FMA director of compliance says peer-to-peer lending is for investors with a good understanding of risk and an appetite to take that risk on

FMA director of compliance says peer-to-peer lending is for investors with a good understanding of risk and an appetite to take that risk on

By Gareth Vaughan

Peer-to-peer lending, which is promising higher interest rates for investors than bank deposits and lower rates for borrowers than bank loans, isn't something for just anyone, the Financial Markets Authority (FMA) says.

"We would say it's not something for everyone. I think it's important that people who use these platforms really understand the risk of the products they are investing in. So in terms of the peer-to-peer space, we would say it's for somebody who can really have a decent understanding and a reasonable risk appetite," FMA director of compliance Elaine Campbell told in a Double Shot interview.

"So somebody who may be able to absorb the loss of both the principal and interest (should invest via peer-to-peer). That isn't to say that's necessarily going to happen, but there might be some losses across a range of investments through the peer-to-peer platform."

"So we would say they are for investors who have really got a better understanding of risk and an appetite to take that risk on," added Campbell.

Peer-to-peer lending, or P2P, is where an online service provider acts as an intermediary matching borrowers and lenders. New Zealand's first licenced P2P lender, Harmoney, opened for business on Tuesday.

The FMA has also licenced two crowd funders thus far, PledgeMe and Snowball Effect. Crowd funding is where the service provider acts as an intermediary between companies offering shares and investors looking to buy the shares.

The passing of the Financial Markets Conduct Act last year enabled the development of licenced P2P lending and crowd funding in New Zealand. There's more on the FMA website on P2P here and crowd funding here. And see all our stories on P2P here.

'We don't have a view about how big these things should get'

Although the New Zealand P2P sector is still in the maternity ward, in countries such as the United States and Britain it has been around for a few years and shown an ability to grow quickly. The International Organization of Securities Commissions, the Madrid-based body regarded as the global standard setter for the securities sector, says if the growth of the past seven years continues, lending originated through P2P could hit US$70 billion in five years.

Lending Club, the biggest US P2P lender, recently filed for an initial public offering through which it's looking to raise US$500 million. The company was valued at US$4 billion earlier this year. Lending Club says it has facilitated about US$5 billion in loans since its 2007 launch, with about US$1 billion of this in the June quarter this year.

Campbell said here in New Zealand the FMA isn't especially focused on how fast either P2P, or crowd funding, may grow.

"We don't have a view about how big these things should get. We're more concerned that the operators are complying with the regulations and that people aren't being harmed," said Campbell.

She said the FMA's keenly aware of having the right regulatory settings for both P2P and crowd funding, but is realistic that some money will be lost.

"Any investment does come with risk. And to us going smoothly isn't about people not suffering loss, but people understanding the risk they're assuming, and understanding that that risk might manifest itself, and actually what does that mean when it does. So going smoothly or going well, doesn't necessarily mean that people aren't going to lose money," Campbell said.

For the FMA P2P and crowd funding going smoothly means the people running the platforms disclose risks appropriately, so people who are investing through them understand those risks, she added.

About three P2P platforms expected

Asked how many P2P and crowd funding licences may be issued by the FMA within 12 to 24 months Campbell said perhaps three P2P licences, and up to six crowd funding licences.

"We've had indications from across both categories, if I look at the numbers as a whole, (from) maybe six or seven entities. Whether they actually manifest themselves in applications at this point is a little unknown. But we would expect that six or seven to turn into two or three actual applications," said Campbell.

"(Looking ahead  a year or two) in the crowd funding space there will be a minimum of three, a maximum maybe of five or six. And in the peer-to-peer space we might be looking at maybe three," she said.

In April Campbell told the FMA was expecting to receive about four P2P licence applications.

Campbell said applications for both P2P and crowd funding licences from Lendit, the Christchurch-based entity fronted by New Zealand Manufacturers and Exporters Association CEO John Walley, are on ice. In July reported Lendit's P2P platform was on the block for $1 million.

"We've got an applicant who has applied across both categories, peer-to-peer and crowd funding. That applicant's asked us to put their application on hold at the moment whilst they think of ways to capitalise their business to enable that business to more successfully operate," said Campbell.

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Given all the hype about P2P lending I decided to try the system out from both investor and borrower perspectives. Investing wasn't particularly exciting. Borrowing on the other hand was very interesting. 

I decided to compare the debt consolidation options on this site with ASB & ANZ's equivilant offerings (given that this is meant to be a disruptive technology against the banks). I applied at each for NZD 13,500.

ANZ: 14.95% intr, approved 13,500 (unsecured)
ASB: 15.95% intr, approved 13,500 (unsecured)

HarMoney: 31.88%, approved 3,500 (unsecured) or 5,000 (Secured)

I'm 23, own my own home (with an ANZ mortgage) and make 75,000 per year before tax (excluding capital gains).

I'm not sure how this is meant to compete with banks. Especially givent that both ANZ & ASB seem happy enough to waive establishment fees while Harmoney isn't.

It would be nice to hear if anyone was offered a rate better than the bank. Thank You.

There is an general understanding about people that post how much they earn. But your too young to know that.

My Apologies. I figured that it would be good for context. I don't quite understand why HarMoney had my risk profile so high. In hindsight it is likely to do with my age. 

Also I guess generally people who can get bank approvals are very unlikely to apply at HarMoney.
This site won't seem to let me update my original comment because it has replies.

"So somebody who may be able to absorb the loss of both the principal and interest (should invest via peer-to-peer).
Those people don't exist - urban myths of this type need to be extinguished. The risk exposure required to recover (absorb the lost capital) is nigh impossible to achieve if we are to believe Pimco's Mr Gross - HT Andrewj.