P2P Guide

15 14 THE P2P LANDSCAPE THE P2P LANDSCAPE For Platforms Naturally, most of the regulatory output in the P2P sector has been focused on the platforms themselves. Initial regulations The initial regulations were set out in CP13/3 in 2013 and came into full effect in April 2016. The overarching objectives of the initial regulations were to: Provide additional protection for consumers. Promote effective competition within the P2P lending industry. Allow the growth of the industry to continue in a controlled way. Ensure platforms provide clear and not misleading information and have appropriate procedures for handling client money. Ensure firms deal appropriately with customers in financial difficulties and complaints. Ensure platforms maintain a stable financial position and have contingency arrangements in place in the event of a platform failure. A post-implementation review was carried out with preliminary findings published in December 2016, where the FCA highlighted concerns over the way some platforms portrayed the level of risk and potential returns on offer. In April 2017 the minimum capital adequacy requirement for platforms was raised from £20,000 to £50,000. A further review is ongoing and a consultation on new rules was delayed by the 2017 snap general election. The FCA has indicated that it will recommend new rules that strengthen investor protections and: Improve standards of disclosure. Strengthen the rules around wind-down plans. Extend mortgage-lending standards to platforms. Enforce additional “requirements or restrictions” on cross-platform investment. “Cross-platform investment” refers to a consumer investing via a single platform, but across loans that have been originated by a number of other platforms. The primary concern here is not with “aggregators” – firms that act only as points of access, without originating loans. What the regulator appears to have taken issue with is platforms that both originate loans themselves, while also aggregating origination from other platforms. Regulatory Landscape 1.5 For Advisers Firms that held permission for the regulated activity of ‘advising on investments’ automatically had their permissions extended to include the new regulated activity of ‘advising on peer to peer (P2P) agreements’ from 6 April 2016 (timed to coincide with the launch of the IFISA). This is also sometimes referred to as ‘advising on article 36H agreements’. Consequently, unsuitable advice to invest in P2P lending may now be covered by the FSCS up to £50,000, provided the adviser cannot meet claims for compensation, the advice was given on or after 16 April 2016, and the loan agreement meets the FCA’s definition of a P2P agreement. P2P agreement (article 36H agreement) An agreement between the borrower and the lender by which the lender provides the borrower with credit and (a) either the lender provides the borrower with credit of up to £25,000; or (b) the agreement is not entered into by the borrower wholly or predominantly for the purposes of a business carried on, or intended to be carried on, by the borrower. If neither (a) nor (b) is satisfied, then the agreement is not an article 36H agreement and the article 36H regulated activity will not be applicable. Note that advisers who hold themselves out as independent are not obliged to consider P2P lending. Firms must, among other things, take reasonable steps to ensure that personal recommendations are suitable for their client. The pertinent information is included in chapter 4 of FCA Policy Statement PS16/8, however, there is very little change for advisers: the FCA has taken the approach that the existing controls for investments will also be suitable for P2P Lending*. In short, P2P lending will be treated as any other investment from the perspective of adviser regulation. The key for advisers is to ensure that they have properly considered suitability and carried out their due diligence. This means: i) knowing how P2P lending maps to more conventional assets so that they can form a clear opinion why P2P is the best option for a particular client; ii) understanding the particular business models of the major platforms so that they can form a clear opinion why one platform was chosen over another; and iii) understanding the operating models of the platform so that they can form a clear opinion on the risks involved. *You can find the full text of the policy statement here: https://www.fca.org.uk/publication/policy/ps16-08.pdf