The Financial Conduct Authority (“FCA”) announced today that it will be consulting on new rules for loan-based crowdfunding platforms (also referred to as peer-to-peer (P2P) lending) following its post-implementation review of the existing crowdfunding rules.
The FCA had initially conducted a review of the sector in December 2016. Since then the FCA has continued to observe a variety of loan-based crowdfunding business models in order to understand how the market continues to develop. Many of the loan-based crowdfunding models have become increasingly complex and the FCA is keen for regulation to take into account any developments.
The FCA has stated that through its post-implementation review and its ongoing work in supervision and authorisations, it has observed poor business practices as well as risks relating to certain business models. The FCA has said that some of the practices it observed have led the FCA to conclude that the regulatory framework needs to be updated and further rules and guidance are required.
Based on its own findings, the FCA has produced a number of specific proposals to change the rules for loan-based crowdfunding platform operators, which are outlined in the consultation paper that was published today. The proposals include making changes to the current rules to:
- Ensure investors receive clear and accurate information about a potential investment and any risks involved;
- Ensure investors are adequately remunerated for the risks they are taking;
- Platform operators implement transparent and robust systems for assessing risk, value and the pricing structure of loans, as well as making charges to investors fair and transparent;
- Promote good governance and orderly business practices; and
- Extend existing marketing restrictions for investment-based crowdfunding platforms to loan-based platforms.
The FCA is keen to improve standards in the market, but is aware that regulation should not stifle further innovation in this field. The FCA believe the proposals seek to prevent harm to investors in a proportionate manner that continues to permit innovation, which should help both fundraisers and investors to enjoy the full benefits of a well-run P2P sector in the long term. On this point, Chris Woolard, FCA executive director of strategy and competition, has stated:
“When we introduced new rules for crowdfunding, we said we’d review the market as it developed. We believe that loan-based crowdfunding can play a valuable role in providing finance to small businesses and individuals but it’s essential that regulation stays up to date as markets develop. The changes we’re proposing are about ensuring sustainable development of the market and appropriate consumer protections.”
In relation to investment based crowdfunding platforms, generally such firms already have certain regulatory obligations under the Markets in Financial Instruments Directive, the Alternative Investment Fund Managers Directive and the FCA Handbook. As such, the FCA is not consulting on changes to the rules that relate to the investment based crowdfunding platforms at this time.
However, following on from the December 2016 statement, the FCA has stated that it is committed to addressing the gap in protections for customers who buy a mortgage or take out home financing products through loan-based crowdfunding. The FCA is proposing to extend the rules which apply to home finance providers to those who offer peer-to-peer lending where at least one of the investors is not an authorised home finance provider.
The FCA consultation will be open until 27 October 2018. Following that, the FCA intends to outline the new rules in a Policy Statement which is expected to be published later this year.