Amy Tomlinson
Posted on 27 Feb 2019

Tougher rules by FCA on peer-to-peer lending platforms

Crowdfunding currently provides an alternative method for companies of raising finance, and allows for variable investment opportunities for investors. Currently, the Financial Conduct Authority (FCA) regulates both peer-to-peer (P2P) lending platforms (where investors will lend money in return for interest and capital repayments) as well as investment based platforms (where the investor will receive a form of equity in the company they are investing in).
After a review of the crowdfunding sector, the FCA is now proposing changes to how it regulates crowdfunding platforms in an effort to reduce the risk of harm to investors whilst still allowing innovation and growth for companies. 
The proposals have been generally well received by crowdfunding groups such as the UK Crowdfunding Association and the Peer 2 Peer Finance Association. The focus of the changes will mainly impact P2P lending, with only some clarification of existing rules on investment based platforms (given they are already subject to stringent regulation).
The FCA found that investors in P2P funding may not currently:
  • be given clear or accurate information, leading to investment in an unsuitable product
  • pay reasonable fees for the platform's services
  • understand the true risks they are exposed to
  • understand what would happen should the platform that is administering the investment fail
  • be clear that investments are not covered by the Financial Services Compensation Scheme.
As a consequence, the FCA proposes that there be more detailed disclosure requirements addressing the nature of some of the services offered to P2P platforms. This will include (but will not be limited to):
  • the nature and extent of any due diligence carried out on borrowers
  • a description of how the loan risk is assessed
  • the role a platform will play in compiling a portfolio of loans (where a portfolio of loans is offered)
  • explanation of tax liabilities
  • late payment or default procedures.
Furthermore, the FCA also proposes to make changes to marketing requirements, extending the restrictions found with investment based lending through to P2P lending. This means that direct offer promotions can only be made to: 
  • certified (or self-certified) sophisticated investors
  • certified high net worth investors 
  • prospective investors who confirm before the promotion is made that they will seek investment advice from an authorised person
  • prospective investors who certify that they will not invest more than 10 per cent of their net portfolio in P2P platforms. 
The latter proposal has proved controversial within the P2P crowdfunding industry due to the low level of permitted investment across the board. Concerns have been raised that P2P platforms (and their lenders) may find it more difficult to attract investors given the low restriction. Concerns have also been raised that this will also increase the costs of borrowing through a P2P platform, hindering the growth of new business. However, the FCA has countered this with the argument that it is not a lack of investors that could lead to a lack of investment but rather a lack of suitable borrowers, something that could be remedied with the planned extended disclosure requirements. In relation to cost, the FCA argues that funds could be supplied elsewhere in the financial sector.
There are also planned changes to how a platform manages its systems and controls to ensure that risks are appropriately identified and managed quickly. As a minimum, platforms will, amongst other things, be required to gather sufficient due diligence on a borrower and their credit worthiness and set fair and appropriate prices on agreements which reflects the risk profile(s) of the borrower. Platforms will also be required to inform investors of all potential outcomes where a platform may cease to perform and the name(s) of any parties with whom arrangements have been made in the event of ceasing to perform.
The FCA consultation paper closed at the end of October 2018 and a policy statement is expected in the second quarter of 2019. Although many of the planned changes are expansions to what is already in place, it will still be prudent for P2P platforms to ensure they review their current processes and procedures to ensure compliance in readiness of the new changes. It is also important to note that the Senior Managers and Certification Regime, which already applies to the banking sector, will apply to crowdfunding platforms from 9 December 2019. A link to the FCA paper can be found here
This article is for general information only and does not, and is not intended to, amount to legal advice and should not be relied upon as such. If you have any questions relating to your particular circumstances, you should seek
independent legal advice.
For more information please contact Alex Watson.