On 4th June 2019 the Financial Conduct Authority (the “FCA”) published final rules for peer-to-peer (or P2P) lending platforms. The new rules are the result of the FCA’s consultation that launched in July 2018, with the FCA stating that the new rules are designed to help better protect investors and allow firms and fundraisers to operate in a long-term, sustainable manner. The new rules and guidance will come into force on 9th December 2019, with the exception of certain rules relating to mortgages that are funded through P2P loans (explained in further detail below) which entered into force on the same day that the policy statement was published by the FCA.
Why have these new rules been introduced?
As we reported in our briefing at the time of the launch of the FCA’s consultation (which can be found here), the FCA’s objective in bringing in the new rules is to prevent harm to investors, without stifling innovation in the P2P sector and is in line with its commitment to keep regulation of the sector under review. Christopher Woolard, Executive Director of Strategy and Competition at the FCA commented on 4th June 2019 that [the new rules] ‘are about enhancing protection for investors while allowing them to take up innovative investment opportunities. For P2P to continue to evolve sustainably, it is vital that investors receive the right level of protection.'
The FCA had also identified a specific gap in consumer protection for customers who enter into a mortgage or take out home financing products through loan-based crowdfunding and proposed to extend the rules that apply to home finance providers to those who operate P2P lending platforms where at least one of the investors is not an authorised home finance provider. These are the rules that entered into force on the same day that the policy statement was published by the FCA.
What do the new rules do?
The new rules implement the FCA’s proposals largely as set out in the consultation paper, although the FCA has added more guidance and clarification to deal with concerns raised by firms during the consultation process.
The FCA has stated that the proposals that generated the most feedback were those relating to the application of marketing restrictions to the P2P sector. The changes introduced by the new rules extend the application of the marketing restrictions that currently apply to investment-based crowdfunding platforms (in relation to non-readily realisable securities) to the P2P sector. This includes bringing in a requirement for P2P platforms that communicate “direct offer” financial promotions to ensure that they only communicate such promotions to retail clients that:
are certified or self-certified as ‘sophisticated investors’ or are certified as ‘high net worth investors’;
confirm before a promotion is made that, in relation to the investment promoted, they will receive regulated investment advice or investment management services from an authorised person, or
are certified as a ‘restricted investor’; that is, they will not invest more than 10% of their net investible assets in P2P loans in the 12 months following certification.
Among other things, this new requirement means that retail customers who are classified as “restricted investors” are limited to investing a maximum of 10 per cent of their investible assets in P2P loans. The FCA’s Policy Statement expressly states, however, that investors that initially fall within the restricted investor category can be reclassified as certified sophisticated investors (removing the 10% investment limit) if they have made two or more P2P investments in the past two years.
Where no advice is given to a retail client, the final rules also require P2P platforms to carry out an appropriateness assessment. This requirement also currently applies to the investment-based crowdfunding platforms. However, the final rules contain guidance on the topics that P2P platforms should consider including in the appropriateness assessment, including:
the nature of the client’s contractual relationship with the borrower, and with the platform;
the client’s exposure to the credit risk of the borrower;
that all capital is at risk
the fact that investments on the platform are not covered by the Financial Services Compensation Scheme;
that returns may vary over time;
that entering into P2P agreements or investing in a P2P portfolio is not comparable to depositing money in a savings account;
information on the platform’s risk mitigation measures, including in the event of its insolvency; and
the role of the platform and the scope of its services.
Overall, the FCA believes that the new rules strike an appropriate balance as they should allow the P2P sector to continue to market to new investors and to differentiate themselves, while also protecting investors.
For crowdfunding firms who provide mortgage and home finance products to retail customers, the final rules extend the application of existing rules for the home finance sector to P2P platforms that offer such home finance products, where at least one of the investors is not an authorised home finance provider.
The policy statement includes various other changes to the FCA rules which will impact the P2P lending sector. In summary, the final rules include:
more explicit requirements to clarify what governance arrangements and systems and controls platforms need to have in place to support the outcomes they advertise relating to the P2P loans on their platforms, with a particular focus on credit risk assessment, risk management and fair valuation practices;
strengthening rules on plans firms need to have in place for the wind-down of P2P platforms if they fail; and
setting out the minimum information that P2P platforms need to provide to investors.
The policy statement also refers to the FCA considering further whether operators of P2P lending platforms should hold additional regulatory capital. While most of the respondents to the FCA’s consultation paper refer to any additional regulatory capital requirement being overly burdensome, the FCA has stated “We will consider if further action is appropriate”.
Investment based crowdfunding platforms
While the focus on this policy statement is the P2P lending industry, the FCA has also commented on the financial promotion requirements that currently apply to investment-based crowdfunding platforms. Once the new rules enter into force on 9th December 2019, these requirements will also apply to P2P lending platforms.
In summary, the FCA’s earlier consultation paper referred to the requirements that must be satisfied to classify an investor when marketing a “non-readily realisable security” (NRRS) or a “non-mainstream pooled investment” (NMPI). The FCA has stated that respondents said that the relevant FCA rules set different expectations under the NMPI and NRRS regimes as to the checks or evidence-gathering that firms must undertake to satisfy themselves of a client’s classification. It was noted that the NMPI rules explicitly require firms to take ‘reasonable steps’ to establish that a person falls within a particular category, whereas the NRRS rules do not explicitly set out such a requirement to take ‘reasonable steps’. In addition to noting this difference, firms that responded to the FCA’s consultation paper requested more clarity on what constituted ‘reasonable steps’ for this purpose.
Taking these comments into account, the FCA stated that “we are considering these comments in a broader context. This will include, where appropriate, consideration of the approach to be expected of P2P platforms which may update further the revised rules set out in this PS. We expect to be able to comment further in due course. If we conclude that additional rules and guidance are needed, we will consult on our proposals”.
Crowdfunding platforms need to prepare to comply with the new rules from 9th December 2019 and, in the case of platforms with mortgage and home finance sector customers, ensure they are compliant with the new rules applicable to them already. Firms can expect the FCA to be monitoring compliance carefully, especially following the Dear CEO letter it published for P2P platforms in March this year, which we reported on here.
The FCA Policy Statement containing the feedback to the consultation and the final rules can be found here.