On 21 March 2016, the FCA published a policy statement (PS16/08: FCA Handbook changes regarding the segregation of client money on loan-based crowdfunding platforms, the Innovative Finance ISA, and the regulated activity of advising on peer-to-peer agreements) outlining the final rules relating to the segregation of client money on loan-based crowdfunding platforms, the introduction of the Innovative Finance ISA (IFISA) and the new regulated activity of advising on peerto-peer (P2P) agreements.

The approach outlined in the paper follows on from two consultation papers: CP16/4: loan based crowdfunding platforms and segregation of client money which was published on 21 January 2016, and CP16/5: Handbook changes to reflect the introduction of the Innovative Finance ISA and the regulated activity of advising on peer-to-peer agreements, which was published on 2 February 2016. The FCA received positive feedback during the consultation period and the final rules take forward the FCA proposals outlined in the two consultations.

Segregation of client money on loan-based crowdfunding platforms

Chapter 2 of the policy statement explains the final rules in relation to the segregation of client money on loan-based crowdfunding platforms. These rules take forward the FCA’s initiatives to protect consumers by ensuring that firms provide it with sufficient information in order to be able to assess the risks of loan-based crowdfunding. The changes to the rules set out in this chapter came into force on 21 March 2016.

The FCA aims to simplify client money arrangements for firms that hold money in relation to both P2P and business-to-business (B2B) agreements. The new rules allow firms to elect to hold all of their clients’ money relating to this business under chapter 7 of the Client Assets Sourcebook (CASS).

If making the election above causes a firm’s CASS firm size to change from CASS small to CASS medium or CASS large, the firm will need to submit a client money and assets return (CMAR). The FCA has introduced a year’s transitional period for firms in this position, and firms will have until the following annual stratification exercise (in January 2017) before they will need to submit their CMARs. However, such firms need to be able to provide CMAR data upon request during FCA supervisory visits in this period. 

The Innovative Finance ISA 

Chapter 3 of the policy statement confirms the approach proposed by the FCA in CP16/5 in relation to IFISAs. This guidance took effect on 6 April 2016. The FCA sets out guidance on existing financial promotion and disclosure rules to clarify the types of information firms should provide in relation to IFISAs. In particular, the FCA clarifies that firms should disclose the following:

  • the potential tax disadvantages arising if a consumer invests in a P2P agreement, held in an IFISA wrapper, which is not repaid;
  • the potential tax disadvantages if the firm operating the platform fails;
  • the procedure applying, tax consequences arising and timeframes involved if an investor wants to cash in a P2P agreement held in an IFISA wrapper; and
  • the procedure for transferring some or all of the P2P agreements held in an IFISA wrapper from one ISA manager to another and how long this would be expected to take.

The guidance is at a very high level and aims to ensure that investors will be aware of the specific IFISA-related risks. The FCA expects firms to provide sufficient information in relation to the tax position of IFISAs before the business is transacted so that customers are aware of potential disadvantages in case a P2P agreement held in an IFISA wrapper is not repaid, or the customer looks to transfer the IFISA from one ISA manager to another. 

Advising on peer-to-peer agreements 

As of 6 April 2016, the provision of advice in relation to P2P agreements is a regulated activity under the amended Article 53(2) Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. Having reviewed the responses to CP16/5, the FCA sets out its new rules, which came into force on 6 April 2016, to account for this new regulated activity in line with the proposals outlined in its earlier consultation paper. 

The rules are intended to bring the regulation of advising on P2P agreements more in line with the regulation of advising on specified investments. In particular, the FCA will apply the suitability requirements contained in chapter 9 of the Conduct of Business Sourcebook (COBS) and the rule on inducements found in COBS 2.3.1R to firms that make personal recommendations in relation to P2P agreements. The rules outline that those advising retail clients on P2P agreements should be qualified under existing retail investment advice qualifications. Since the FCA considers that the rules in the Training and Competence Sourcebook are appropriate to ensure that employees adequately understand the differences between standard ISAs and the IFISA, the rule changes do not include extending the appropriateness test to P2P agreements when sold on a non-advised basis. 

Furthermore, firms that hold themselves out as independent financial advisers (IFAs) are not obliged by the rules to consider P2P agreements when making personal recommendations to their clients. Following the Retail Distribution Review, IFAs must consider all retail investment products which are capable of meeting the investment needs and objectives of a retail client when making personal recommendations to them. The rules specifically stipulate that IFAs do not need to consider P2P agreements in the basket of all retail investment products when providing a personal recommendation to a retail client. The FCA recognises that not all advisers will be in a position to advise on P2P agreements as a matter of course, and so it does not deem it appropriate to require IFAs to consider such agreements when advising their clients. Where an IFA does provide advice in relation to P2P agreements, this advice will amount to a regulated activity and the IFA will need authorisation from the FCA.