FCA proposes changes to the regulatory framework for peer-to-peer platforms

The FCA has published a consultation containing proposed new rules to update the regulatory framework for peer-to-peer (P2P) platforms. The proposals include introducing new restrictions on the types of investors P2P platforms can target directly with financial promotions.

Although the FCA's consultation does not comment on the European Commission's (the Commission's) recent proposals for an optional EU-wide authorisation to enable cross border provision of crowdfunding services, the FCA is continuing to engage with the Commission to ensure the FCA's own regulatory framework reflects insights into risks observed in other jurisdictions.

Increased protections for P2P investors

The FCA believes investment-based crowd funding platforms tend to have relatively simple business models with platforms acting as conduits to provide investors with a route to see and access information about potential investment opportunities. Loan based P2P platforms, however, have evolved with more complex business models which risk causing harm to investors. 

The proposed new rules and guidance are therefore primarily aimed at enhancing the regulatory framework applying to loan based P2P platforms to protect investors while still allowing for further innovation.

The key changes

Marketing restrictions

The proposal likely to have the biggest impact on P2P platforms is for direct financial promotions to be limited to investors who:

  • are certified or self-certify as sophisticated investors;
  • are certified as high net worth investors;
  • confirm before receiving a specific promotion that they will receive regulated investment advice or investment management services from an authorised person; or
  • certify that they will not invest more than 10% of their net investible portfolio in P2P agreements.

This reflects the FCA's concern that investors may incur notable losses by being overexposed to this asset class, particularly given that the P2P industry is still maturing and a number of platforms may exit the market whilst the industry consolidates.

Information

There will be granular rules on minimum standards of disclosure.  The FCA proposes that P2P platforms provide:

  • a description of the P2P platform's role containing particular prescribed information;
  • an explanation of certain risks that would arise in the event of the P2P platform's failure;
  • more detail about what the P2P agreement will cover before the investor selects individual P2P agreements or the platform allocates P2P agreements to investors; and
  • certain ongoing disclosures at any point in time once an investor has entered into a P2P agreement.

Systems and controls

The FCA is proposing new rules on credit risk assessment to make sure that P2P platforms can meet the expectations they set in respect of their offerings.  As a minimum under the new rules, all P2P platforms will need to:

  • gather sufficient information about the borrower to be able to competently assess the borrower’s credit risk (ie the probability of default and loss given default);
  • categorise borrowers by their credit risk in a systematic and structured way; and
  • price the loan so it adequately and fairly reflects the credit risk determined.

If a platform is already required to do a creditworthiness assessment under the FCA's Consumer Credit sourcebook (CONC) or (as proposed in this consultation) an affordability assessment under the Mortgage Conduct of Business sourcebook (MCOB), the proposed new rules would be complied with by meeting these existing requirements.

Wind down

The FCA is concerned that investors may be exposed to the credit risk of the platform as much as the underlying loan, given that they depend on the platform to collect payments from borrowers.  Although there are already existing rules requiring P2P platforms to put in place arrangements to ensure that P2P agreements will continue to be administered and managed in the event of wind down, the FCA found that some arrangements were inadequate.  The proposals therefore include clarifying the existing rules and introducing a new rule that P2P platforms should develop an up-to-date manual (referred to as a "P2P resolution manual") containing information about their operations that would assist in the event of a platform's insolvency.

Borrower protections

In addition, the FCA also proposes one main change to the protections afforded to borrowers which will impact property P2P platforms.  Where at least one of the investors is not an authorised home finance provider but the platform provides home finance products, the FCA proposes to apply rules from MCOB and other Handbook requirements to address potential gaps in regulatory protection.

Effective date

The FCA propose that these new rules should come into force six months from publication of the final rules and Policy Statement given that the majority of the proposals build on existing requirements and firms should already have some of what is required in place.

Next steps

The FCA has asked for responses to the consultation paper to be submitted by 17 October 2018.

Please contact the authors of this blog post or a member of our Financial Services Regulatory Consulting team if you would like to discuss how any aspect of the proposed rules published by the FCA impacts you.


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