FCA review – the impact on P2P lenders?

It’s rare that a fairly dry sounding FCA consultation paper with the title CP13/10 “Detailed Proposals for the FCA regime for consumer credit” makes it onto the top story slot on BBC radio’s Today news programme.  

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But the FCA’s big foray into the murky world of pay day lending has rightly attracted an avalanche of publicity, with the outfits like Wonga for instance firmly in the regulators sights. Yet dig beneath the surface of these media reports and one discovers that the FCA’s inheritance of the OFT oversight mantle is largely an exercise in big words and relatively small actions. Pay day lending does absolutely need much more intrusive regulation and possibly punitive price caps but that isn’t what is about to happen!

In our reading of the report there’s alot of technical talk about closer inspection and tougher advertising rules, plus the obligatory nod towards affordability tests, but nothing that would make the pay day lenders tremble in their shoes.

And it’s a similar story over in the P2P lending space, also the subject of this consultation paper – many industry insiders had been worried that the FCA might signal a much more punitive regime but in reality all the sector’s got are a few tighter rules for borrowers and disclosure.

The best news for the AlternativeFinance space probably comes in the sentence that read “We have sought to balance the need of the risks associated with this activity with the objective of developing a proportionate regulatory regime” – the terms ” balance of risks” and “proportionate” are hugely important.

Both terms indicate that the regulators will be looking at the fast growing space in a fairly discriminating manner, not conjuring up too many onerous rules as part of its more ‘proactive’ regime.

Other key important statements include

• “We will aim to ensure that all firms wanting to offer consumer credit products and services are well run, fit and proper and, where applicable, have suitable business models.” This sentence indicates that the regulator will be paying close attention to the business models of platforms – and their ability to withstand any financial stress.

• “A proportionate approach will help us focus our most intense scrutiny on higher-risk firms and the problems that have a greater impact on consumers”. This again underlines the importance of a pro-active approach which will involve the regulators focusing on those firms with the highest systemic or reputational risk to financial services and credit provision

• Last but by no means least, there’s the obligatory big stick which comes in the shape of “We will have dedicated supervision and enforcement teams to crack down on poor practice, money laundering and unauthorised activity, to seek out the firms that are not complying with our rules or are illegally carrying out consumer credit business”. For which read, mess up and you’ll find the inspectors on your doorstep!

Beyond these broad statements there’s also a number of straight forward practical measures introduced including four eminently sensible reforms:

1. “We propose that borrowers should have a 14 day right of withdrawal from agreements entered into with lenders.

2. We additionally propose to apply a requirement for peer to-peer lending platforms to provide notices to borrowers in arrears or default along with ‘information sheets’

3. We also propose to apply equivalent rules to peer-to-peer lending platforms that facilitate borrowers obtaining short-term high-cost credit (payday loans) to those applied to lenders providing such credit”.

4. Platforms will need to provide ” a specific risk warning to a borrower if the loan is secured against the borrowers home”

Permissions for platforms?

Perhaps the best news overall comes in a series of short comments on interim permissions for the sector based on “operating an electronic system in relation to lending and, if applicable, for debt administration”.

According to the FCA, a P2P platform should get this interim permission as long as it has “a valid consumer credit licence from the OFT in place at the end of 31 March 2014 which covers the activity of ‘debt administration’; and it notifies the FCA before 1 April 2014 that it wishes to be granted an interim permission to carry on the new regulated activity of operating an electronic system in relation to lending (and pays the appropriate fee)”.

It’s also worth noting that the FCA seems fairly relaxed about capital requirements observing that it is only “proposing to require debt management firms and some not-for profit advice bodies to hold specific amounts of capital”.

There is though one last intriguing ‘absence’ – hidden at the back of the paper is a section that addresses various respondents comments to its earlier proposals on P2P lending. In particular we were struck by one comment which suggested that “the scope of the regulated activity should be limited to lenders lending to borrowers of the same/similar classification – for example, individuals lending to individuals. It was suggested that the potential risk to the lender is increased where the borrower is a business since it is more difficult to accurately assess the creditworthiness of a business”. Its response? Silence!

Overall we’d suggest that Rhydian Lewis, founder and CEO of RateSetter.com is probably spot on when he suggests that the incoming FCA framework will provide a strong foundation” for the continued growth of the sector. But will crowdfunding receive the same generous treatment?

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