What the new P2P rules mean

  • Describe how the FCA rules will improve consumer protection
  • Identify the dangers of the rules over 'sophisticated investors'
  • Describe some of the problems the FCA found with P2P platforms

This, according to its policy statement published in June, is that investors in P2P platforms can make informed decisions, setting out the minimum information that P2P platforms need to provide; that they have clear and accurate information about the investment risk; that they are appropriately rewarded for this; and that they understand their capital is at risk and may suffer losses.

A glance at the online consumer reviews of some P2P lending firms suggests that these objectives may have not always been met in the past.

It is hard to argue that the changes the FCA is bringing in will not help in addressing some the concerns aimed at the sector.

P2P platforms must now clarify governance arrangements and controls, particularly around credit risk assessment, risk management and valuation (with regards to the loans and borrowers); there are new rules around the wind-down of the platforms, so that the loans can still be managed and administered even if the platform fails; and new details on the minimum information given to investors, with greater transparency around the role of the platform, fees and the arrangements for winding down.

For many established P2P platforms doing much of this already, the requirements will present few difficulties.

For others, they do not seem unreasonable.

More importantly, there are also a number of changes specifically designed to protect less experienced investors, particularly those not taking advice. (Those poorly advised already have some protection and potential means of redress through the Financial Services Compensation Scheme.)

These inexperienced investors will be limited to putting in 10 per cent of their investible assets in P2P, and they will have to be evaluated by the platform operator for appropriateness, assessing their knowledge and experience of this type of investment.

Moreover, there will be restrictions on marketing, so that financial promotions can only be sent to sophisticated or high net worth investors, for example. 

Overall, the reforms try to ensure that firms are well run, that investors understand the risks and that those putting money in do not lose more than they can afford to, even if the firm itself goes under.

Has the horse already bolted?

Despite the new controls restrictions, the FCA has chosen not to heed those calling for a ban on sales without advice or even to ban sales to the public entirely.

Moreover, it has yet to be seen how the controls for non-advised sales will work.

On the 10 per cent restriction, investors will be able to self-certify, for example.

It will probably be some time and perhaps another review before we know how well this works in practice.

And the same is true of firms’ checks on appropriateness.