Most consumers will be subject to limits on the amounts they can invest in peer-to-peer (P2P) investments, under new rules announced by the Financial Conduct Authority (FCA) in early June 2019.

Unless they have received regulated financial advice, ordinary retail investors who are new to P2P investing will only be allowed to place 10% of their investable assets in P2P agreements.

Investors who have self-certified as ‘sophisticated investors’ or who have been certified by the firm as ‘high net worth investors’ will not be subject to a 10% cap. However, the FCA says that it is important that all P2P customers understand the extent to which their capital is at risk, given that these investments are not covered by the Financial Services Compensation Scheme.

P2P firms will also be required to have an independent risk management function, an independent internal audit function and an effective compliance function, the size of which should be proportionate to the size of the firm. The risk function must be overseen by a person who meets the definition of a senior manager under the Senior Managers and Certification Regime, and who is not part of the independent compliance function. The FCA also highlights that, under existing rules, P2P firms must take appropriate steps to identify and to prevent or manage conflicts of interest.

Wind-down arrangements should be an important consideration for any P2P firm. The FCA says that arrangements should be in place to ensure that there is a “reasonable likelihood” that the investments can continue to be managed effectively should the P2P firm cease trading. If these arrangements involve another firm stepping in to wind down the management and administration of the P2P agreements, the lenders must be informed of the identity of that firm and how that firm will hold the lenders’ money.

All of these changes will come into force on December 9 2019.

There is, however, one further change that comes into force immediately. P2P platforms that offer home finance products will now need to comply with certain parts of the FCA’s Mortgage Conduct of Business Rules (MCOB). Unless one of the investors is not required to be authorised as a home finance provider, the P2P firm will need to comply with:

• MCOB 11 regarding affordability assessments
• MCOB 13 concerning arrears, payment shortfalls and repossessions
• MCOB 4, 5, 6 and 7 relating to the information to be disclosed at various stages of the process
• MCOB 12 on fees and charges
• MCOB 10 and 10A regarding calculation of the Annual Percentage Rate
• MCOB 2 concerning general conduct of business rules
• MCOB 3A governing financial promotions

Christopher Woolard, Executive Director of Strategy and Competition at the FCA said:

“These changes are about enhancing protection for investors while allowing them to take up innovative investment opportunities. For P2P to continue to evolve sustainably, it is vital that investors receive the right level of protection.”

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article