting edge are exciting” – and partly because of the strong regulatory agenda.

“I know how government works and some of my thinking is based on how people used to approach me when I was a civil servant,” he comments. “Too many negotiations with regulators start from the premise that what is good for us must be what the regulator wants.

“You have to understand their remit and objectives, and show them how they can achieve that. And if you can bring answers as well as problems, that often works.”

He also believes that there is work to be done spreading the word about what P2P investing is: “We have a role in education and explaining what the sector is all about, and its contribution to the economy.”

But running a successful trade body is not just about regulation and education, important as those functions are. He will also have to deal with criticism of the Association, some of which has come from within the industry itself. Not least the controversy over the recent decision no longer to require its members to publish a complete downloadable loanbook on their websites – regarded by some as a retrograde step in terms  of transparency.

Was it really a coincidence that – in the run-up to its imminent stock market flotation – Funding Circle ceased to publish its loanbook so shortly after the P2PFA rule change? The decision was taken in response to concerns from the members, Smee concedes. But it is not about reducing transparency so much as making sure that the information provided remains useful to investors.

“As the sector grows in economic standing – particularly now some of the members are quite big – the membership could see how that level of granularity could work against a sensible market,” explains Smee. “People can play games with data – you want to provide enough information to be useful to a reasonable investor, not to help people who are going to play the market.”

It’s probably true that very few retail investors ever delve into the details of a platform’s full loanbook. But pragmatism may also have played a part; having already lost one of the ‘big three’ founder members RateSetter, back in August, could the Association could really afford the departure of yet another big fish from its membership roster?

Smee is certainly keen to ensure that the Association is as inclusive as possible. Its membership currently comprises nine platforms – Crowdstacker, Folk2Folk, Funding Circle, Landbay, Lending Works, MarketInvoice, ThinCats, Zopa and new entrant CrowdProperty – representing more than 50 per cent of the total market. It also has eight further associate members, comprising professional services firms such as Equifax, Fox Williams  and Orca Money.

“I would like to see new members joining and an increase in our market share,” he says. “It means wearing out a bit of shoe leather going round and talking to people. Giving a clear pitch to the industry and saying, ‘This what we can do for you’.”

Fortunately, he also believes that the FCA review and the new grown-up era of regulation it presages presents a great opportunity to do just that.

“Clearly the membership proposition changes in the light of the new FCA regime,” Smee says. “I want to be a constructive – but critical – friend to the regulator. One that isn’t afraid to say, ‘You’re going over the top’. Regulators tend to want to provide the questions, and then all the answers too. If you want to make a market work, the regulator has got to be prepared to let it.”

This interview featured in the October issue of Peer2Peer Finance News, now available to read online.