AltFi Insights: FCA new peer-to-peer rules clampdown on marketing, investor caps and wind-down arrangements

Peer-to-peer platforms that offer loans to small firms using cash garnered from investors will come under tougher rules from December, said the Financial Conduct Authority (FCA).

The regulator’s rule changes last week come in the wake of the demise of Lendy last month, which collapsed into administration with £160m in outstanding loans and with more than £90m in default.  Lendy had spent the last six month’s on the FCA’s watchlist, and the body has launched a probe into the specifics of its crash.

The watchdog’s new rules for the whole of the industry impose stricter requirements on governance arrangements and other controls it operates under.

However, the FCA focus on how these firms market themselves, how much investors can spend and how these platforms should be wound up if they fail, has attracted the most industry attention.

Total lending arranged by peer-to-peer platforms passed £10bn  during the third quarter of 2018, according to the most recent figures released by industry body Peer-to-peer Finance Association.

Peer-to-peer marketing

On marketing, the watchdog said “we wanted to ensure that only consumers capable of understanding the risks and of bearing the consequences invest in peer-to-peer agreements”, in its report explaining the new rules.

The FCA said platforms must ensure they only market to retail clients who:

• are certified or self-certified as ‘sophisticated investors’ or are certified as ‘high net worth investors’

• confirm before a promotion is made that, in relation to the investment promoted, they will receive regulated investment advice or investment management services from an authorised person, or

• will be certified as a ‘restricted investor’; that is, they will not invest more than 10 per cent of their net investible assets in peer-to-peer agreements in the 12 months following certification

The FCA said these proposals “generated the most feedback” when they were sent out in an earlier consultation paper. It said around 30, mainly peer-to-peer firms, wrote back to them.

Firms were concerned that these rules gave  “a misleading impression of the riskiness of peer-to-peer investments”, said the FCA, and “would impact negatively on competition” by restricting the types of investors available to them.

Investor caps

Ratesetter chief executive Rhydian Lewis, a pioneer of the industry formed in the wake of the financial crisis, called the 10 per cent investor cap, an “unnecessary” move that “just patronises normal people”.

However, the watchdog said the investor cap is a key plank of its proposals.

It said: “We maintain that limiting how much a restricted investor can invest in peer-to-peer agreements is an important means of ensuring that retail investors who are new to the asset class do not over-expose themselves to risk. We consider it an important part of the wider package of changes that we are making.”

Wind-down arrangements

On wind-down arrangements, the watchdog said firms must already have an existing plan and must notify investors when changes are made.

But under the new rules firms must “make it clearer that relevant information should be provided . . . that allows customers to understand a platform’s wind-down arrangements and consider the risks before they decide to invest”.

The body adds: “This does not necessarily mean that full plans need to be disclosed. Summary information is acceptable, as long as it includes relevant information to ensure investors understand what would happen to their investment if the platform triggered their wind-down arrangements.”

The FCA said it received around 40 responses to these proposals, and while most were broadly supportive, some were critical.

Some businesses complained that “other financial institutions are not required to share their wind-down plans” with investors, said the FCA. Others added that these plans “may give investors a false sense of security”, and that “investors may misinterpret an update to the wind-down policy as a signal that a platform is facing difficulties”.

Clampdown

Overall, Lewis’ Ratesetter broadly welcomed the regulator’s plans saying much of what it set out was already industry practice.

He said: “Rather than a 'clampdown' this is a validation of our mission to open the asset class of loans to everyone, not just the rich.”

Lewis added: “No longer can our sector be dismissed as the Wild West of investing - the cowboys are being driven out and the regulation is now on a par with mainstream savings and investment choices.”

However, most peer-to-peer firms who began to enter this area after banks cut back on small business lending, fearing defaults in the wake of the 2008 financial crisis, are loss-making. These platforms are racing to add customers and hand out loans to boost scale, which it later hopes to turn into profits.

However, failures such as Lendy will only stoke fears among investors that some of these firms are dropping their lending standards in a bid for scale.