Individuals will not be permitted to have more than 10 per cent of their assets in peer to peer investments unless they have taken financial advice, under new rules proposed by the Financial Conduct Authority (FCA).
The rules, released this morning (4 June), are designed to prevent investors from taking what the regulator considers to be excessive risk.
The new rules come just days after Lendy, a peer to peer lending platform, went into administration with a high volume of non-performing loans on its platform.
Under the new rules, platforms will be required to assess a client’s knowledge and experience of peer to peer platforms, and setting new minimums for the level of information platforms must disclose.
In particular, platforms will not be prevented from including information about specific investments in their marketing materials.
There will also be a more explicit requirement 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.
Christopher Woolard, executive director for 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 has refined its proposals to ensure the new rules protect consumers and support the P2P market. In particular, additional guidance has been provided to make it clear that platforms will not be prevented from including information about specific investments in their marketing materials."
Laura Suter, analyst at AJ Bell, said: "Peer-to-peer platforms have been dealt a blow by the regulator today, as the FCA introduces new rules to tighten up the sector.
"From December, anyone wanting to invest in peer-to-peer will now have to pass a test to show they understand the risks they involved, and new investors will be limited to having 10 per cent of their assets in the sector.
"Providers will also be restricted in how they market products in the future, stopping mass advertising campaigns.
"The latest Isa season highlighted the flood of marketing from peer-to-peer lenders, some of which made comparisons with cash Isa rates or didn’t fully highlight the risks involved in the sector."
Peer to peer platforms host the innovative finance Isa (Ifisa), was launched in April 2016 to allow UK individuals to earn tax free income on peer to peer lending.
In April the FCA warned about risky Ifisas being advertised alongside cash Isas. The regulator stated it had seen evidence the two products were being promoted together, and it warned investments held in Ifisas were "high-risk".
The City watchdog warned these types of investments might not be covered by the Financial Services Compensation Scheme and investors might therefore struggle to reclaim any money lost.
The FCA warned: "Anyone considering investing in an Ifisa should carefully consider where their money is being invested before purchasing an Ifisa."