The Financial Conduct Authority has expressed concern that the Innovative Finance Isa might be encouraging people who don’t understand crowdfunding to put their money into it.
The regulator published a call for input as part of its post-implementation review of the rules for the regulation of crowdfunding platforms introduced in 2014.
It raises a number of concerns and asks for comments on whether these worries are founded and, if so, how they can be tackled.
One of these is around the introduction of the Innovative Finance Isa in April, and whether the ability to invest money in peer to peer (P2P) through self-invested personal pensions, might attract a new type of investor to crowdfunding.
In the paper, the FCA stated: “The ability of people to invest pension money in P2P loans, for example, within a self-invested personal pension, or to use the new pension freedoms to take money out of their pensions at retirement and invest in loans, may lead to a change in the investor base.
“There is anecdotal evidence that suggests P2P investors in the past were relatively wealthy or knowledgeable,” it continued.
“The availability of P2P investment through Isas and pensions, or at retirement using money released from pensions, may create a change in the investor base toward retail investors who are less experienced or knowledgeable, who trust the Isa ‘brand’, and who may not fully appreciate the risks involved.”
The regulator therefore asked whether more retail investors are being attracted to P2P through the new Isa.
The current rules for investment-based crowdfunding requires firms to assess whether prospective investors have the knowledge or experience to understand the risks involved, and to check whether investors meet certain criteria before being able to invest money.
The FCA has said it might apply the same approach for loan-based crowdfunding.
Another issue is the potential market for P2P residential mortgage contracts.
“We are aware some P2P platforms are considering moving into residential secured lending,” the paper stated.
“The business models of such operations might have the effect that there is no one responsible for the regulated lending activity, bypassing Mortgage and Home Finance: Conduct of Business Sourcebook affordability requirements and other lending responsibilities.
“To address any potential loophole, we propose to apply usual MCOB lending standards to P2P platforms where the investor/lender is not acting by way of business.”
As part of its review into the funding of the Financial Services Compensation Scheme, the FCA is also looking into whether its current approach - where investors also do not have any recourse to the FSCS in the event that a firm operating a loan-based crowdfunding platform fails - is still appropriate, given the growth of the P2P market.
When the FCA introduced its rules in 2014, it said the additional regulatory costs would be disproportionate to the amount of loss investors might suffer if a platform failed at the time, and to the amount that would be covered by the FSCS in such an event.
