The corporate watchdog has highlighted conflicts of interest in the marketplace lending industry that may need to be managed better.
The Australian Securities and Investments Commission has released the results of a survey of the sector, revealing a market still in the early stages of development.
ASIC says it is interested in how the industry is handling a range of conflicts. “If most of the revenue is generated from loan originations then the provider might have a stronger interest in origination of loans rather than ensuring that existing loans are repaid. This potential conflict may be amplified by the fact that the provider does not necessarily lend it own funds but is lending the funds of investors,” ASIC’s report says.
Lenders must also balance the need to continue originating loans to generate revenue with the maintenance of an appropriate credit assessment standard to meet responsible lending obligations.
The survey covered nine marketplace lenders, who wrote a total of $156 million of consumer and small business loans in the 2015/16 financial year. Of a total of 7448 borrowers at June 30 last year, 7415 were consumers and 33 were business borrowers.
Ninety-six per cent of loans were unsecured.
Funding for the loans was sourced from wholesale and retail investors, including trustees of self-managed superannuation funds.
At June 30 last year, eight respondents had a total of 3201 investors, made up of 2664 retail investors, 239 wholesale investors and 298 SMSF trustee investors.
Wholesale investors accounted for 65 per cent of funds invested, retail investors 22 per cent and trustees 13 per cent.
Most revenue (83 per cent) is generated by loan origination fees. The high proportion of origination fees (as opposed to ongoing fees) may be explained by the fact that most providers have not been operating very long.
Of the respondents that reported current and historical gross default rates, three reported default rates greater than zero. Current defaults ranged from 0.1 per cent to 3.4 per cent (at June 30 last year) and historical defaults ranged from 0.25 per cent to 12.2 per cent.
When respondents were asked about their expected default rate for the 2017 financial year, the mean rate was 2.5 per cent, with responses as high as four per cent.
Loans in arrears represent 3.1 per cent of total loans outstanding.
Two lenders have arrangements to offset losses in the event of default. However, these arrangements are not guarantees.
Marketplace lending businesses are diverse, with a number of different business models and levels of activity. Most platforms are structured so that investors invest on a “fractionalised” basis, with multiple exposures to parts of a number of loans.
Some platforms allow investors to fund a whole loan. Others offer a pooled approach through a managed fund, giving investors exposure to all loans in the portfolio.
In addition to conducting the survey, ASIC has undertaken surveillance activity in relation to advertising and disclosure.
The regulator says it has required operators to make corrective disclosure in some instances to address issues identified, including inadequate disclosure of key features and risks, withdrawal rights available to investors and inappropriate comparisons with bank or other competitor products.
Three lenders have breached their obligations under the Corporations Act – one a significant breach.