A number of concerns have been raised, with the loan-based (P2P lending) industry being on the receiving end of more feedback than their investment-based counterparts. That is no surprise, however, given how new the rules for P2P lending are and how flexible they were originally made.
All in all, the feedback which is common to all platforms is as expected: the FCA wants to see more consistent standards around disclosure to investors, management of conflicts of interest, and financial promotions.
Focus on P2P
For the P2P industry, this is the first review of the rules that arrived in 2014. The FCA's work over the last few months has not removed its concerns about how many "bells and whistles" have been added to the basic P2P model. Even features that seem in consumers' interest, such as provision funds, are seen to be causing additional complexity and risk which the FCA believes is not well explained.
"While some of the features of the market noted in the call for input existed in 2014, they have grown in significance and firm structures have grown in complexity. In addition, business models are becoming more complicated and look increasingly similar in substance to other, existing regulated activities, but without being subject to the same regulatory requirements or offering the same consumer protections."
Equally, the FCA has raised concerns about client money handling with certain platforms and the need for more robust plans to ensure that loan books can be run-off to maturity.
A large part of the rules review will be to raise standards so that current good practice by some is undertaken across the board. It is certainly not a crackdown on the industry as some might have foreseen. Indeed, a number of P2P platforms have now received their full licence from the FCA - with Folk2Folk, LandlordInvest and UK Bond Network demonstrating that their businesses meet the regulator's expectations.
What was included and omitted?
There was a lot of comment provided for an initial feedback statement, as well as some obvious omissions where the FCA is still making up its mind.
For consistency reasons, the FCA is resisting calls to cease referring to P2P lending as loan-based crowdfunding.
Despite the work done back-and-forth between the FCA and P2P platforms this summer over wind-down plans, the FCA remains concerned and will propose more robust rules.
The FCA states (see quote below) that it is concerned about the pace of innovation. As this is quite a departure from the stance of Project Innovate, this may be an indication that the FCA is struggling to effectively supervise the market. No actions are suggested but this is one to watch.
"While the FCA has placed great weight on promoting innovation in financial services in general, we are growing increasingly concerned about the speed of change in the investment-based and loan-based sectors"
There seems to be some determination for investment-based platforms to have to double check that people really are high net worth or sophisticated, despite the fact that this guidance has to date only been applied to pooled investment structures (funds etc).
The FCA considers that investors with other ISAs will not understand the risks of the Innovative Finance ISA, but it is not expecting the IFISA to appeal to people who do not already invest through platforms. Nevertheless, risk disclosures for IFISAs will form part of the proposed rules in 2017.
Predictions for the 2017 rules
The proposed new rules will be published in Q1 2017 and are likely to include:
The FCA will complete its post-implementation review and release the proposed new rules for consultation in Q1 of 2017. It is anticipated that the new rules will be in place for summer 2017.
How can we help?
We've been working with a number of platforms to help them meet FCA standards. Here are some of the projects we've been working on that are relevant to the Feedback Statement:
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