More about the lending, less about the tech
The global alternative finance industry has undergone staggering growth in recent years. In the UK alone, in 2015 the combined market activity of the alternative finance industry grew 84% from £1.74bn the year before to £3.2bn.* However, as the industry continues its rapid growth, regulators must also continue to develop more stringent and enforceable regulation in order to protect both institutional and retail investors alike.
One of the biggest issues is the varying level of sophistication within the range of investors. Steps must be taken to make sure lenders fully understand what they are buying, are able to make informed decisions about the risk/return profile of their investment, and are treated fairly. Regulators need to remember that alternative finance is more about the lending, and less about the tech.
On a macro level, it is crucial that corporate governance standards are improved across the sector and only the most compliant and well managed platforms are able to thrive. Improving the regulatory framework will naturally raise barriers to entry, thus eliminating the weaker business models and improving competition.
Such improvements will also lead to increased consolidation in a fragmented market, leading to a further strengthening of standards. Consolidation is a good thing, and will signal the natural maturation of what remains a nascent market.
Government initiatives such as the Innovative Finance ISA will help to improve trust in and awareness of the sector by educating and encouraging lenders.
Only by getting the correct regulatory guidelines in place can the sector expect to attract the necessary investment to drive scale and fulfil the vital role it plays in providing SMEs with much needed capital. This process needs to be undertaken quickly and with active engagement from the broader industry in order to ensure that instances of malpractice are appropriately dealt with and to allow the sector to continue its journey to becoming a key pillar of the mainstream financial sector.
* Pushing Boundaries: The 2015 UK alternative finance industry report, February 2016. Note: this excludes balance sheet lenders, and thus does not cover the whole AltFin market.