Regulation  

P2P lenders have to up their game

Noline Matemera

Noline Matemera

 In a seven-page “Dear CEO letter”, the Financial Conduct Authority (FCA) fired a shot across the bows to 65 peer-to-peer lender (P2P) chief executives warning of a ‘strong and rapid crackdown’ if firms fail to address its concerns.

The letter specifically addressed recurring problems such as poor disclosure of information to clients, unsatisfactory data management and opaque charging structures and heralds a significant change in tone and approach from the regulator.

The collapse of Lendy earlier this year – which was preceded by Collateral in 2018 following intervention by the regulator – has undoubtedly been one of the drivers behind the letter.

In the wake of these two recent high-profile failings, the letter was undoubtedly a carefully timed move, showing that the regulator is clearly on high alert.

Pre-empting investor fears, the letter focussed on the FCA’s perceived increased risk from the P2P community.

It highlighted concerns about P2Ps potentially exposing investors to a greater amount of ‘risk than they appreciate’, in a high return and ‘low-interest-rate environment’.

One of the reasons highlighted was a lapse in communication between firms and the FCA, particularly when notifying the regulator of a change in operating model, messy wind-downs and loan defaults, all of which do not reflect well on P2P lenders’ due diligence and operational processes.

In June, the watchdog followed through on a cautionary letter issued the previous year, clamping down on the sector by introducing strict new rules concerning their use of marketing, wind-down arrangements and investor caps.

Principles-based approach

Typically, the FCA adopts a principles-based approach, especially for the less established and more innovative areas of the financial services sector such as P2P.

This means firms are left to independently determine what the guidance means for their individual business models. Last week’s letter certainly marks a step away from this usual approach and should be viewed as a harbinger of things to come.

The last 15 months have seen two warnings and a set of new regulations issued to P2Ps by the FCA, but this latest letter suggests a heightened regulatory focus on this sector.

Indeed, it would be reasonable to infer that enforcement action against firms and senior management individuals is highly likely, particularly in light of the number of warning shots, failings and the FCA’s focus on senior management accountability under the SM&CR.

While it is difficult to read the tea leaves on any potential future enforcement action, the FCA’s communication should serve as a useful prompt for firms to take stock of their performance and conduct from a regulatory perspective.

Any stock-take should focus on each of the individual items specifically referenced in the letter.

More generally, P2P lenders will have reacted differently to the steady flow of warnings and prompts in different guises from the FCA.

Some P2Ps will undoubtedly have taken account of the letter and previous communications in their operations and procedures.