FCA regulation and P2P lending

September, 2016

Regulation is a hot topic across the financial services industry and peer-to-peer lending (or loan-based crowdfunding) is no exception.  As a relatively new asset class within the Alternative Finance sphere, the FCA introduced the current regulatory regime for authorised firms in 2014.  Since then the market has developed and so the FCA is conducting a review of the regulatory framework with the first step being a call for input from industry members to provide feedback on the market and its regulation. 

BondMason submitted a detailed response to the FCA last week.  We have summarised below our key points and thoughts on regulation of P2P Lending:

 

1. We welcome the opportunity to provide feedback and are supportive of the FCA’s approach to regulating P2P lending thus far. 

2. We view P2P lending as an attractive addition to the investment landscape for retail investors who should continue to have access to this asset class.

 

3. We are particularly supportive of certain key principles of the regulation: information to be fair, clear and not misleading; protection of client monies; resolution plans (if a platform collapses, loan repayments will continue to be collected so those lending money do not lose any of the funds repaid by borrowers) and the 1-to-1 principle, meaning the direct link between borrower and lender.

 

The areas we highlight for suggested change or as a concern are as follows:

Credit experience: we encourage the FCA to assess credit experience of senior personnel at each P2P platform.  In addition to platforms clearly explaining their credit processes to lenders, additional protections could include by introducing some very basic underwriting criteria for early-stage companies looking to borrow. 

Avoiding pooling: maintaining the 1-to-1 relationship between lender and each loan that makes up the borrower’s total borrowing is important, with reporting by each P2P Platform to its clients on this basis at all times.

Innovative Finance (IF) ISA: only P2P loans should be allowed in IF ISAs, not debt securities offered by equity crowdfunding platforms. Our concern is that an investor may invest their savings or pensions through an IF ISA into a debt security (bond, debenture) issued by a start-up or very early stage company without a meaningful trading history or asset security, which is closer to equity risk, than debt.

Provisions funds: provision funds generally worsen returns for lenders, yet may provide lenders with an inappropriate sense of protection and comfort. We do not believe the FCA should encourage an increase the usage of provision funds. 

Disclosure: we would like to see all P2P platforms clearly show the “Capital at Risk” warning on their landing page and sign-up pages for Lenders as well as clear disclosure that the loans are not liquid accompanied by an explanation of how an investor can get their money back.

*Warning: nothing in this article should be construed as advice. Your capital is at risk

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