The FCA has made its final P2P lending “client money” and “conduct of business” rules.

The client money rules came into force on 21 March 2016, and were published the same day.

The conduct of business rules will come into force on 6 April 2016, when the government’s tax and Innovative Finance ISA legislative changes also take effect.

Until the client money rules changed, a P2P loan platform provider (PP) was obliged to segregate the money it received in connection with regulated P2P loans (i.e.  monies being lent and repaid), from its own funds, and the money it received in connection with unregulated P2P loans. If certain tests are met, a P2P loan PP can now elect to treat regulated and unregulated P2P loan monies in the same way. This will make client money segregation easier.  However, before making this election, a PP should consider what impact the election will have on the aggregate value of its “client money“. This is because an increase in the aggregate value of the client money could change the PP’s CASS status. If that happens, the PP may then be obliged (a) to prepare and submit FCA Client Money and Assets Returns; (b) to comply with (more of) the FCA’s “Responsibility for CASS operational oversight” rules; and/or (c) to appoint a compliance officer (see CASS 1.2; CASS 1.3; SUP 10A and SUP 10C).

From a Conduct of Business perspective, the FCA has decided to:

  • apply its suitability rules to firms making a person recommendation involving advice of P2P agreements (see COBS 9);
  • ban the payment and receipt of commission by FCA regulated firms in relation to personal recommendations made to retail clients on P2P agreements (see COBS 6.1A; COBS 6.1B; and COBS 6.2A)
  • apply the rule on inducements (COBS 2.3.1R) to personal recommendations involving advice on P2P agreements, in the same way that it is applied to other retail investment business;
  • apply its training and competence rules to ensure that financial advisers who advise on P2P agreements are appropriately supervised and assessed as competent to carry out that activity (see TC 2.1);
  • give consumers who receive advice on P2P agreements access to the Financial Ombudsman Service and the Financial Services Compensation Scheme.

Some firms had argued that they would not be able to conduct adequate due diligence on P2P agreements, and this would make it difficult or impossible for them to comply with the suitability rules. They also argued that there would be little interest in advising on P2P agreements, because it would be difficult to measure the risks associated with them, so most investments would be “non-advised”. Unsurprisingly, the FCA rejected these arguments: “… we consider it important that firms consider what research and due diligence they need to undertake to ensure they are familiar with the nature and risks of the products that they select for customers … We would expect an adviser to understand the distinctions in risks between different product types, especially those that may appear similar. For example, advisers should consider the risks of P2P agreements when compared to bank or building society deposit accounts … Our existing rules also set out situations where firms can place reliance on other persons [see, for example COBS 2.4.6R]. It is generally reasonable for a firm to rely on information provided to it in writing by an unconnected authorised person or a professional firm, unless it is aware, or ought reasonably to be aware, of any fact that would give reasonable grounds to question the accuracy of that information … Advisers must form their own opinion of the risk of any investment and advise their clients based on this opinion. If an adviser is unable to form an opinion based on the information available, then the correct response is not to advise the client to invest in that product …

The FCA has decided not to apply the appropriateness test to P2P agreements when sold on a non-advised basis; or to require firms to consider P2P agreements when they hold themselves out as independent; but each of these things will be kept under review, and could change in the future.