New rules for P2P platforms establish retail investment cap

Reforms have been confirmed by the FinancialConduct Authority that prevent retail customers who are new to peer-to-peer lending from extending more than 10 per cent of their investment pot. The cap – which does not apply to new retail customers who have received regulated financial advice – comes amid concerns that vulnerable investors could be over-exposed to the small but fast-growing sector. Where no advice has been given, platforms will be required to assess investors’ knowledge and experience of P2P investments. Also, the minimum information that P2P platforms must provide to investors has now been specified, while additional guidance makes clear that platforms are not barred from including information about specific investments in their marketing materials.There are more explicit requirements for governance arrangements, along with the systems and controls that ensure the outcomes advertised by platforms are supported – particularly with regard to credit risk assessment, risk management and fair valuation practices. More robust rules on plans for winding-down P2P platforms if they fail have been brought in.With immediate effect, the regulator has applied 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. Otherwise, the new rules must be implemented by P2P platforms by 9 December 2019.The announcement comes less than two weeks after the collapse of property finance P2P site Lendy. Christopher Woolard, executive director of strategy and competition at the FCA, commented: “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.” Dr Roger Gewolb, who founded the loan comparison site FairMoney.com, has commented on the developments: “It is disappointing that the new FCA rules appear to conflate P2P equity investments with P2P lending, as we should perhaps be less concerned with P2P equity – investors no doubt better understanding the risks involved when injecting capital into these businesses.”“Borrowers, on the other hand, are still not fully equipped with all the facts to understand how little protection they have when borrowing from a P2P lender,” he said. “They are also not in a position to properly and professionally access the information on loan portfolios and their performance that is given to them by many of the P2P lending platforms. These lenders need proper independent supervision and regulating to protect potentially vulnerable borrowers and this regulation absolutely needs to come without stifling the industry, the same as it has done for a very long time with all deposit-taking institutions.”“The Bank of England should be regulating the P2P lending market and treating lenders the same as licensed deposit takers,” added Gewolb. “However, what the FCA has issued today appears to still leave the duty of care for creditworthiness and lending performance with the companies themselves, effectively no doubt leaving the cowboys in charge of the ranch in some cases.” “Many of the ‘peer’ depositors/investors in P2P lending have been replaced with institutions’ money such as insurers and pension funds,” he explained. “They don’t require the same level of protection (and they are probably given better information by the lenders) as ordinary people who invest into P2P lending platforms to take advantage of the more favourable interest rates… these people need protection and that, in my opinion, is where the Bank of England and not the FCA needs to step in.”