Regulation  

FCA sounds warning on peer-to-peer lending

FCA sounds warning on peer-to-peer lending

A ‘post-implementation review’ of the new regulatory framework covering crowdfunding platforms next year could see rules relating to peer-to-peer lenders toughened to reflect increasing risks to consumers, the Financial Conduct Authority has said.

In a paper setting out an ‘early review’ of the new regulations, which came into force in April 2014, the regulator states crowdfunding websites continue to mislead consumers and cites a threefold increase in investment in the market over the past year.

The watchdog warns in particular that if risks to which investors on loan-based platforms are exposed to increase to mirror those in investment-based platforms, it will review its approach.

Under the framework published in April 2014, rules for investment-based and loan-based crowdfunding platforms, mainly peer-to-peer lenders, were separated to apply a less onerous regime for the latter.

Provisions included that firms should check prospective clients are either advised, defined as ‘sophisticated’, or only investing a maximum of 10 per cent of investible assets.

The warning comes at a time of rapid growth for both forms of crowdfunding - and in particular a surge in interest in P2P lending following relaxation of tax rules in the Autumn Statement and ahead of new pension freedoms which will boost interest in income alternatives.

Since introducing its rules last year, the crowdfunding market has grown rapidly. According to Nesta and the University of Cambridge, loans on peer-to-peer platforms were almost £1.3bn in 2014, three times larger than the £480m raised in 2013.

Investment-based crowdfunding platforms raised £84m last year compared to £28m in the previous year.

Problems which cropped up from the FCA review of both markets related to websites and social media use, the regulator says.

Between April and October 2014, 25 websites, including both loan-based and investment-based platforms, were reviewed against the financial promotions rules and the requirement to be fair, clear and not misleading.

With regard to the investment-based platforms it found problems with most of the websites including insufficient and “cherry-picking” information as well as “downplaying important information”.

The regulator said this is particularly concerning as, according to Nesta, 62 per cent of equity crowdfunding investors described themselves as “retail investors with no previous investment experience of early stage or venture capital investment”.

Its review of loan-based crowdfunding identified similar issues, including creating the impression that an investor’s capital was secure.

The FCA added that one issue of particular concern to the crowdfunding sector is the extent to which using social media can be regarded as a ‘financial promotion’. The regulator expects to publish final guidance on social media and communications in the first quarter of this year.

Christopher Woolard, director of strategy and competition at the Financial Conduct Authority, said: “Over the last year we’ve seen the extraordinary growth of peer-to-peer and equity-based crowdfunding continue.

“Our aim, with the rules we put in place in April, is to ensure that the growth we’re seeing comes with appropriate investor protection in place.”