Peer-to-peer lenders reject Turner’s criticism

Lord Turner of Ecchinswell, who led the Financial Services Authority during the credit crisis, predicted that losses on peer-to-peer loans “within the next five to ten years will make the worst bankers look like absolute lending geniuses”.

Peer-to-peer lenders use online platforms to link up consumers and small businesses that want to borrow money with retail and professional investors. The industry has lent an estimated £5 billion since the first platform, Zopa, emerged in 2005.

The Times reports that Lord Turner, who was appointed at the FSA, which has since been replaced by the Financial Conduct Authority, at the onset of the credit crunch, described peer-to-peer platforms as “a group of people [who] are going into a lending process on a technical platform without anybody really doing ‘go out and kick the tyres’ credit analysis”.

He told the BBC: “You cannot lend money to small and medium enterprises in particular without somebody going and doing good credit underwriting. This idea that you can just automate that on to a platform — it has a role to play but I think it will end up producing big losses.”

Lord Turner, who is on the board of Oak North, a start-up bank, said that people should invest in peer-to-peer platforms only “if they have money they can afford to lose”.

Andrew Holgate, managing director of Assetz Capital, a peer-to-peer lender that provides credit to small businesses, said: “Lord Turner’s sweeping statement isn’t a true representation of the sector.

“Speaking for Assetz Capital, we actually have fewer automated processes in the credit process than the banks, and our underwriting heavily relies on face-to-face relationships with [companies], not just credit-scoring algorithms or telephone interviews.”

Christine Farnish, chairwoman of the Peer-to-Peer Finance Association, the industry’s trade body, said that Lord Turner’s analysis “[flew] in the face of the evidence”.

“P2P lenders . . . take credit risk underwriting extremely seriously, and they have exactly the same information at hand, and do the same sort of analysis, that the banks do, if not more.

“P2P lending offers for the first time in history actually something that’s really clear, understandable to ordinary folk, that spells out the risks and the rewards, so people can make their own decision.

“Strict credit underwriting rules apply to all our members and this should not be confused with higher-risk forms of crowdfunding or lending to sub-prime customers.”

She added that members of the trade body, which represents about 90 per cent of the sector in the UK, “operate with high standards of transparency and business conduct”.

“This includes publishing their full loan books on their websites and providing clear information on all fees and charges to both investors and borrowers. I would challenge anyone to find this level of transparency in any other part of the financial services market.”

The organisation added that the industry’s default rate is low, running at present at about 3 per cent.

Christian Faes, co-founder of LendInvest, an alternative finance platform, said: “These comments are self-serving and timed to drum up more sales of Lord Turner’s book. Surely, he is conflicted too, given that he’s now a regulator-turned-banker.”

Landbay, a peer-to-peer mortgage lender, said that “to presume that all platforms use automated underwriting processes is incorrect and misleading”.