P2P faces tougher rules

Previously the peer to peer (P2P) lending sector had only been on the fringes of consumer credit regulation. With the transfer of consumer credit to FCA in 2014, P2P platforms were recognised as a regulated activity under a new category, “operating an electronic system in relation to lending”.

In 2016 FCA launched a post implementation review of the crowdfunding sector. Consultation Paper 18/20 has now been issued, which summarises findings and proposes new rules and guidance for P2P lending.

The FCA review identifies several material issues:

  • Poor communication and marketing materials that; fail to fully inform investors of the risks they are exposed to, fail to include the required risk warnings, fail to make clear that the schemes are not covered by the FSCS.
  • Inadequate systems and controls for disclosure, including failing to enable investors to make informed decisions.
  • Poor due diligence on underlying borrowers, leading to poor loan pricing.
  • Opaque charging structures with potential conflicts of interest. Some platforms might be incentivised to seek higher margins through taking riskier loans, thereby increasing the risk transferred to investors.
  • Inadequate risk management and credit risk analysis to support the advertised returns, fair valuations and fair pricing.
  • Losses to investors due to inadequate wind-down arrangements and poor record-keeping.
  • Investors over-exposed to inherently risky asset classes.
  • Overstated contingency funds giving investors a false sense of security. FCA also warn that the structures of some contingency funds could amount to platforms operating a form of insurance for which they are not authorised.
  • Some platforms giving false impressions of liquidity through operating in secondary markets.

Failure to meet existing requirements and new rules

In some instances, these findings result from failures to meet existing regulatory requirements. Where this is the case FCA has indicated that they are in discussions with platform providers. Considering the seriousness of some of these issues, some enforcement action would seem inevitable. FCA is also proposing that the existing rules and guidance need to be made more complete and up to date. The current proposals are as follows:

  • Where the platform sets the price of the loans there should be more prescriptive rules around risk management. This should include carrying out robust credit risk assessments, the accuracy of which is tested and improved over time.
  • Where a platform promotes a rate of return it must be able to demonstrate a reasonable basis for calculations and make the risk parameters clear.
  • More robust governance and oversight, including risk management policies and procedures.
  • Platforms must ensure risk management, compliance and audit functions that are proportionate to the nature, scale and complexity of their business.
  • Marketing restrictions, including targeting direct offers only to defined categories of investor.
  • Platforms to have detailed and up to date wind-down manuals to cover the event of insolvency.
  • Improved disclosure, at customer acquisition stage and on-going throughout the customer journey.

The regulator also makes specific reference to the forthcoming implementation of the Senior Managers and Certification Regime. This reminder of the new responsibilities underlines FCA expectations and reinforces their intention; to act against individuals at firms who are not following the rules and putting customers first.

The closing date for comments on the Consultation Paper is 27th October 2018.

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