The Financial Conduct Authority has confirmed its proposed changes to the peer-to-peer lending market with a view to preventing harm to investors in the sector. These include a cap on how much retail investors can put into P2P loans without receiving investment advice. Loan-based crowdfunding platforms now have six months to prepare for the new rules.
Last year, the FCA suggested applying new rules to the UK crowdfunding industry. Its latest policy statement now sets final rules.
Marketing restrictions and appropriateness assessment
Restriction on advertising to new retail investors
The most eye-catching change is the effective cap of 10% of investable assets for retail investors who are new to investing in the sector.
The FCA has introduced this cap by adding P2P loan agreements to existing restrictions on advertising illiquid investments to retail customers. This stops P2P platforms from marketing their products to potential investors unless those investors have either received regulated advice or confirmed that they will not invest more than 10% of their assets in P2P loan agreements.
Exceptions apply for marketing to high net worth individuals and more experienced investors, i.e. those who have made two or more P2P investments in the previous two years.
New guidance on client communications
Some respondents to the FCA’s consultation suggested that the marketing restriction would be disproportionate and that it could constrain the development of the crowdfunding sector.
To address these concerns, the FCA has given new guidance on the information platforms can give to customers about their products and risk profiles without breaching the marketing restriction. But, ultimately, the FCA has made the move as “an important part of the wider package of changes” to address harm in the P2P sector.
Checking investor experience
Platforms will also need to perform appropriateness assessments, i.e. check the investor’s knowledge and experience of the asset class. These are expected to be more than a tick-box exercise and should involve asking multiple-choice questions that avoid yes/no answers. The assessment is not required if the investor has received regulated investment advice.
“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.”
Christopher Woolard, FCA Executive Director of Strategy and Competition
Clearer rules on governance arrangements and systems and controls
Higher regulatory standards for P2P platforms
The FCA will also extend general organisational requirements to P2P platforms. These set standards for governance arrangements relating to platforms senior management and their compliance, audit and risk functions. They include requirements on platforms to make and maintain wind-down arrangements in case they fail.
New conduct of business rules
The FCA will also require platforms to, among other things:
- establish policies and procedures to enable them to carry out credit risk assessments
- have a risk management framework which is appropriate to the nature, scale and complexity of the business
- publish an annual outcomes statement setting out information on past and future performance
- provide more information to customers including ongoing reports
What’s happening next?
What do platforms need to do?
The final rules and guidance come into force on 9 December 2019. This means that P2P platforms now have six months to reflect the new requirements into their organisational arrangements, including implementing new policies and procedures where necessary to ensure compliance with the new framework.
FCA to reflect on marketing restrictions
The FCA has also indicated that it is looking at its approach to marketing restrictions more generally, i.e. not only for loan-based crowdfunding platforms but across different regimes. The FCA says it may consult on new rules and guidance in due course.