The Financial Conduct Authority’s decision to define peer-to-peer lending too narrowly has hampered the market, it has been claimed.
According to one compliance expert, the FCA’s decision has meant only 40 per cent of the P2P loans which HM Treasury had intended to be covered by the legislation were actually captured by the regulator’s definition.
This comes one year on from the launch of the Innovative Finance Isa, announced in the 2015 Summer Budget and available from 6 April 2016, which allows savers to invest in P2P lending without paying tax on the gains.
However the Isa has been mired in criticism with just 14 P2P Isas now available, as dozens of lending platforms still wait for approval from the FCA.
The regulated activity relating to loan-based crowdfunding is set out in article 36H of the Regulated Activities Order.
Gillian Roche-Saunders, partner at Bates Wells Braithwaite said: “When the Treasury drafted article 36H they were trying to regulate the P2P activity that already existed in the market.
“The FCA has taken a narrower view, and whether it’s due to unclear drafting or a confusing interpretation this means that P2P firms have had to jump through hoops.
“There has been a real difference in interpretation between the FCA and the Treasury.
“Given the number of changes platforms have had to make to their business model over the last 18 months, I would estimate that only around 40 per cent of the P2P loans that the Treasury intended to be covered by the legislation were actually captured under the FCA’s definition.”
Article 36H says the online system should be “capable of determining” which loans are made available to borrowers and lenders.
But Ms Roche-Saunders said the FCA has interpreted this as meaning that the technology used includes some form of match-making process, a feature that wasn’t prevalent previously.
She said another example was pre-funding, where deals were initially funded by an institution and then resold to consumers hours or days later.
The FCA’s said loans must always involve the consumer at the outset and so prefunding prevents a loan ever become P2P, and therefore every being able to be part of the Innovative Finance Isa.
A spokesman for the P2P Lending Association, said: “The P2PFA is concerned that the FCA has chosen, in some respects, to adopt a narrow interpretation of them, the consequence of which could be a regulatory gap for consumers buying certain loans as well as opening the door for unscrupulous new businesses to enter the market and, potentially, avoid regulation.
“This approach is also forcing some platforms to make changes to their business models which add cost and potentially reduce choice in the marketplace, whilst doing little or nothing to benefit consumers.”
Julian Cork, COO at Landbay said: “We worked with the FCA and Treasury to ensure all our loans were 36H compliant, which required a small tweak to our business model in relation to pre-funding of loans. This most certainly assisted us in becoming one of the first to launch our IFIsa.”
FCA and HM Treasury had not returned requests for comment at the time of publication.
damian.fantato@ft.com
