The Crowdfunding and Peer-to-Peer Arguments Heat Up

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Nick Moules
28th August 2013

There has been more high profile coverage of the crowdfunding and peer-to-peer lending industries recently as politicians, regulators and industry advocates have all been busily declaring their concerns and ambitions for these fledgling, yet potentially hugely influential industries.

Crowdfunding is either seen as the biggest scandal of a generation in the making or the biggest positive transformation to hit the business funding market, probably since the internet. Unsurprisingly, those in favour want light touch regulation, those in opposition want the tightest possible regulation to prevent abuse of the process to protect the consumer, and to protect the standing of the high street banks in British society.

But has the argument really moved on? Probably not, the difference now is where these arguments are taking place. National newspapers are now the battle ground, rather than the comments section of a far-flung website visited by ten people a month.

In the Sunday Times last weekend, the FCA repeated its stance that those investing in equity crowdfunding had little or no protection if the business fails. Angel investors will be familiar with this, but crowdfunding is targeting the wider market, who might not be so aware of the risks. You can’t blame the regulator for sounding caution (what else would you expect from a regulator?), but as Barry Sheerman MP points out, it needs to be put into context:

“These negative, unattributed comments from the FCA, which strongly imply that crowdfunding should be reserved only for experienced investors and city-types, are unhelpful and give a distorted picture of the crowdfunding sector. Those of us with deep knowledge of the sector have not seen any evidence of investors being systematically misled or exploited.”

No-one can argue the potential for investors to be ripped off is there, but in our experience, platforms operating in that sector do so with high levels of integrity and governance, so we’re inclined to agree with Mr Sheerman.

Conversely, peer-to-peer lending looks to be heading for the heart of regulated financial services with the announcement that HMRC is looking at including the asset class in ISAs, giving lenders a tax break.

In an article by Dan Hyde of The Telegraph he outlines the frustrations many lenders experience when calculating the tax they need to pay, which can be complicated by late payments and defaults. How much will be allowed to be included will be interesting as many individuals have significantly more than the current allowance invested in the market and it still doesn’t solve the tax problems for the portion that falls outside the allowance.

There is still some debate as to whether peer-to-peer lending is a saving or investment. The smart view might be to separate lending to individuals and businesses. Where people lend through Zopa and Ratesetter they’re getting returns similar to top rate savings accounts and are protected (to an extent) by their slush funds, whereas gross returns through lending to businesses are more in line with other investments like property and don’t come with the same level of protection.

Understandably at this stage, the FCA has asked all debt-based sites to follow the same rules while it takes time to understand the different business models and associated risks and benefits.

In our opinion, the recent warnings about crowdfunding and peer-to-peer lending feels like the first signs of lobbying by the high street and the traditional finance providers against the rise of the industries.

What started out as a media darling has now gathered sufficient momentum to merit lobbying – evidence of the perceived threat to business. As long as the good news keeps coming about the number of businesses receiving funding from these sources and individuals getting returns that top bank products, the argument will continue in the most high profile of environments.

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