The FCA has published its policy statement on peer-to-peer (P2P) lending following a lengthy public consultation into the crowdfunding industry in general. The policy statement introduces a large number of new rules for P2P platforms and includes restrictions on direct marketing to non-sophisticated / high net worth investors unless they are receiving regulated advice, and ensuring such investors do not place more than 10% of their investable capital in P2P platforms.
P2P lending is one of the financial sector's great unknowns. Whilst its popularity has increased exponentially in recent years, (the FCA estimates that 275,000 people have funds in P2P lending platforms, totalling more than £5bn across 68 providers) regulation, until now, has been sparse. In an attempt to provide clarity, the FCA has announced a series of new rules which will mostly come into force later this year.
The aims of the rules are to ensure investors have clear and accurate information about the investment risk of a product, to allow them to make suitable investment choices and to understand that their capital is at risk and they may suffer losses.
In summary the following key rules will be implemented:
Marketing restrictions will be applied in an attempt to protect unsophisticated investors.
Appropriateness assessments will be introduced when no advice has been given to the investor.
The Mortgage and Home Finance Conduct of Business sourcebook (MCOB) and other Handbook requirements will now be applicable to P2P platforms that offer home finance products, where at least one of the investors is not an authorised home finance provider.
These changes are discussed more below.
P2P platforms will soon be restricted to marketing to sophisticated and high-net-worth investors, those receiving regulated investment advice or those who certify that they will not put more than 10% of their investment portfolio in P2P loans. The FCA states this is an attempt to protect unsophisticated investors who are unaware of the risks involved with P2P lending.
This change has not been welcomed by all with Rhydian Lewis, chief executive of RateSetter, one of the largest P2P platforms, accusing the regulator of "patronising normal people".
Although not quite a ground-breaking introduction given such a system already exists in crowd bonds and equity crowd funding, the test aims to help assess whether the investor has an understanding of a number of matters, including the relationship between the borrower and the platform; that returns may vary; that all capital is at risk; and that there is a lack of FSCS protection.
Christopher Woolard, executive director of strategy and competition at the FCA, said: "These changes are about enhancing protection for investors while allowing them to take up innovative investment opportunities. For P2P to continue to evolve sustainably, it is vital that investors receive the right level of protection."
The introduction of the test is not without questions, as many P2P platforms will now be asking themselves: when does the test need to take place – at the time of registering with the platform or when the investment is made? Further clarification is likely to be needed from the FCA if firms are not to be caught out.
Introduction of the MCOB requirements
There is currently no P2P market for home finance, however the FCA understands that some P2P lenders are moving into the home finance lending sector. They would not currently be able to offer the same level of protection that that a consumer would have if they purchased a mortgage in the traditional sense.
Requirements will include the P2P lender ensuring that any investor is able to afford the sums due under the contract and largely mirror the MCOB requirements.
The application of these rules will have immediate effect.
Where next for P2P?
The rules provided by the FCA are undoubtedly a step in the right direction. Given so little is known about P2P lending and the obligations of the platforms offering such services, it is alarming to consider that a survey of 4500 P2P customers in 2018 found that 40% of those surveyed had invested more than their annual income.
The rules should provide greater protection to consumers and greater clarity to P2P platforms. It is also an acknowledgment that P2P lending is here to stay, with the regulation providing a degree of authority to P2P platforms who can no longer be viewed as 'new' unregulated providers.
P2P platforms have until 9 December 2019 to implement the majority of these changes. To read the FCA's policy paper, please click here.