On 4th of July 2019, FCA (the Financial Conduct Authority) in the UK has confirmed new rules for P2P platforms.1 The UK watchdog is one of the frontrunners in financial regulation among other jurisdictions. This article aims to clarify what changes will be implemented and who will be affected. It does not affect Grupeer per se, as we are not conducting any business in the UK, nor have loan originators there. However, we have clients from the UK and we hope that this article will be valuable information for them.
Why FCA is concerned
The rapid development of alternative finance and specifically the P2P lending sector has raised concerns of the regulator. After conducting a review, the regulator came across poor business practices, lack of disclosure of information to clients, platforms taking a very active role- making decisions on behalf of customers. As a result, many investors were misled regarding their financial situation and not understanding the real risk they were taking. Ultimately, FCA has prepared changes which will protect customers without putting restrictions on the growth of the P2P lending industry, or as FCA puts it: “These changes 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.”
In 2014 the FCA took responsibility for oversight of the crowdfunding industry and the loan-based products.
In 2016 the FCA has started reviewing the post-implementation of regulation in the crowdfunding sector and has learned that there are various models, in which the p2p sector is operating. Besides that, many poor practices were discovered.
In July 2018 the FCA started a consultation on the changes to the rules and guidelines that apply to loan-based crowdfunding.
In May 2019 the UK platform Lendy has collapsed after scrutiny from the regulator.
What will be changed
As FCA is a financial regulator in the UK, they only have a say on the investment industry in Great Britain. And it turns out that subsequently UK retail investors will be allowed to invest only 10% from their overall investments into the p2p industry. However, the investors, who received the “regulated financial advice” will be allowed to invest the bigger share in the P2P market. Additionally, the marketing of the investments itself will be restricted, so the less informed clients will not be misled. The potential client, who did not seek a bit of professional investment advice, will be required to take an assessment test, to find out his/her knowledge of the financial instruments. The FCA will supply the assessment test as well.
Obviously, the watchdog is doing that to protect the investors. We at Grupeer always said that regulations are not going to hurt the P2P industry, but only strengthen it. However, so far it seems that the FCA is regulating the demand side for the P2P investments. On the other hand, other changes will affect how P2P platforms disclose their information, setting out the minimum reporting and transparency requirements, the requirement of the governance arrangement, and controls. The worst-case scenario, also, will have to be planned out in details, explaining to potential investors what the procedures are going to be and what are the risks. The real estate development projects will have additional requirements.
The deadline for the implementation of these rules is set for 9th of December 2019. The rules regarding the “Mortgages and Home Finance” loans are in effect as of 4th of July 2019.
Notable P2P platforms in the UK
- The UK is the birthplace of the first-ever P2P platform- ZOPA. Founded in 2005 it was the only platform to exist during the financial crisis of 2008. It did not only survive the Great Recession but also brought a positive return of 4% to its investors- the only asset class which didn’t bear losses.
- Funding Circle was founded in 2010. It was the first company to have a planned IPO (initial public offering) on the London Stock Exchange with an estimated market capitalization of GBP 1.5 Billion. This IPO has brought wider recognition to this asset class. The current market capitalization is shy of GBP 500 Million. The dramatic fall of the shares was caused by the news about Lendy.
- Lendy is an ill-known lending platform from the UK, which collapsed at the end of May 2019. This event has strengthened the FCA concerns and probably has led to stricter regulations. You can read our story about poor Lendy here.
P2P lending and the EU?
The big question is, will the EU follow the suit and will copy some of the tight restriction imposed by the UK? There is a high concentration of the P2P platforms in the EU, so this is particularly interesting to many investors. The regulations regarding the transparency and good business practices are, of course, welcome, however, the demand-side restrictions are questionable. The noble purpose of the P2P lending industry is serving and aims to perfect in the future, is the democratization of the investment industry. Previously, investing was accessible only to the richest percent of the population. But with P2P platforms, any investor older than 18 with Eur10 can earn passive income.
The next steps of the EU are not clear, as its goal is to increase access to finance of small businesses within the Capital Markets Union and the FinTech Action Plan. P2P in this sense is making a big contribution too- more and more businesses could secure financing without the complicated bureaucratic processes through modern loan originators.
Overall, the birth of P2P lending sector has not left anyone indifferent. Investors are earning impressive passive income, whilst the real interest rate is eating the savings in bank accounts. The businesses are embracing improved access to finance and investment professionals are developing in the new industry. The urge of the regulators to monitor the new branch of alternative finance is also welcome, however, we hope it will not limit the freedom to invest but will clean the market from incompetent players.