The Financial Conduct Authority has published a set of proposals to clampdown on the peer-to-peer (P2P) lending market.
In a 156-page review of the crowdfunding industry, the regulator said it has seen examples of poor business practices, particularly among peer-to-peer platforms.
For example, the regulator found instances of investors not being given clear or accurate information, leading to the purchase of unsuitable financial products, and not being remunerated fairly for the risks they were taking.
In response to this the FCA has proposed a package of reforms to increase confidence in the P2P sector.
These include rules requiring public disclosure of expected and actual rates of return, of default rates and of loan risk and duration.
It has also proposed restrictions on marketing, meaning P2P platforms will only be able to communicate financial promotions to sophisticated or high net-worth investors.
Christopher Woolard, executive director of strategy and competition at the FCA, said: "We believe that loan-based crowdfunding can play a valuable role in providing finance to small businesses and individuals but it is essential that regulation stays up-to-date as markets develop.
"The changes we’re proposing are about ensuring sustainable development of the market and appropriate consumer protections."
Peer to peer lending, where an investor lends money to another consumer or business through a platform to make a financial return, has become increasingly popular among retail investors, and the crowdfunding market has grown from an estimated £500m in 2013 to £2.7bn in 2015.
Data from the Peer-to-Peer Finance Association showed cumulative lending by its members was approaching £9bn at the end of March 2018.
Among the concerns the FCA had was that when platforms offered investors a target rate of return for a P2P portfolio which they assembled or managed, they were not always exposing investors to loans which met the risk parameters advertised at the time of investment.
In response, the FCA has proposed rules that, when choosing P2P agreements on behalf of the investor, platforms must only facilitate ones in line with the risk parameters advertised to the investor.
On top of this, P2P platforms offering a target rate of return must be able to determine, with reasonable confidence, that a portfolio will generate the advertised target rate.
On top of this, the regulator has also published proposals on mortgages and other home finance facilitated by P2P platforms.
There is currently no UK P2P market for regulated home finance but the FCA has said it is aware some P2P platforms are considering moving into residential secured lending.
In the consultation paper, titled Loan-based (‘peer-to-peer’) and investment-based crowdfunding platforms, the FCA stated: "The business models of these P2P platforms might mean that nobody has responsibility for the regulated home finance lending or providing activity. This is because it would be possible for a P2P platform to facilitate a home finance product where some or all of the investors are not required to be authorised as home finance providers."
To address this, the FCA has proposed that where a P2P platform facilitates home finance products and at least one of the investors is not required to be authorised as a home finance provider, the platform itself must comply with the regulator's mortgage conduct of business rules.
The FCA has said it is not consulting on rule changes for investment-based crowdfunding platforms because there are already details rules in place but it has provided guidance on marketing.
damian.fantato@ft.com
