Why governance is key to the future of P2P

Demonstrating the appetite of investors for the asset class, the peer-to-peer (P2P) lending sector raised £2.2 billion last year, doubling in size from 2014.

The prospect of high returns, catalysed by media attention, has drawn a range of investors to the sector, all looking to enhance and diversify their portfolios.

While many indicators point towards a bright future for P2P in the UK, claims of misconduct in the US are casting a shadow over the sector on both sides of the Atlantic.

In the few months, the actions of US-based Lending Club, the world's largest P2P lender outside of China, have damaged the sector's reputation.

Such events provide ample ammunition for P2P's critics. The former chairman of the Financial Services Authority, Lord Turner, is among the most vocal of these.

Even before Lending Club's troubles, he went on record to state that P2P loans could be a source of losses that would 'make the worst bankers look like absolute lending geniuses'.

But can these claims be substantiated? While the P2P industry has some growing pains, which need to be addressed, Turner's sweeping statement fails to take into account the huge variety of providers and their diverse approaches to security and transparency and, in the UK at least, its impressive track record.

The UK and US have very different regulatory regimes. Where American regulation has been slow in developing, the UK's regulator, the Financial Conduct Authority (FCA), has been proactive in building a regulatory framework which better resembles the regulation of more traditional financial services companies.

This is not to say that the charges levied by Lord Turner should be taken lightly. Over the past two decades, evolving technology has led to the fast formation of a number of disruptive industries - which have then suffered reputational damage in their early stages due to operational lapses or failures.

When music streaming began to move into the mainstream, for example, a handful of platforms took advantage of the limited governance in place. The likes of Limewire gave users the means to share music without artists' consent, threatening the credibility of those platforms acting responsibly.

Fast-forward 10 years, and the success of Spotify, Apple Music and Deezer, among others, demonstrates that music streaming is a viable business model.

Here, the regulation of the industry has allowed a middle ground to be reached so that Spotify and its competitors are now part responsible for the first rise in music sales for over a decade.

While this story has a happy ending, early-stage participants suffered. This is unacceptable and presents a growth model that P2P lenders should look to learn from rather than replicate: the lesson being that regulation, far from hindering an industry, can actually help it grow.

In the UK, measures have already been put in place to ensure that this is the case. A significant landmark was reached on 1 April 2014, when the FCA assumed regulation of the sector, a model that is now being replicated worldwide.

Regulation helps to protect both investor and borrower, and gives the sector added credibility and will only serve to boost awareness and participation.

Ultimately, as in the case of any investment product or vehicle, investors do need to exercise caution - and consider platforms' process to make sure they are comfortable deploying their capital through the platform.

However, for the industry's own credibility, platforms must be transparent and act with integrity at all times.

The actions of Lending Club should give all platforms food for thought, and serve as a reminder of what could happen if platforms and industry regulators fail to play their parts in developing a sustainable, long-lived industry.

Chris Maule is chief executive and founder of UK Bond Network.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.