The Financial Conduct Authority (FCA) has announced that it will be introducing new rules designed to prevent harm to investors, without stifling innovation in the peer-to-peer (P2P) sector. When the FCA set its first rules for P2P, it committed to keep these under review as the sector evolved. These new rules are designed to help better protect investors and allow firms and fundraisers to operate in a long-term, sustainable manner.

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 FCA has refined its proposals to ensure the new rules protect consumers and support the P2P market. In particular, additional guidance has been provided to make it clear that platforms will not be prevented from including information about specific investments in their marketing materials.

As originally proposed, the FCA is placing a limit on investments in P2P agreements for retail customers new to the sector of 10 per cent of investable assets. This is an important means of ensuring that they do not over-expose themselves to risk. The investment restriction will not apply to new retail customers who have received regulated financial advice.

In addition to these restrictions, the new rules cover:

  • More explicit requirements to clarify what governance arrangements, systems and controls platforms need to have in place to support the outcomes they advertise, with a particular focus on credit risk assessment, risk management and fair valuation practices.
  • Strengthening rules on plans for the wind-down of P2P platforms if they fail.
  • Introducing a requirement that platforms assess investors’ knowledge and experience of P2P investments where no advice has been given to them.
  • Setting out the minimum information that P2P platforms need to provide to investors.
  • Applying the Mortgage and Home Finance Conduct of Business (MCOB) sourcebook and other Handbook requirements to P2P platforms that offer home finance products, where at least one of the investors is not an authorised home finance provider.

P2P platforms need to implement these changes by 9 December 2019, except for the application of MCOB, which applies with immediate effect.

Dr Roger Gewolb, Executive Chairman and Founder of fair loan price comparison website FairMoney.com, said “The FCA should be congratulated that it has now released these new rules in such a timely manner; however, I continue to believe that the FCA should not be the regulatory body to take action with the P2P lending sector. It is disappointing that the new FCA rules appear to conflate P2P equity investments with P2P lending, as we should perhaps be less concerned with P2P equity, investors no doubt better understanding the risks involved when injecting capital into these businesses.”

“Borrowers, on the other hand, are still not fully equipped with all the facts to understand how little protection they have when borrowing from a P2P lender. They are also not in a position to properly and professionally access the information on loan portfolios and their performance that is given to them by many of the P2P lending platforms. These lenders need proper independent supervision and regulating to protect potentially vulnerable borrowers and this regulation absolutely needs to come without stifling the industry, the same as it has done for a very long time with all deposit-taking institutions.”

“The Bank of England should be regulating the P2P lending market and treating lenders the same as licensed deposit takers. However, what the FCA has issued today appears to still leave the duty of care for creditworthiness and lending performance with the companies themselves, effectively no doubt leaving the cowboys in charge of the ranch in some cases. ”

“Many of the “peer” depositors/investors in P2P lending have been replaced with institutions’ money such as insurers and pension funds. They don’t require the same level of protection (and they are probably given better information by the lenders) as ordinary people who invest into P2P lending platforms to take advantage of the more favourable interest rates and these people need protection and that, in my opinion, is where the Bank of England and not the FCA need to step in.”

Yann Murciano, Chief Executive at BLEND Network, said “At Blend Network, we believe the measures promise to be a positive step forward for P2P platforms. We already use appropriateness tests, which the FCA is proposing. We believe these measures will have a significant positive impact on the P2P industry, particularly on the way that loan risks and platform business models are assessed.”

“It is because the FCA has kept a watchful eye on the growing UK P2P industry educating and protecting consumers that is the second largest by volume in the world after the US. Last year, £3bn of loans were advanced to small businesses and property developers among others and £15bn has been advanced overall since the inception of Peer2Peer lending in 2005.”

“After all it is not regulation but strong oversight that anticipates dangers is the key to preventing financial scandals happening in the first place.”