The regulator’s proposed changes to promotions rules in P2P are sharply dividing opinion.
More than a week on from the publication of the FCA’s long-awaited consultation paper on crowdfunding, one proposal in particular is drawing impassioned responses from industry observers.
The FCA is looking ‘to extend marketing restrictions that already apply to investment-based crowdfunding to P2P platforms’, thereby limiting ‘P2P platforms’ ability to market to certain investors’.
Specifically, the regulator is proposing that peer-to-peer 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.
For me, the proposed changes are flat-out strange. They will make P2P less accessible for ordinary investors, prove onerous for the major platforms (which already have tens of thousands of ordinary investors signed up), make it more difficult for smaller P2P firms to scale (as early-stage platforms tend to rely more heavily on retail), and, perhaps most importantly, they suggest that P2P and equity crowdfunding platforms are originating similarly risky assets – which just isn’t true.
I accept that there are some bad eggs out there – a fact underlined by the recent collapse of the little-known pawnbroking and property-backed peer-to-peer platform Collateral. Everyone who follows peer-to-peer closely has a sense of which platforms are problematic, whether it be in terms of their marketing, their performance, their governance, or whatever else. But I’d estimate these firms make up less than a third of the industry in terms of platform numbers, and significantly less by lending volumes.
Why should investors and platforms both be punished for the unscrupulousness of what in reality amounts to a handful of platforms? Never mind the possibility – as argued by AltFi’s David Stevenson – that these changes simply won't work. Surely the regulator should be able to move against firms on a case-by-case basis, rather than punishing a promising industry en masse?
For some, the regulator’s proposed restrictions are reflective of a ‘a nanny-state mentality’. One M Thomas, commenting on Stevenson’s article, wrote an impassioned response. Here's an extract (the full comment is well-worth reading).
By the sounds of it, the FCA has once again demonstrated its antipathy towards individual small investors and the original spirit of P2P (to cut out the middleman). The Banks and their investment manager brothers are not satisfied by merely invading and perverting the P2P space, they want to make it as difficult as possible for the ordinary people (to whom P2P was originally marketed - and for whom P2P was most appealing) to get involved. I am sensible with money, take a fairly cautiously balanced attitude to risk and don't have all my eggs in one basket, but my own exposure to P2P totals a great deal more than the proposed 10% limit on investible assets and I am honest enough to say that I am not a sophisticated investor - I wouldn't go into anything I didn't understand properly because I'm not a greedy fool. I suspect that there are many other people with a similar mindset, who would feel the same way as I do. At the very minimum, these FCA proposals demonstrate a nanny-state mentality - people must be protected against themselves - but I suspect it is far more than that, going as far as institutional conspiracy. If the FCA will not act with honesty, integrity and intelligence in this matter, then the FCA must be deemed irrelevant to the P2P sector.
M Thomas is far from alone in holding such views. An unnamed AltFi commenter, a pensioner, wrote that he resents the appropriateness changes.
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.
Another commenter, Douglas Wood, wrote that he fully agreed with the pensioner's comments, and that he is willing to declare himself a sophisticated investor and ‘to take the consequences’.
It hasn’t been one-way traffic, mind. Richard, another AltFi commenter, welcomed the proposed changes.
This is good that regulation is tightened up, it’s 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.
Meanwhile, Eamonn McMahon, founder of asset finance firm EquipmentConnect, made the point in a LinkedIn thread that parts of the peer-to-peer market are ‘esoteric and very high up the risk scale’ and that most investors are neither able nor willing to price risk properly when dealing with these platforms.
I fully accept this point, but I come back to the question: why are these proposals seemingly being made with the lowest common denominator in mind? Why can’t the regulator go after the specific platforms that are obfuscating the true nature of the risk being taken on by investors, the platforms that actually are advertising unachievably gaudy returns, the platforms that really are failing to adequately demonstrate their performance and that have historically failed to provide accurate returns projections?
I accept that it’s easier to simply crack down on the industry as a whole, but that doesn’t make it right.
As RateSetter’s Rhydian Lewis recently put it, in a blog post on the FCA proposals: “Introducing marketing restrictions not only raises questions around personal freedom, fair competition and financial exclusion, but would be disproportionate given the risk profile of P2P. It would be a mis-categorisation of the asset class, as well as a backward step for competition and financial inclusion.”
He continues: “We appreciate that the regulator is seeking to protect investors from harm. That is why we support those of its proposals that will manage risk such as risk management frameworks, governance and platform wind-down arrangements; what we don’t support is blocking access. We say: eliminate the high-risk elements of P2P lending and you can keep it accessible.”
I leave you with one final AltFi comment, from none other than a Zopa co-founder, Tim Parlett, which I feel is an eminently sensible judgement of the situation.
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.
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.