Question

Critically assess the risks associated with the growth of Peer to peer lending (p2 plending).What regulatory actions have been taken in Australia to mitigate these risks?Describe and evaluate further regulatory actions that could be taken.

Answer 1

Risks involved in P2P lending:

1. No sufficient diversification (concentration risk)

2. Loss of money due to bad debts (credit risk)

3. Loss of money due to a P2P lending site ending up a failure (platform risk)

4. Loss of money due to scam or heedlessness

The development of regulation for P2P platforms in Australia has recognized all of these characteristic risks but has arguably focused on account supervision and investment facilitation. Australian credit control forces a number of limitations upon retail lenders. First, investors are not involved in a ‘common’ investment where all have pro-rata share in a common set of assets. Second, MIS does not originate new securities but enable investment in a diversified portfolio of existing securities.

Further regulatory actions that could be taken to mitigate P2P lending risk are :

1. checking the creditworthiness of borrowers

2. Diversifying across borrowers

3. Looking for a program that assists in loan recovery

4. Ensure that the whole lending process is transparent.