Following the collapse of Lendy, the FCA has today announced that it is placing a P2P investment limit on retail customers (10.0% of investable assets, unless regulated financial advice is received) who are new to the sector. The move is intended to ensure that retail investors do not over-expose themselves to risk.
How this new ruling will be policed remains a matter to be seen, but P2P platforms have until 9 December 2019 to implement the changes. I can foresee the platforms having difficulty personally verifying the wealth of their investors, so can imagine a scenario in which investors must self-certify that they are aware of the risks of investment.
I don’t personally agree with the overall investment limit as I feel it wrongly mollycoddles all retail investors, many of whom have a strong understanding of the risks and rewards of P2P investments. However, I do believe that increased regulation and transparency from the P2P platforms will ultimately help to drive the sector forward.
In addition to the restrictions on total investments, the new rules include:
- More explicit requirements to clarify what governance arrangements, systems and controls platforms need to have in place to support the outcomes they advertise, with a particular focus on credit risk assessment, risk management and fair valuation practices.
- Strengthening rules on plans for the wind-down of P2P platforms if they fail.
- Introducing a requirement that platforms assess investors’ knowledge and experience of P2P investments where no advice has been given to them.
- Setting out the minimum information that P2P platforms need to provide to investors.
- Applying 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.
P2P Finance News reported the following industry reactions:
Rhydian Lewis (CEO at RateSetter):
“Rather than a ‘clampdown’ this is a validation of our mission to open the asset class of loans to everyone, not just the rich.
“The limit on savers’ first investment is unnecessary and just patronises normal people. But the other aspects of the regulation mean savers can invest with confidence that P2P lending is particularly well regulated and here to stay.
“No longer can our sector be dismissed as the Wild West of investing: the cowboys are being driven out and the regulation is now on a par with mainstream savings and investment choices. We are confident that RateSetter’s growth is set to snowball from here – especially our ISA.”
Paul Smee (Chairman at the Peer-to-Peer Finance Association):
“Much of what is included in the FCA policy statement published today reflects what is already good practice in the P2P lending market and we welcome that. We are pleased that the FCA recognises the significant and positive impact which P2P lending has on the economy, as the sector becomes a mature feature of the UK financial services landscape; and we consider that overall they are proposing a proportionate way forward for regulation.
“The statement is a long and complex document so we will be doing further analysis on its implications for the market.
“We will be monitoring especially closely the impact of marketing restrictions on how retail investors can participate in this important asset class and will let the FCA know if there is evidence that their rules are proving an unnecessary obstacle.”
Jaidev Janardana (CEO at Zopa):
“At Zopa we’re supportive of proper regulation of the P2P industry and have always worked closely with the FCA to that end. The majority of the rules introduced today are reflective of what Zopa itself already does and will bring other platforms into line with our approach. While we’re in a position to fully comply with the rules, we do have concerns about some specific areas of the new regulations.
“We share the FCA’s view that investors need to understand the risks of P2P lending and fully support the proposed appropriateness test as a way of checking an investor’s knowledge and experience of the sector.
“We are, however, concerned that the marketing restrictions don’t take into account the diversity of risk levels of the underlying assets to which P2P investors are exposed. At Zopa, our customers invest in a well-diversified portfolio of low risk personal loans, and we have consistently delivered positive returns to investors, including throughout the 2008 downturn.
“For people looking to invest in P2P, we’d suggest ensuring they have an understanding of the asset class they are investing in and the associated level of risk. Consideration should be given to how well established the platform is, its track record of performance, and whether it has a responsible approach to risk management before making their choice.”
James Meekings (UK MD at Funding Circle):
“We welcome today’s proposals. Funding Circle has consistently campaigned for industry regulation that protects consumers and raises industry standards. We look forward to working closely with the FCA on the implementation of these new rules.”
Mike Bristow (CEO, CrowdProperty)
“At CrowdProperty we welcome more specific guidelines around good practice in the P2P lending industry – there is a spectrum of practices which must become more closely aligned for the good of individual retail lenders.
“It’s a strategic sector for the UK which must be allowed to flourish in a high-quality manner. We believe that well informed retail investors should be able to participate and hope that marketing restrictions will not compromise retail investors benefiting from the more efficient matching of the supply and demand of capital that high quality P2P lending platforms deliver.”
Yann Murciano (CEO at Blend Network)
“At Blend Network, we believe the measures promise to be a positive step forward for P2P platforms. We already use appropriateness tests, which the FCA is proposing. We believe these measures will have a significant positive impact on the P2P industry, particularly on the way that loan risks and platform business models are assessed.
“It is because the FCA has kept a watchful eye on the growing UK P2P industry educating and protecting consumers that is the second largest by volume in the world after the US. Last year, £3bn of loans were advanced to small businesses and property developers among others and £15bn has been advanced overall since the inception of P2P lending in 2005.
“After all, it is not regulation but strong oversight that anticipates dangers [that] is the key to preventing financial scandals happening in the first place.
“As US Commerce Secretary Wilbur Ross put it: ‘There is no evidence that regulation makes things better. The most highly regulated industry in America is commercial banking and that did not stop those institutions from making terrible decisions.’ Regulation does not solve things, good supervision does.”
Bruce Davis (Joint MD at Abundance Investment)
“The review of the sector involved unprecedented levels of data collection and scrutiny including independent research from the leading Universities studying the sector (Cambridge and Leeds).
“We welcome the proposals which level the playing field between loans and debentures in terms of the way in which the sector helps investors to understand the risks of investment which has always been the focus of the industry from its inception.”