FCA tightens rules on peer-to-peer lending platforms

The Financial Conduct Authority (FCA) is introducing rules to strengthen protections for investors using peer-to-peer (P2P) and investment based lending platforms based on tighter governance and robust risk management systems

Following consultation earlier this year, 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 at 10% 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.

The FCA estimates that 275,000 people have cash in peer-to-peer lending platforms, investing more than £5bn across 68 providers.

Kam Dhillon, principal associate at Gowling WLG said: ‘The final rules follow on from, and are broadly in line with, the FCA's proposals in the consultation it launched in July 2018 in CP18/20. The FCA's aim is to improve standards within the sector while supporting innovation, enhance investor protection and allow platforms to operate in a sustainable manner.’

One of the key concerns of the FCA is to ensure that platforms meet the expectations of investors and the new rules create stricter governance and risk controls.

Dhillon said: ‘To do this, peer-to-peer platforms must understand and be able to price the credit risk of the peer-to-peer loans they facilitate, at origination and over time. This requires having in place an appropriate risk management system. The FCA has introduced prescriptive rules for a risk management framework for peer-to-peer platforms.

‘The advertised target rate of return must be based on a reasonable calculation/ assessment process. Platforms must be able to demonstrate that they use appropriate data and have robust modelling capability to calculate target rates effectively,’ he added.

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

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 will continue to monitor the P2P market as it develops further.

PS19/14: Loan-based (peer-to-peer) and investment-based crowdfunding platforms: Feedback to CP18/20 and final rules

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