Alternative Investment 

Why the FCA is concerned about P2P finance

This article is part of
Guide to crowdfunding and P2P lending

Why the FCA is concerned about P2P finance

Since 2014, peer-to-peer (P2P) platforms have had to be authorised by the Financial Conduct Authority (FCA) to operate.

This means they have to have systems in place for the treatment of client money, and processes that check for money laundering, and other procedures for ensuring the correct running of a financial business.

Many platforms have initially operated on interim permissions, before getting their final permissions, but they all now have to be on full permissions.

A recent Freedom of Information request revealed that, so far, up to 13 June, as many as 373 applications for authorisation to run a platform were made to the FCA, of which 80 per cent were withdrawn, according to RSM, the accountancy firm, rather than get to the stage where they were rejected.

The areas where they have fallen down on has generally related to the treatment of client assets, and how they reconcile client money that is held in trust, before it is deployed.

Damian Webb, restructuring partner and alternative finance specialist at RSM says: "When money comes in before it is deployed, that money must be held in trust for the clients. They weren't reconciled properly."

There have also been failures in the area of client on-boarding, especially in terms of 'Know Your Client' and prevention of money laundering.

Regulation, regulation, regulation

The FCA recently published a consultation paper where it wants to instil some further rules on the way these platforms operate.

Mr Webb says: "The FCA is essentially trying to regulate the sector. They're effectively trying to make everybody follow the same standards.

"The most significant aspect is they're trying to stop retail investors who aren't sophisticated investing in the sector because the FCA perceives it as high risk."

In CP18/20 published at the end of July, the FCA says that it intended to allow P2P platforms to market only to certain investors.

The problem, it said, was that many investors were taking on considerable risks without being remunerated correctly for that risk, or even being aware they were taking that risk in the first place.

The paper says: "We are not comfortable that risk and reward are always balanced appropriately on all P2P platforms, and we are concerned that investors cannot assess their risk exposure due to the way platforms operate."

The fear held by the FCA is that, while defaults have been minimal, the sector is new and has not been through a complete economic cycle as such, so that the default rate may increase. In addition, some platforms may diversify into riskier areas, while they are still in growth mode.

As a result, the FCA is proposing that the P2P platforms actively promote their services to just a select group of investors (one of the following):