The British Financial Conduct Authority (FCA) recently introduced new rules for investor protection in the peer-to-peer (P2P) lending sector. The new rules will bring better risk management systems and stricter governance to investment-based lending platforms.
Investor protection is a top priority
The FCA launched consultations a year ago to refine its proposal for introducing new rules to support P2P lending markets and introduce robust protections for users. The top financial regulator has provided additional guidance to clarify that that lending platforms will not be barred from including information about specific investments in their marketing communications.
The original proposals made by the FCA are still relevant. It will place a limit on P2P agreements for retail agreements which are new to this sector, capping 10% of their investable assets. This mechanism ensures that new customers do not over-expose themselves to the risk associated with the sector. New retail customers who received regulated financial advice will be exempt from these restrictions.
What else do the new rules cover?
The platforms providing P2P lending services will have to clarify governance arrangements, control platform, and systems to support the results they advertise more explicitly. Here too, the focus will be specifically on credit risk management, fair valuation practices, and general risk management. They will also have to strengthen rules on winding down the platform in case they fail.
Platforms will also be required to assess the experience and knowledge of investors in P2P investments if they have not received regulated financial advice. The proposal also sets the minimum information that the P2P platforms should provide their customers. In addition to this, the FCA proposal will apply the Mortgage and Home Finance Conduct of Business (MCOB) sourcebook and other similar handbook requirements. The rules will be applicable when at least one investor is not an authorized home finance provider on platforms that offer home finance products.
According to FCA estimates, about 275,000 people are using P2P lending platforms, and their investments exceed 5 billion pounds, spread across 68 providers. According to principal associate at Gowling WLG, Kam Dhillon, the FCA intends to improve the standards in the P2P lending sector while providing adequate consumer protections. It also wants to boost innovation and allow the platforms to run sustainably.
Dhillon noted that P2P platforms should price the credit risk for all loans they facilitate at the time of origination, as well as over time. This will not be possible without an appropriate risk management system. Platforms must also focus on advertising a reasonable calculation of returns for investors.