Unbolted changes investor protection in wake of new FCA rules

Today marked deadline day for P2P lenders to introduce new FCA rules (announced 4 June 2019). In addition to restricting retail investors from investing more than 10% of their investable assets, the rules set out:

  • 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.

The above rules have meant that investors must self-certify as sophisticated, high-net-worth or restricted investors. If no regulated investment advice has been sought, investors must pass a test to prove they have sufficient knowledge of the risks of making the P2P investment.

The new rules should ensure that investors are fully aware of the potential risks and rewards of making a specific investment.

In addition to increasing investor awareness of platform risks, the new rules have had other knock on effects on platform business models. For instance, Unbolted have today announced that that they will cease providing their ‘Gold Trust protection’ for new gold/precious metal loans. As a result of this reduced protection, lenders will benefit from increased interest rates. The full text emailed to all investors is included below:

To protect our lenders from gold price volatility, we used to purchase exchange-traded derivatives (ETF put options) that pay off in the event gold prices fall. We used to hold these derivatives in our brokerage account in trust for our lenders (the “Gold Trust”). The new rules on contingency funds, which were designed for cash funds, would have required us to publish mark-to-market derivative positions as well as our exact hedging plan for the future which is an impractical ask. Therefore we have decided to no longer offer Gold Trust protection for any new gold/precious metal loans. 

We will also not offer Provision Trust protection for new standard loans. Given our past performance (published here) on the recovery of defaulted assets, we feel that it is better for us to offer higher returns to our lenders than to put it away towards a contingency fund. Accordingly, we are now increasing the interest rate to be paid on gold loans to 0.65% per month (increase of 15bps) and on standard loans to 0.80% per month (increase of 10bps). These increased interest rates will also make us more competitive in the current market. The amount of principal loss on the platform to date is less than 0.05%. 

We will of course stand by all our existing gold and standard loans protected by the Gold Trust and Provision Trust respectively and continue to hold the existing put options and funds in trust.

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