It may have reviewed the sector as recently as December 2016, but the Financial Conduct Authority (FCA) has now opened a formal consultation on further rules it is proposing for the loan-based crowdfunding (peer-to-peer (P2P) lending) sector.

The regulator says that the new rules “are designed to address the ways in which the loan-based crowdfunding model has developed since the FCA last reviewed the sector” and adds that the business models used by firms in this sector are becoming increasingly complex.

The FCA is concerned about the evidence it has found of customers buying inappropriate products, and of them otherwise being treated unfairly.

Specifically, it remains concerned that investors may not:

  • Receive clear or accurate information from firms in this sector
  • Understand or be aware of the risks involved with this type of financial product
  • Receive fair remuneration for the risks they are taking
  • Understand the consequences for them if their peer-to-peer platform fails
  • Appreciate the true cost of their investment

The proposed new rules include:

  • All platforms that set the price of the agreement must have a robust risk management framework that gathers sufficient information from the borrower to fully assess their credit risk, and then sets a price that is fair and appropriate, and reflects the risk profile of the borrower
  • If a platform offers investors a target rate of return for a P2P portfolio which it assembles or manages, then it should have a reasonable basis to conclude that the return it is advertising can reasonably be achieved
  • Where a platform chooses which loans to facilitate for an investor it should ensure that investors are only exposed to loans that, at the point they are allocated to an investor, meet the risk parameters advertised
  • Firms will be required to have risk management policies which allow them to identify, manage and monitor risks associated with their business model
  • Firms must have an independent compliance function, and where proportionate to the size of the firm, the function must not be involved in the services or activities they monitor, and must be remunerated in a way that does not compromise their objectivity
  • P2P platforms that communicate direct offer financial promotions will only be able to target individuals who are sophisticated, or high net worth, or confirm they will receive regulated investment advice, or confirm they will not invest more than 10% of their net investible portfolio in P2P agreements
  • A platform must have wind-down arrangements in place to ensure that P2P agreements facilitated by it will continue to be managed and administered in accordance with the contract terms should the platform be unable to do so
  • P2P platforms who offer home finance products will be subject to the affordability assessment requirements of Chapter 11 of the FCA’s Mortgage Conduct of Business rules, and the requirements for the treatment of borrowers in arrears documented in Chapter 13

Christopher Woolard, executive director of strategy and competition at the FCA, said:

“When we introduced new rules for crowdfunding, we said we’d review the market as it developed. We believe that loan-based crowdfunding can play a valuable role in providing finance to small businesses and individuals but it’s essential that regulation stays up to date as markets develop. The changes we’re proposing are about ensuring sustainable development of the market and appropriate consumer protections.”

The consultation closes on October 27 2018 and final rules will be published in a Policy Statement later this year. The rules would then come into force six months after the publication of the policy statement.

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