Retail investors will be allowed to invest just 10% of their investable assets into peer to peer (P2P) loans, following the release of the Financial Conduct Authority’s new rules for the sector.

P2P lending has exploded in popularity since the launch of Zopa, the first P2P lender in the UK, in 2005, with the attractive returns advertised proving a popular alternative to the low interest rates found in retail deposits. In 2018, P2P platforms facilitated loans worth almost £3 billion, according to the P2P Finance Association (P2PFA).

However, the higher risks associated with P2P loans and the fact they are not covered by the Financial Services Compensation Scheme (FSCS) means the FCA has been keen to protect retail investors who may not understand these risks from being over exposed to the sector.

The FCA has now published its latest tightening of the rules, which mean that retail investors new to the sector will be limited to 10% of investable assets in order to prevent over-exposure to risk.

To be implemented from 9 December, the rules will also require platforms to assess an investor’s knowledge and experience of P2P investments where no advice has been given to them, before allowing them to invest.

Other rules brought in by the FCA include:

  • 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.
  • 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.

Christopher Woolard, Executive Director of Strategy and Competition at the FCA said: “These changes are about enhancing protection for investors while allowing them to take up innovative investment opportunities.

“For P2P to continue to evolve sustainably, it is vital that investors receive the right level of protection.”

The FCA first began looking into P2P in 2014, and last year proposed the 10% market cap, along with applying the same restrictions currently applied to investment-based platforms, such as debt based securities, to P2P, among other new restrictions. According to the FCA, these marketing restrictions generated most of the feedback it received, with many P2P platforms describing them as a ‘blunt tool’.

Commenting on the new rules, Peer To Peer Finance Association (P2PFA) chair Paul Smee said that overall the organisation considered them to be a proportionate way forward for regulation. However, he added: “We will be monitoring especially closely the impact of marketing restrictions on how retail investors can participate in this important asset class and will let the FCA know if there is evidence that their rules are proving an unnecessary obstacle.”

P2P platforms need to implement these changes by 9 December 2019, except for the application of Mortgage and Home Finance Conduct of Business sourcebook, which applies with immediate effect.

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