Regulatory Bulletin: New rules for P2P platforms
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FCA confirms new rules for P2P lenders
On 4th June 2019, the FCA published Policy Statement 19/14: Loan-based (‘peer-to-peer’) and investment-based crowdfunding platforms: Feedback to CP18/20 and final rules (PS19/14). The policy statement sets out the final policy positions the FCA have reached, taking into account feedback received in response to CP18/20. It also contains final rules that implement the policy decisions made. The new rules and guidance will come into force on 9 December 2019, with the exception of applying MCOB to P2P platforms that offer home finance products, which comes into force on 4 June 2019.
What does this mean?
As evident from the recent collapse of Lendy, the regulatory regime applicable to P2P lenders has required a revamp and reinforced the FCA’s review that retail investors in this space need protecting. Research from the FCA found that the P2P sector had developed a wider, more complex, range of business models. Many platforms in the sector are now taking a much more active role, for example by taking decisions on behalf of the investor. The FCA also identified poor business practices, for example, in disclosure of information to clients, charging structures, wind-down arrangements and record keeping.
In summary, the FCA confirms in PS19/14 that it is:
- introducing more explicit requirements to clarify what governance arrangements, systems and controls platforms need to have in place to support the outcomes they advertise. Particular focus has been placed on credit risk assessment, risk management and fair valuation practices, especially for platforms with more complex business models;
- strengthening rules on plans for the wind-down of P2P platforms;
- applying marketing restrictions to P2P platforms, designed to protect new or less experienced investors. The FCA has also clarified the practical implication of these new rules as they apply to P2P agreements;
- introducing a requirement that an appropriateness assessment be undertaken, where no advice has been given to the investor. The FCA has also provided guidance on what the assessment should include;
- setting out the minimum information that P2P platforms need to provide to investors;
- requiring P2P platforms to implement these changes by 9 December 2019; and
- from 4 June 2019, applying the Mortgage and Home Finance Conduct of Business sourcebook (MCOB) and other Handbook requirements to P2P platforms that offer home finance products, where at least one of the investors is not any authorised home finance provider.
The proposals that generated the most feedback were those relating to the application of marketing restrictions to the P2P sector. Most of the P2P platforms responding to this proposal felt that this approach was disproportionate and a ‘blunt tool’ to achieve the FCA’s stated consumer protection objective. A small number suggested that the FCA should go further, for example by introducing a 10% of net assets cap on investments for all retail clients.
The FCA considered the feedback received and decided to finalise most of the rules as consulted on, with some modifications. In particular, the FCA has:
- Provided guidance on the application of the restriction on information that can be made available to prospective investors in P2P agreements. This clarifies that retail investors can be provided with information on specific investments before they have to complete a client classification process.
- Clarified that the appropriateness assessment needs to be undertaken before an investor can submit an application to invest. We have also provided more information about what the assessment should include.
- Added clarification that those P2P platforms offering a target rate of return, should be able to demonstrate they have appropriate access to data, and the modelling capability and governance arrangements to do so effectively.
- Added guidance on the inputs that might be needed to calculate credit risk at portfolio level, by also referencing the variability of losses through the cycle.
- Required P2P platforms to assess and determine, depending on their business model, when they will be revaluing P2P loans.
- Required P2P platforms to disclose if they consider a borrower is unlikely to meet their obligations, even if there has not yet been a default.
What can FinTech Compliance do to help?
At FinTech Compliance, we are working with some of the leading P2P lenders to keep ahead of the rules and drive growth.
With these new rules in mind, we are offering the following:
- User journey reviews to identify the appropriate point at which to implement investor-type declarations
- Drafting and design of your Appropriateness Test
- GAP analyses, requirements mapping and drafting of your Wind Down Plan
- Risk Management Framework advisory services
- Provision of suitable personnel to comprise your Independent Compliance and/or Control Functions
Contact us to discuss further