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The crowdfunding review begins

Two years into the P2P & crowdfunding regimes regimes,

the FCA calls for input

· Regulatory update,P2P lending,Crowdfunding

The FCA's call for input signals that the review of the crowdfunding and P2P lending regimes will be far more intensive than the initial review it published in early 2015. 

It is the first step in a review of the industry that will also include the FCA analysing market trends and the individual businesses.

Although the regulatory regimes are entirely different - one set of rules for P2P lending (loans involving an individual) and another for investment-based crowdfunding (shares, bonds and funds) - the call for input highlights two common areas the FCA wants to investigate: conflicts of interest and investors' understanding of risk.

P2P

The FCA questions whether the mainly disclosure-based regulatory regime they created for P2P is sufficient. The review that launched with the call to input will be core to deciding what changes are required.

The FCA highlighted the following areas of interest:

  • The exposure to default risk created by provision funds
  • Evolution of platforms from a pure intermediary to a quasi-asset manager or quasi-bank (without the accompanying regulation)
  • The potential for unrealistic promises being made to lenders about liquidity 
  • The level and quality of information disclosed to investors
  • Changes to loan performance, due diligence standards or treatment of retail lenders with the rise of institutional investment and securitisation
  • The expectation that institutional lenders will be lending 
  • The need for more protections where mortgages / home finance agreements are offered through platforms
  • The quality of creditworthiness assessments
  • Continued concerns about misleading and imbalanced financial promotions
  • Whether FSCS cover should be applied to P2P platforms

Crowdfunding

The FCA will be looking at the due diligence undertaken by platforms and whether that is sufficient given their role and target audience.

Some concerns have been raised that investors may be categorising themselves as sophisticated or high net worth, when they are not. The FCA will explore whether this is a problem in practice

The knowledge tests that platform users are asked to pass will also be scrutinised by the regulator. appropriateness tests create. At a minimum that is likely to involve looking at the quality of the questioning (whether the right people fail) and what occurs when a user fails the test.

Innovative Finance ISA & SIPPs

The FCA refers to the general public's trust in the ISA brand and whether consumers will underestimate the risk of crowdfunding and P2P investments made through this wrapper as a result. It is equally concerned about pension money invested through self-invested personal pensions (SIPPs) given the new freedoms to remove money from pension pots and put them towards other investments.

Next steps

Responses to the FCA's paper are due by 8 September. We would encourage all firms affected to respond and, where possible, to provide the FCA with evidence.

We will producing a response and in the meantime you can read our initial thoughts on the call for input here.

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