What is the Financial Conduct Authority (FCA) planning to change in order to further protect consumers investing via peer-to-peer lending? What is our perspective, as a peer-to-peer lending platform? Read on to find out...
The rise of high risk investments
Online investment platforms first became available in the UK in 2005, and as a result, people now have a wider selection of investment opportunities available to them.
Peer-to-peer lending, and other types of online investment through these new platforms, are increasing popular as alternatives to mass-market investments.
Peer-to-peer lending is classed as a ‘high risk investment’ by the FCA. The FCA have recently said that it has become apparent that consumers have little understanding of the risks involved with high risk investments. Therefore, consumers aren’t investing in products that suit their needs, savings and budgets.
This has led the FCA to plan tougher rules to protect consumers from high-risk investments, including strengthening the rules for financial promotions.
FCA strengthening financial promotion rules
Members of the Financial Conduct Authority have shared their concerns. Executive Director of Consumers and Competition at the FCA, Sheldon Mills, shares proposals on how the FCA are going to bring about change:
"We have already taken action by banning the mass-marketing of speculative mini-bonds. We continue to address harm in this market through our ongoing supervisory and enforcement action but recognise more needs to be done. Our latest proposals would further reduce the risk of people taking on inappropriate, high-risk investments that don’t meet their needs."
Source: FCA Press Release
The FCA are focusing on strengthening financial promotion rules, particularly in relation to high-risk investments. Research published in a FCA Discussion Paper found ‘45% of self directed (i.e. non‑advised) investors said they did not view ‘losing some money’ as a potential risk of investing’ and 'consumers only start to recognise that a financial promotion for an investment product is probably ‘too good to be true’ when the promised rate of return is around 30% or more.'
To facilitate productive outcomes of high-risk investments, the FCA have created a strategy plan. The plan is to cover the next 3 years, in these areas:
- Classification of high-risk investments
- Further segmenting the high-risk investments market
- Approval of financial promotions.
FCA improvements to financial promotion guidelines
In a recent Press Release, the FCA wrote:
“The classification of high-risk investments: The FCA’s classification of investments determines the level of marketing restrictions that applies to that investment. The FCA is seeking views on whether more types of investments should be subject to marketing restrictions and what marketing restrictions should apply, for example for equity shares and Peer-to-Peer agreements.
Further segmenting the high-risk investments market: The FCA is concerned that despite its existing marketing restrictions, too many consumers are still investing in inappropriate high-risk investments which do not meet their needs. Therefore, the FCA plans to strengthen its rules to further segment high-risk investments from other investments and is seeking views on how best to achieve this. The FCA is considering what improvements could be made to risk warnings, which are often perceived as white noise to many investors and often do not convey the genuine possibility of an investment loss. Other suggestions in the paper include requiring consumers to watch educational videos or to pass an online test to demonstrate sufficient knowledge about financial products. This could help prevent consumers from simply clicking through and accessing high-risk investments that they do not understand.
The approval of financial promotions: Firms which approve financial promotions for unauthorised persons play a key role in ensuring those promotions meet the standards we expect. The FCA is seeking views on whether there should be more requirements for these firms to monitor a financial promotion on an ongoing basis, after approval, to ensure it remains clear, fair and not misleading.”
Freedom of investment has its risks
It is important to note that investment always comes at a risk when customers are investing their own capital that they have a risk of losing. Sarah Pitchford, Executive Director of Markets at the FCA, states the freedom investors have, which it also comes with consequences:
“Investors have never had more freedom – technology has democratised the market, new products have become available, and people have better access to their life savings than before.”
“But that freedom comes with risk. We want to give consumers greater confidence to invest and to help them do so safely, understanding the level of risk.”
Source: BBC News
FCA'S annual perimeter report
The FCA’S annual perimeter report revealed customers' vulnerabilities. The FCA have clocked that retail investors are attempting to pass as sophisticated investors in order to access higher-risk investments.
“Investors who do not meet these tests are being ‘pushed’ through them, often by unregulated firms. This unscrupulous behaviour is sometimes helped by the appeal to some retail investors of self-certifying themselves as ‘sophisticated’ or ‘high net worth’ and the sense of exclusivity that the exemptions offer."
Source: P2P Finance News
Investigations are underway in cases where customers have invested in unsuitable high-risk investments and scams. This is reported by the FCA who are involved with 31 investigations. Furthermore, the perimeter report states that they want to protect customers from scams and fraud:
“There are promotions online for firms that do not exist, for firms that falsely claim to be regulated, for firms that claim to be based in the UK but are not, for products for which spurious claims of returns are made and for clones of legitimate authorised firms. This is a fast growing problem.”
Source: FCA Handbook
The Chief Executive of the FCA, Nikhil Rathi, promises that going forward the FCA will be more ‘innovative, assertive and adaptive’.
Our perspective
rebuildingsociety.com was one of the first regulated P2P lending platforms in the UK. Following the post-implementation review in 2019, the firm, along with all other P2P platforms in the UK, implemented the mandatory Lender Classification process and Lender Appropriateness tests, and has continually reviewed and edited these to incorporate the changing nature of the risks faced by lenders.
Protecting consumers from malicious and inherently fraudulent investments must be a priority of the FCA.
That being said, the regulator must also ensure that it meets its objectives of promoting innovation and competition in financial services. It would be a shame that if, in its delivery of its strategic plan to provide better protection to consumers, the regulator made access to investing and investments inaccessible to the everyday investors who benefit from access to investment platforms such as rebuildingsociety.com and other P2P lending platforms.
Read more about our appropriateness test and how we as a platform help lenders understand the risks of investments.
