By Ryan Weeks on 27th July 2018
Perhaps the key development is that equity crowdfunding promotions rules may soon be applied to P2P firms.
The FCA's review of crowdfunding rules - both loans and equity based - is finally here. We'll be reading and reacting live. More to follow...
Are you reading the paper too? Send us your comments!
The FCA is proposing that P2P promotions target exclusively the following groups: those certified or who self-certify as sophisticated investors, those certified as high net worth investors, those under advisement from an authorised person, or those who certify that they will not invest more than 10 per cent of their net investible portfolio in P2P agreements.
In other words, the regulator is looking to apply the same marketing rules to debt-based platforms (P2P) as apply to investment based platforms (equity crowdfunding). This must surely be seen as a blow to the industry.
The FCA last reviewed the sector in 2016. It is now inviting responses to proposals to change rules for loan-based platforms (peer-to-peer lenders). These cover, in the FCA’s words:
Proposals to ensure investors receive clear and accurate information about a potential investment and understand the risks involved
The regulator says it has observed poor practices in the sector, ‘particularly among loan-based platforms’. Here’s a quote from the FCA’s executive director of strategy and competition Christopher Woolard: “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.”
Responses to the consultation are due by 27 October 2018.
More on the aforementioned 'poor practices': “For example, in relation to disclosure of information to clients, charging structures, wind-down arrangements and record keeping.”
See chapter 5 for full details of the proposed rule changes.
On timings: "To give P2P platforms time to make any necessary adjustments we propose a commencement period. We propose that these new rules should come into force six months from publication of the final rules and Policy Statement."
The FCA has come up with a trio of new terms to categorise what it sees as an increasingly complex crowdfunding market. They are:
But note that a single platform can operate in more than one way.
Reaction in from Funding Circle's co-founder and UK MD James Meekings: "Funding Circle has consistently campaigned for proportionate regulation that protects consumers, whilst allowing innovation to boost choice and competition in the lending and investment markets. We welcome today’s review as we believe it sets out to do that, and we look forward to continuing to work together to offer alternative and transparent investment opportunities for investors, and access to finance for small businesses."
And this from Julia Groves, partner and head of crowdfunding at Downing LLP: "It’s unsurprising to us that the FCA review is clearly focused more on the loan-based area of the market (P2P lending), given the lower levels of disclosure and the lack of transparency offered by some P2P platforms. By comparison, investment-based crowdfunding such as Downing’s asset-backed Crowd Bonds, automatically fall under higher regulations which rightly demand thorough due diligence and set out clear requirements for testing investor’s understanding of risk. We ensure our fees are as transparent as possible, for example, by setting them out clearly in the offer document for each of our Crowd Bonds."
Rupert Taylor, co-founder and CEO of AltFi data, also commented: "AltFi Data’s methodologies have always aligned with the FCA’s intention to make comparisons of the risk and return of platform lending as simple as possible. Our methodologies enable platforms to demonstrate that their return outcomes match their return expectations, based on a standardised methodology, thereby enabling originators to provide the FCA proposed ‘outcomes statment’ to a third party verified and like for like comparable standard."
Here's a section from the UK Crowdfunding Association's response: "We would still emphasise the need for the FCA to improve its use of technology to make monitoring an online sector more effective and efficient and not to rely on the sharp eyes of UKCFA members highlighting examples of poor or even illegal practice in the investment world. We welcome the FCA’s proposals for further alignment of the regulation of P2P Lending and Investment Crowdfunding."
The responses are still coming in. Here's Jaidev Janardana, CEO of Zopa: "As the founder of the P2P industry, we are always in favour of measures that move forward its maturity and allow responsible growth. We welcome the insight and recommendations that the FCA released today, as we believe it’ll provide more alignment of how customers should be treated within the industry."
