Mark Carney: internet-only lenders pose risk to UK financial system

Bank of England governor says fintech firms could trigger next financial crash without tighter regulation

The Bank of England governor has warned that a new breed of internet-only lenders are beginning to pose risks to the financial system and without tighter regulation they could trigger the next financial crash.

Mark Carney said high street banks were being displaced by online lenders that were untested in a recession, when bankruptcies might make their loans worthless.

Cyber-attacks could also strip customers of digital money, leaving them to face huge losses without the traditional protection offered by regulators, he said.

The warning follows a speech last year by Adair Turner, the former chief financial regulator, who said losses on loans made over the internet could make the worst bankers look like “lending geniuses”.

Speaking at a conference in Germany, Carney said digital money held out the prospect of allowing millions of people excluded from the mainstream banking system to access loans securely.

Threadneedle Street has several initiatives under way to allow peer-to-peer online lenders access to central bank funds and facilitate transactions.

But he expected the authorities “to pursue a more intense focus” on financial regulations, lending rules “and a more disciplined management of operational and cyber risks” as the price of the industry’s growing influence.

In the UK, about 14% of new lending last year to small and medium-sized businesses was by so-called fintech lenders, which typically offer loans with funds provided directly by investors.

He likened the growth in recent months to the explosion in securitised loans used by banks such as Northern Rock before the 2008 financial crash.

“It is not clear the extent to which P2P lending can grow without business models evolving in ways that introduce conventional risks. Were these changes to occur, regulators would be expected to address such emerging vulnerabilities,” he said.

The UK is expected to become a global leader in online lending, putting pressure on the Bank to adopt regulations that protect customers without stifling a still young industry.

Bitcoin’s value has increased in recent months. Photograph: Getty

Bitcoin is the best known digital currency, but swings in its value have undermined consumer confidence and limited its growth.

The currency has a fixed number of coins which can be used to buy goods and services from providers that accept them. A recovery in Bitcoin’s value in recent months and the popularity of the blockchain electronic wallet, which mimics a bank account, has prompted some analysts to predict it will take off this year.

“Payment services traditionally relied on cash, debit and credit cards, and wire transfers. Now fintech companies are providing domestic and cross-border payment services on significant scale through digital wallets or pre-funded eMoney,” Carney said.

“Tech firms take a slice of payment revenues and, in many cases, the totality of customer transaction data. In the process, they are systematically capturing the type of knowledge I used to gain from my daily interactions with customers in the bank branch,” he said, referring to his first job as a bank teller.


Phillip Inman Economics correspondent

The GuardianTramp

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