Don’t let regulators kill off the best idea in finance in decades

P2P lending is one of the best innovations in finance for ages, says Matthew Lynn. The last thing we need is to regulate it to death.

Anyone with money to save hasn't seen much in the way of good news in the last ten years. The stock market has gone nowhere. Fund managers' fees have stayed obstinately high. Half the banks have gone bust and if they aren't going belly-up, they are usually mis-selling something or other to their exasperated customers.

Interest rates are at 300-year lows, and the governor of the Bank of England is promising to keep them there for as long as possible. It is a wonder that anyone bothers to save at all.

Yet there has been at least one piece of good news. The internet has enabled a new breed of peer-to-peer (P2P) and crowd-funding websites to cut out the middlemen and hook savers and borrowers up directly, offering both sides a far better deal.

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P2P lending is becoming a huge growth industry and one in which the UK could emerge as a major player. Sites such as Zopa allow savers to make direct personal loans, while the likes of Funding Circle do the same for small businesses.

Anyone lending through them gets a far higher rate than from a deposit account with their bank (understandably, as it's riskier), while the borrower gets a much better deal too and the bank or credit-card company gets squeezed out.

Likewise, crowd-funding allows entrepreneurs to raise capital from private investors without having to go through a fund manager or a venture-capital house and they usually find it easier and cheaper to raise the cash they need. And some of the sites are getting big Zopa has matched' £400m of loans so far.

These sites are simply doing to finance what the web has done to dozens of other industries cutting out the middlemen, putting buyers and sellers in direct contact, and stripping out transaction costs.

And because the finance industry has a heck of a lot of middlemen, most of whom are vastly overpaid for the actual value they add and many of whom are dishonest as well it is without question one of the industries that most needs a shake-up.

Retailers generally run on very thin margins, and travel agents are pretty straight with customers if those industries can be turned upside down by the internet, there is no reason why finance can't be as well. Probably even more so.

The trouble is, the regulators are now getting involved. From April next year, the fast-growing P2P lending and crowd-funding industries will start being regulated by the Financial Conduct Authority (FCA).

The FCA is worried that investors might be taking inappropriate' levels of risk, and that they may not be getting enough information on what they are investing in. And it wants to ensure that firms have enough capital in place to continue trading, and that the client's money is held in the right places.

Many people will welcome that. After all, unregulated finance has a bad reputation. And most players in the sector say they support some form of regulation in part, I suspect, because it makes them look more legitimate, and so makes it easier to get people on board, but also because it is bad for public relations to say you don't want to be supervised by anyone.

But, in fact, it is a terrible idea for three reasons. First, internet businesses don't need regulating. Do we need government inspectors checking whether it's safe to buy from every individual on eBay? Of course not we can see the feedback left by other customers, so if they are crooks they will be found out immediately.

The same is true of any other web transaction. State supervision is only needed where there is a lack of information and that's the one thing the web has in abundance. Any P2P site that ripped people off sorry, mis-sold' products in the way traditional banks and insurers do would be out of business in a flash.

Secondly, regulators quickly become captives of the status quo. P2P is a big threat to traditional finance. It offers better deals to both savers and borrowers, finding new ways of doing things at a much lower cost.

Big banks, fund managers and venture-capital houses will be very scared of that, and rightly so. They will, no doubt, lobby hard for rules that will kill it off. And the regulators will listen to them.

Finally, it will prevent new ideas from emerging. P2P lenders and crowd-funders are innovating furiously. Not all of their ideas will work but a few will, and the finance industry could use some fresh thinking.

Right now, it is very easy to get started in the industry and to test new things. They don't have to get it past a regulator; they can just try it out to see if it will fly. But if they need permission, it will slow it down and it is far too early in the sector's development for that.

P2P lending and crowd-funding is one of the best things to happen to finance in decades for consumers that is. It would be a tragedy to let regulators kill it off. Indeed, if there is anything customers need protecting from, it is the traditional banks and fund managers not the people offering a better deal than they do.

Matthew Lynn

Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years. 

He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.