New Zealand peer to peer lenders have hit back at criticism by a former British regulator warning a crash in the sector would make "bankers look like lending geniuses".

Lord Adair Turner, who previously chaired the Financial Services Authority, has predicted big losses for the the industry which involves matching up borrowers and investors through online platforms and claims investors are lending money to bank rejects who aren't being properly risk-assessed.

"The losses on peer-to-peer lending which will emerge within the next five to ten years will make the worst bankers look like absolute lending geniuses," he said on the BBC's Today programme, according to a report in the Telegraph.

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But Neil Roberts, founder of Harmoney - New Zealand's biggest peer-to-peer lender - refuted the claim that its borrowers were made up of banks rejects.

"Harmoney has created a prime book which would be the envy of any banking institution."

Roberts said borrowers had to go through a tough vetting process including having to verify their income, home ownership and work status.

As a responsible lender, we then ensure affordability by checking bank statements, ensure loan purpose if valid and check for any adverse data.

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Only around 20 per cent of those that applied for loans got through to its lending stage with Harmoney so far lending just under $200 million.

In Britain the market has taken off quickly but in New Zealand it is still relatively new.

Four companies have received licenses to operate; Harmoney, Lend Me, Squirrel Money and Lending Crowd but three out of four have only recently begun lending.

Lord Turner said investors should only participate in peer-to-peer lending if they have money which they can "afford to lose."

Roberts said investors did take on the risk that borrowers would not repay the money but in return they received returns that were commensurate with the risk.

"We believe the risk is entirely manageable, particularly and essentially with the risk grading, fractionalisation, pricing for risk - which are all essential for any platform offering."

So far its default rate has been low with an average of just 3.22 per cent of loans not being repaid although the rate for its riskiest loans was 11.19 per cent.

In exchange its returns have averaged 12.66 per cent in the year to January 22.

But the industry has yet to face a down-turn in economic conditions.

Roberts said he did not believe it would be adversely affected in "any noticeable way" in an economic down-turn because of regular reviews of its credit underwriting process.

Lord Turner was also critical of how peer-to-peer platforms lent money to small and medium sized businesses saying it could only be done with "good credit underwriting", including verifying that the firm had premises, machines and the right skills.

The idea you can just automate that onto an [online] platform will end up producing big losses.

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Wayne Croad, managing director of Lending Crowd, which specialises in loans to small to medium sized businesses said it undertook extensive checks on business borrowers.

"Lending Crowd checks director identities, completes company searches, web, directory and social media checks on all commercial customers.

"Additionally we collect financial statements and bank statements from all commercial borrowers.

"Also we secure against assets owned by the business or its owners in 100 per cent of our loans."

Croad said its borrowers were mainly tech savvy busy people who were interested in getting a better rate than at the bank.

"They require an online solution to raise money without unnecessary bank bureaucracy and red tape."