The Financial Conduct Authority’s (FCA) recent regulatory update on P2P introduced the concept of appropriateness tests for unadvised customers to the market.
These tests, though not unique to P2P, raised a few practical questions around their implementation. For example, where a third party facilitates a retail client lending on a P2P platform, the third party will need to assess the appropriateness of the potential investor.
According to a guide by The Investing and Saving Alliance (TISA), where this is the case: “it is the responsibility of the P2P Platform to assess the consumer onboarding journey and determine the appropriate application of the Appropriateness Test.”
For aggregators such as Orca, this could mean that every P2P platform it uses will need to assess its test, which could well affect the already shrunken aggregator market for P2P. From an aggregators point of view, every new platform they offer clients is another company who will want to check their onboarding process. From the platform point of view, the additional responsibility of multiple aggregators could be perceived as a regulatory vulnerability.
There are also questions around the FCA’s approach to existing customers. As TISA comments, the FCA has stated it is not its intention to trigger divestment of existing investments, or those made before the implementation of the appropriateness test. As such, existing investments won’t require the test to continue.
There may be the temptation to onboard as much money from retail investors – those destined to become ‘restricted’ – in advance of the implementation of the appropriateness tests (which must be done by December 9th). P2P platforms are no strangers to introductory offers: Ratesetter currently offers new customers £100 for a £1000 investment, and there are pages dedicated to tracking similar offers. It will be interesting to see if these ramp up in order to attract new investments prior to the deadline.
As TISA say: “P2P Platforms should consider the possibility that an existing customer may not pass the Appropriateness Test.”
It is important to remember this rule is for investments, not investors. A restricted investor who invests prior to the implementation of the appropriateness test will still need to take the test in order to make another investment.
The tests themselves do not require a binary pass or fail outcome. What is initially a fail, may not be the end of the road.
Instead, where clients have failed to demonstrate the necessary knowledge of the investments, platforms may provide educational material to the customer to help them understand the investment better. The customer may then be allowed to retake the test, depending on the individual platform’s rules.
The hope is this will result in restricted investors having a much better understanding of what they are investing in and the risks involved. Of course, the FCA expects exemplary record-keeping by the platforms to evidence why an investor has been allowed to invest, creating an additional administrative and compliance burden. But there is a strong argument that this is a small price to pay to protect not only investors, but also this increasingly important sector of alternative finance.
Intelligent Partnership is currently producing a report into the alternative finance sector, which provides more details about the recent FCA regulatory changes. We are also conducting an adviser survey. For the chance to win a free Amazon Echo, and claim a copy of the report, click here.