Following its consultation, the Financial Conduct Authority (FCA) has published a Policy Statement outlining the new rules that now apply to peer-to-peer (P2P) lending transactions.
From the start of the tax year on April 6, investment in peer-to-peer loans will be permitted within an Individual Savings Account (ISA). An ISA that includes a P2P component is known as an Innovative Finance ISA (IFISA).
From this date, advising on P2P agreements will be a regulated activity, and firms will need specific permission to carry out this activity. The requirements are explained in more detail below, but essentially firms will be subject to similar requirements when giving P2P advice as firms are when giving investment advice at present.
Firms can now elect to hold client money from both P2P and business-to-business (B2B) agreements together, should they wish. This follows feedback from firms suggesting it was very difficult to keep P2P monies separate from all other monies. However, firms must note that if they choose to hold P2P and B2B client monies together, all such monies must be handled in accordance with the FCA’s Client Assets rules.
When transacting IFISA business, firms are expected to provide clients with an explanation of the tax situation, the potential impact if the P2P agreement is not repaid and the potential impact if the P2P platform operator fails. They should also explain how an IFISA can be cashed in, or transferred to another provider – here transfers can only be made if all outstanding loans have been repaid. Firms should give an indication to affected clients of how long the transfer is expected to take.
Firms advising on P2P agreements should note that the FCA’s rules on ensuring suitability of advice will apply. For the time being at least, there will be no requirement to comply with the FCA’s rules on appropriateness if the firm arranges P2P transactions on a non-advised basis.
P2P advisers cannot receive commission from the provider, and so must be remunerated entirely via fees. Firms also cannot receive any other form of inappropriate inducement to recommend certain products, so as with investment advice, P2P advisers must think carefully before accepting any gifts, hospitality or other inducements from providers.
P2P advisers must be appropriately supervised and assessed as competent. They will need to attain a suitable Level 4 Diploma qualification. So in summary P2P advisers must have the same level of competence and qualifications as those advisers who give investment advice. Firms must also have systems and controls in place for monitoring P2P advice, which should be equivalent to the controls they have in place for other investment advice.
Firms giving P2P advice must hold the same level of capital resources as any other investment advice firm.
All of the FCA’s financial promotions rules, as set out in Chapter 4 of the Conduct of Business Sourcebook, will apply to firms giving P2P advice.
Clients who receive advice on P2P agreements will have access to the Financial Ombudsman Service should they wish to complain, and to the Financial Services Compensation Scheme (FSCS) should the advising firm go out of business. There will still be no recourse to the FSCS if the firm operating the P2P platform fails.
Financial advisers who hold themselves out to be independent at present can continue to do so even if they do not offer advice on P2P agreements.
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.