Full disclosure

The regulator has introduced tougher transparency requirements for the peer-to-peer lending sector, but stakeholders are split on how to interpret the new rules. Michael Lloyd investigates…

Ever since tougher rules for transparency were introduced in December 2019, platforms have been seeking clarity on how to interpret the new regulations – to the point where some have questioned if they are even effective. The idea behind the new rules is to allow investors to make informed decisions by displaying a certain amount of loanbook data, such as default rates, on their websites to give investors the opportunity to do their own due diligence on the portfolio.

The now-defunct Peer-to-Peer Finance Association (P2PFA) demanded that all of its members provide loanbook data, but these new Financial Conduct Authority (FCA) regulations require even more from the sector.

Following the publication of an extensive consultation paper, the FCA introduced prescriptive disclosure rules for all platforms, in the hope that retail investors will better understand the service the platform is providing, while also being able to compare different platforms in terms of both service offering and performance.

Platforms now also have to publish detailed disclosures of the role of the platform, including how they undertake due diligence, characterise risk and price an agreement; and what will happen in the event of the platform failing and ongoing disclosure regarding individual agreements. The rules also mandate for detailed publication of the expected and actual default rate of all P2P agreements the firm has facilitated by risk category, to be shown as an outcomes statement published annually.

Read more: FCA chair suggests tougher rules on high risk products for retail investors

Stuart Law, chief executive of Assetz Capital, has openly criticised the rules, claiming that they require platforms to publish data in a way which may not be easy for the average retail investor to understand.  “There are simpler ways of explaining these things,” he says. “We’d like to be simpler, but we have to follow the rules. “Much of what we publish is regulatory and that is a problem because it’s not easy to understand but we can’t do anything about it. We do our best, but our hands are tied.”

However, other stakeholders point out that the FCA has to strike a balance between allowing firms to be flexible and to ensure they publish their data in the right way. Mark Turner, managing director, regulatory consulting at business advisory firm Duff & Phelps, says the regulator will not mandate exactly what needs to be published in detail, as the requirements will differ for each type of firm.

Furthermore, the City watchdog is aware that more detailed instructions may not be welcomed by the wider lending sector. “The FCA could give more guidance perhaps, but the onus is on firms to think about their database and provide enough data to make informed decisions,” Turner says. He adds that firms need to publish data which is honest about the potential risks of the platform, and contains information on losses, which enables investors to make informed decisions.

If they do not do this, and it leads to customer harm, the City regulator can take legal action against both the firm and its senior managers individually, under the Senior Managers and Certification Regime. “Where there’s customer harm through losses and investors can say they didn’t know what they were investing in, platforms can expect a level of complaints and the regulator to get involved, asking senior managers difficult questions,” Turner says.

Read more: Exclusive: FCA chief rules out ‘best endeavour’ leeway on P2P rules

Platforms agree that they need to ensure investors can make these informed decisions, but no one seems to be able to agree on what this might actually look like in practice.  Investors can misread data, which can lead them to believe that a certain investment is safer than it actually is, or vice versa. “Investors new to lending can often jump to incorrect conclusions,” says Assetz Capital’s Law.

Overloading people with unnecessarily detailed data can give rise to these misunderstandings, therefore it is vital that platforms publish clear, digestible and relevant information in order to help investors make investment decisions and assess their performance. What’s more, different types of investors require different levels of transparency.

For instance, retail investors may be happy with the headline figures on a platform’s loanbook, while sophisticated investors may want more granular detail. This makes it difficult to present P2P data in a standardised way. It should also be noted that disclosure alone is not enough to protect investors, although it should give them more insight into the platform’s processes.

“The sector as a whole welcomed the changes and we saw little push back on implementation,” says Dena Chadderton, partner at compliance consultants Adempi Associates.

“We believe the rules are sufficient. There are however two points to consider here – firstly that disclosure rules do not guarantee the completeness or quality of the due diligence or risk assessment undertaken by the platform and secondly disclosure does not protect against investment loss or defaults.”

And then there is the question of whether platforms should be the ones to take charge of their own data publication – or if this should be done by an independent third party instead.

Brismo collects data in a standardised way from platforms, verifies this as a third party and creates metrics that illustrate performance. “This allows investors to quickly appraise performance both within the lending space, and in the context of other asset classes,” says Rupert Taylor, the company’s founder and chief executive.

A third-party transparency monitor would lead to performance and risk being reported on a truly comparable basis – but only if the entire P2P sector got behind it. This is not currently the case. Transparency monitors would also require more detail from the regulator on what data is actually required, and how it is presented in a way which can be understood by every different type of investor. “My concern is that the platforms not showing their data transparently don’t do it because it probably doesn’t show very good things,” says Mike Bristow, chief executive of CrowdProperty. “If there was a common and detailed data transparency requirement across the sector then lenders would be able to compare data better.”

At the moment levels of transparency vary across different platforms. Some opt to publish enormously detailed reams of data, while others need a little improvement. As fintechs, P2P lending platforms are well-placed to take advantage of the latest technology to deliver data in an honest way – and there is certainly no shortage of data processing software on the market. If this data is updated frequently and presented in a clear and concise manner, it could make a huge difference to investor confidence and understanding.

“Firms should always be thinking of what they can do to help investors make informed decisions,” says Turner. “Data isn’t just numbers but information and that’s at the heart of decision making.” Amid the uncertain economic environment created by Covid-19, the need for transparency is greater than ever.

Platforms have had to be open with investors about any problems they are encountering, from having to introduce payment holidays for borrowers, to adding lender fees for investors, or by pausing lending altogether. Investors simply want more updates during volatile periods, and this is when strong data management can truly demonstrate its value. “I think the importance of data transparency has certainly increased,” says Turner.

“If the P2P sector can demonstrate it’s open and transparent with investors it can emerge from this crisis in a positive way.” Confusion remains around how to be transparent, what the transparency regulations mean and how effective these rules can be. However, what’s certain is that data transparency in this space has improved over time and will continue doing so. It will evolve as platforms grow and hire more experienced senior staff who are more used to collating and presenting data.

And the quality will improve too, as investors become more confident in their understanding of the sector, and start demanding more from their platforms. However, just publishing more and more data isn’t the answer – platforms must provide better-quality relevant data, which is presented in a way that allows investors to make fully informed decisions.

“Investors will seek transparency more and more, and will prefer to go to platforms that are more transparent about their performance and therefore everyone has to lift their standards,” says Bristow.