If you follow news on P2P lending you may be aware that over the last few years the Financial Conduct Authority (FCA) have been carrying out a review of the Peer-to-peer and crowdfunding (equity) sectors. Since publishing their first rules in 2014, the industry has seen significant growth and diversification, so the new rules are due for review.
On the 4th June 2019, the FCA published its feedback and changes to the rules, which will come into effect on the 9 December 2019. We responded to the consultation papers and have worked closely with industry bodies such as the UKCFA, to help shape and influence changes to the regulations.
The changes that the FCA have decided to implement are synergistic to the changes proposed in the consultation paper 2017/2018, most of which we agreed with and were already part of our processes. Consequently, users will notice relatively few changes. Many of these changes focus on demanding higher levels of transparency and clearer communication, risk management and cross-platform standardisation of definitions in relation to defaults. We are pleased to learn that the FCA has adopted the definition we have used since our inception of "90 days past due". Historically members of the P2PFA have been able to compare favourably, by having a more lenient default definition of "120 days past due". So this makes it easier for users to compare platforms.
In the FCA’s consultation in 2018 it classified platforms into three categories based on their business model. Pricing, Conduit and Discretionary platforms. We are a conduit platform because we allow lenders to set an interest rate price. Many of the new rules are specifically aimed at pricing and discretionary platforms, mandating high standards on credit risk analysis models and reporting, as lenders have less control of their own investments on these platforms.
| Model | Features |
| Conduit | Lenders pick the loans and the platform administers the loan, clearing of funds and security |
| Pricing | The platform sets the price, but the lender picks the underlying loans |
| Discretionary | The platform sets the price and chooses the investor’s portfolio of loans to generate a target rate |
What changes to expect
Investor categorisation
Lenders will need to be classified as either:
- High net Worth investor; or
- Sophisticated Investor; or
- Self-certified sophisticated investor or
- Restricted Investor
Restricted investors are unable to put more than 10% of your available investment assets into P2P lending platforms.
Lenders must also undertake an appropriateness test prior to being able to invest in any of the businesses on the platform. This mandated test will essentially quiz your knowledge and understanding of the platform and your understanding of our role.
Many of you have already completed a type of appropriateness test, so we are confident that the majority of our long-standing lenders will have no problem passing this once introduced.
The classification of investors wil have an impact on how and to whom platforms may market to and will change the structure and nature of many P2P promotions and adverts.
Find Out about how we handle defaults
Living Will (Platform Wind-down Arrangements)
It has long been a requirement that P2P platforms have a Living Will or wind-down arrangement in place to ensure an orderly wind-down of a platform's loan book in the event that the platform ceases to trade. The necessity and importance of these arrangements is currently being tested with the current winding down of Lendy and Collateral.
Living wills must adequately set out the plans for a 3rd party to be able to successfully distribute lender funds from ongoing loan repayments and ensure that lender funds are maintained and kept according to the CASS (client money) rules.
As a fully authorised and regulated platform, we are frequently reviewing and updating our Living Will and also act as the back-up servicing company for our appointed representatives and have in the past successfully facilitated the winddown of an associated platform. Should we as a platform cease to trade we’re confident that our arrangements would ensure the protection of client money and the smooth winding down of the loan book.
Find out more about our Living Will.
What the new rules failed to cover (in our opinion)
Whilst many of the rules implemented by the regulator are welcomed, we believe that there is more to do. Lenders need to able to compare and contrast the performance of their investments across a variety of platforms.
Definition of Net Return
Whilst the definition of default may now be standardised, there is great diversity in the manner in which platforms calculate net returns and how these are reported to investors. Whilst each platform is required to set out for its investors how it goes about calculating net returns, lenders will still be unable to compare like for like net returns across platforms.
Find out how our net returns are calculated
Higher Standards of Transparency
Many of the new regulations have focused on strengthening the requirements of specifically of pricing platforms’ Risk Management and Credit Risk frameworks, implementing improved requirements on reporting and audit. However, lenders investing on some pricing, but mainly discretionary platforms will still be unable to identify who specifically they are lending.
Rather more concerning is a sentence in the FCAs feedback is what seems to be a reduction in standards for conduit platforms like ourselves. The regulators feedback states:
In cases where a platform decides not to price loans on behalf of investors (ie. operate a conduit-type business model) the platform will not be required to conduct a credit risk assessment of the borrower.
FCA Feedback to CP18/20
This could result in performance standards amongst conduit platforms plummeting. Lower standards of credit risk might result in higher defaults and increased risk to investors.
We will not be reducing our credit risk assessment standards and will not be reducing the amount of information or level of transparency our lenders have come to enjoy. Our credit risk team regularly review the loan book performance and manage the credit risk assessment applied to all loan applications according to its performance.
Furthermore, we will also continue to review ways in which information on lending opportunities is published, so as to inform lenders as much as practically possible, to make considered investment decisions for themselves, and price the risk appropriately.
Find out more about our views on transparency.
What's Next?
As a platform we're proud to have already implemented or made steps to implementing many of the changes mandated by the FCA.
Over the next few months we'll be making a few minor changes to platform and your lending experience. If you haven't already, we'll ask you to complete an appropriateness test and lender classification.
If you have any questions about the new regulations, how they might affect you as a lender please feel free to get in touch with us, we'd be happy to hear from you and to answer your questions.