"We operate with customer interest at the forefront of our business and as such the spirit of these regulations - which seek to ensure that customers are well informed and treated fairly - are in line with our own ethos. While we are still digesting the detail, we believe that the measures will not represent significant change from how we operate today."
"Following this review, we will continue to work collaboratively with the FCA and with our customers to ensure we provide the best possible services and products."
Peer-to-Peer Finance Association chair Paul Smee has also weighed in: "The Association has always maintained that all investors lending through a peer-to-peer lending platform need to be clear about the performance of the platforms on which they invest. That is why P2PFA members have set out and signed up to Operating Principles which give a gold standard for disclosure. We are pleased that the FCA’s proposals endorse the idea of full disclosure."
"There is a lot of detail in this document, and we will be working through its implications, to ensure that the eventual regime is practical, proportionate and allows for the development of a healthy and competitive market in peer-to-peer lending. Peer-to-peer lending needs to make its full contribution to the growth of the UK economy and we will be working to ensure that new regulatory requirements do not get in the way."
24 Sep 2018 12:55pm
Appropriate oversight and consumer protection is essential in this nascent industry. It isn’t always clear where the risks are and size of risk given limited information available and it is therefore not always clear whether investors are being suitably compensated for risk. Capital preservation should be the overriding principle for P2P platforms and procedures to promptly and efficiently repay investors in the event of default within maximum specified time limits would be a positive step forward especially where provision funds exist. A 10% limit however does seem low and work needs to be done to differentiate between different types of P2P and ensure FCA recognise these differences and adjust percentage limits accordingly. Otherwise FCA needs to explain their concerns especially where provision funds offered under BOE stress testing methods and why such a low percentage limit is deemed appropriate.
01 Aug 2018 05:31pm
P2P needs more regulation so that it can be available to all: more transparency, more accountability, more reporting, controls on sharp practice, bigger penalties for rule breaches, better comparisons between providers, etc. As one of the Zopa co-founders I welcome all that. But what the UK does NOT need is regulations that limit access to the wealthy and/or industry insiders to P2P innovation. The focus should be on making P2P so thoroughly and well regulated that it can confidently be freely marketed to everyone.
30 Jul 2018 09:24pm
This will speed up the consolidation process in the sector as some player will find it difficult to cover the additional costs. The key issue remains however that investors can not compare the risk between platforms easily even with additional regulation and even with better return data there is a delay in net return due to delayed default and recovery. We need a “FICO score” for European SMEs. An affordable counter party risk rating. I would love to see more support from regulators to achieve this as it would help in all respect (risk awareness, secondary market, liquidity).
30 Jul 2018 04:10pm
I fully agree with the sentiments of the last contributor above (30 July, 1.12pm). I couldn't have put it better myself, indeed probably not as well. If necessary I am quite prepared to declare myself "a sophisticated investor", a phrase which I would love to see officially defined, and to take the consequences.
30 Jul 2018 01:12pm
As a pensioner I resent the FCA's comments about the appropriateness of P2P lending for pensioners. As a former company director I'm well able to decide for myself what investments I make, and have no plans to reduce my current level of P2P lending (30% of my total). The FCA may wish to reflect on the fact that had its predecessor been rather better at monitoring the activities of Equitable Life, many of us would now have less need to consider some higher risk investments in our retirement.
27 Jul 2018 09:37pm
This is good that regulation is tightened up, its just exactly what p2p needs. Too many doubts remain, especially with the recent p2p platform folding. I would like to see FCFS protection. The FCA is quite correct the provision funds are not a guarantee and subject to a harsh test they would possibly struggle.
Now in its sixth year, the AltFi London Summit returns on 18th March 2019 to 155 Bishopsgate. Last year proved to be a crucial turning point for the key players building the future of finance. Leading platforms launched oversubscribed IPOs, digital banks proliferated and mainstream financial institutions started their own disruptive propositions. With 2019 certain to be another landmark year, more questions will be asked by regulators with investor interest in disruption also poised for more rapid growth.