The Financial Conduct Authority has tightened the rules around peer-to-peer (P2P) lending, including a limit on investments in P2P agreements for retail customers new to the sector. For the UK’s businesses, it’s an intriguing sign of a sector that’s maturing into an alternative to the high street banks.
The FCA took over regulation of the P2P lending sector in 2014. And yet, by 2017, the major P2P platforms still hadn’t received full FCA authorisation to operate, with most operating on interim permissions.
These gimcrack arrangements are now being phased out as the sector continues to mature. As Mario Lupori, chief investments officer at the P2P platform Ratesetter put it, the sector is now “moving out of the early adopter phase and entering the early mainstream”.
The most notable change is the new limit on investments in P2P agreements for retail customers new to the sector of 10% of investable assets. According to the FCA, this limit is an important means of “ensuring that they do not over-expose themselves to risk”.
The investment restriction will, however, not apply to new retail customers who have received regulated financial advice.
P2P works by creating a marketplace for investors to loan money directly to businesses and individuals. Basically, the platforms act as middlemen between people who want to lend and people who want to borrow, sidestepping traditional high street lenders.
The sector has been a runaway success in the UK, but there has been increasing anxiety over a lack of oversight. The recent failure of Lendy, a P2P network that offered secured property bridging and development loans, was a particularly worrying collapse.
Lendy advertised 12% per year return rates to investors, and to maintain these promises offered low-quality loans. The end result was its administration and losses for investors who were chasing Lendy’s promised yields.
The new FCA rules can be seen as a reaction to Lendy’s collapse as the regulator might want to get the P2P sector on a stable footing. Alongside the 10% restriction, the FCA has introduced other rules that cover:
More explicit requirements to clarify what governance arrangements, systems and controls platforms need to have in place to support the outcomes they advertise, with a particular focus on credit risk assessment, risk management and fair valuation practices.
Strengthening rules on plans for the wind-down of P2P platforms if they fail.
Introducing a requirement that platforms assess investors’ knowledge and experience of P2P investments where no advice has been given to them.
Setting out the minimum information that P2P platforms need to provide to investors.
Applying the Mortgage and Home Finance Conduct of Business (MCOB) sourcebook and other handbook requirements to P2P platforms that offer home finance products, where at least one of the investors is not an authorised home finance provider.
Ratesetter’s Lupori praised the introduction of these rules. “The rules aren’t actually new, by and large. The FCA has taken rules that apply to the investment sector generally and apply to P2P. That’s a good thing: it protects consumers. The more regulated an industry the better the outcome for consumers.”
The regulation will likely thin the herd a little bit, Lupori added. “There are 60-70 authorised P2P firms but I can only name a dozen. That’s a good thing in a young industry that there’s proliferation, but we believe what’ll come to the fore is natural selection. The big players with a good business model will survive and do well under this regime.”
Lupori's only criticism was the 10% restriction. “One can bet their life away on the dogs, but you can’t invest in an asset with a track record,” he said. But the FCA has ignored these criticisms, from Ratesetter and other P2P platforms.
“These changes are about enhancing protection for investors while allowing them to take up innovative investment opportunities,” said Christopher Woolard, executive director of strategy and competition at the FCA. “For P2P to continue to evolve sustainably, it is vital that investors receive the right level of protection.”