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Do internet lenders pose a risk to the UK’s financial system?

Authored by Phil Meekin

Phil Meekin

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Approximate read time: 2 minutes

Bank of England governor Mark Carney has recently warned about the new breed of internet-only lenders who may begin to pose a risk to the UK’s financial system. He feels that left as they are and without tighter regulations in place, these lenders could set off another financial crash.

As this new breed of online lenders are displacing traditional high street banks, Carney warned that they had not been tested under pressure, such as in a recession. These lenders may face huge losses as a result of cyber-attacks or bankruptcies, which could make their loans worthless.

Any losses, big or small, that these peer-to-peer lenders, or their depositors, incur are currently not be subject to any protection as the money they deposit is deemed to be at their own risk.

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Carney agrees that digital money lent in this way allows those companies excluded from mainstream banking to access loans in a secure way. However, going forward, he sees there becoming a greater focus on financial regulations, lending rules and risk management of online lending operations and cyber-crime.

As more businesses and individuals are using this peer-to-peer lending method, he feels regulations and safeguards will need to be put in place in an industry which is currently unregulated whilst also allowing the industry to grow and develop further.

The rapid growth over the recent months has seen the Bank of England expect the UK to become a global leader in online lending over the course of this next year. This way of thinking shows why the bank and its governor feel that it is so important to put some protections in place for depositors to stop them losing too much and potentially pulling out of investing in this area.

Alongside online peer-to-peer lending, Bitcoin and blockchain electronic wallet, which mimics a traditional bank account, has grown in popularity and use. These services offer the tools and opportunity for more companies to make use of eMoney, digital wallets and online peer-to-peer lending.

The ease and speed of this kind of lending and these business transactions will be the catalyst to make this sector grow but as Carney has warned without regulation and procedures in place, the UK’s financial system could face some risks in the future.

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