The Financial Conduct Authority (FCA) produced a review of crowdfunding rules last Friday. Below, Jamie Telkman of our credit-analysis team summarises the relevant points from the FCA's review.
The FCA is soliciting the reaction of Money&Co. and other leading crowdfunding platforms to its review. We actively encourage our registered users and lenders to respond to Jamie's analysis, and to offer their own thoughts on the review (see the end of this article).
Key Points Arising From the FCA Review
Pooling of credit risk via a provision fund or 'quick access accounts' (QAA). Though legislation passed by the Treasury in January 2016 that meant platforms operating with provision funds were not considered collective investment schemes, the FCA remains wary of platforms committing 'regulatory arbitrage' where there are blurred lines between P2P and business models such as asset management (the platforms are effectively able to become substitutes for asset managers without being subject to the same regulation). Such regulatory arbitrage is also present with banking business with the emergence of QAA, where platforms aim to give investors access to their invested capital within periods as short as 30 days. This displays operational similarities with bank savings accounts, but without the same consumer-protection requirements, and prudential requirements for the mismatching maturities between the offered product and the underlying investments. The FCA will be exploring if P2P regulation should be amended and banking-type regulation implemented to cover such products.
Institutional vs. Retail. The FCA has raised concerns over preferential treatment being given to institutional or larger investors over less-experienced, individual investors. In particular, they give the example of institutions having the chance to review and invest in loans before retail investors are able to.
IFISA and Pensions. With the introduction of the IFISA and increased use of SIPPs and the new pension freedoms, the FCA is concerned that this opens up P2P products to less experienced investors who may not fully recognise the risks involved.
Prudential Requirements. From 1st April 2017 the fixed minimum-capital requirement for loan-based P2Ps will rise from £20,000 to £50,000. For those platforms with more than £25 million in loaned funds outstanding, the minimum requirement will be greater than £50,000 and will be based on a percentage of loaned funds outstanding.
Client Money Rules. The FCA reiterates its requirement for firms holding client money to comply with the client money rules detailed in their Client Assets sourcebook (CASS) and they will be monitoring all such platforms on an ongoing basis.
Due Diligence. Platforms are expected to explain to potential investors their approach to assessing creditworthiness, and as part of their continued review of the sector, the FCA will be evaluating the quality of these assessments. Although it appears that more emphasis is being applied to consumer lending in this regard, the document states that the FCA is currently considering how best to approach the evaluation of platforms' due diligence for P2B (also known as P2P business) lending.
Standards of Disclosure. The FCA has concerns over the level and clarity of disclosures made to investors about default rates and how these levels differ depending on when the loans were originated. It also reminds platforms of their responsibility to present information about investment opportunities in a fair and clear manner, and that the information must be sufficient to enable investors to understand the nature of the investment and associated risks and, consequently, to make investment decisions on an informed basis.
Financial Promotions. The FCA expresses its concern around non-compliant P2P financial promotions, particularly when platforms compare their products to savings accounts and other similar products offered by banks (i.e. savings products covered by the Financial Services Compensation Scheme [FSCS}). They do, though, recognize that their policies may be excessive for online and social media promotions and so have asked for feedback so they may gauge whether revisions need to be made.
Investor Understanding. Although equity-based P2P regulation currently requires a form of investor self-certification, loan-based P2P does not. The FCA is considering, and asking for feedback on, whether such a policy should be introduced for loan-based P2P.
10. FSCS. At present, investors do not have recourse to the FSCS in the event of borrower defaults. Whilst the FCA is not proposing to introduce such recourse in the immediate future, it is currently conducting a review into the way the FSCS is funded and is considering whether, following further market growth and development, such a stance remains appropriate for the P2P sector.
Platforms have been asked to respond to a series of questions related to the points summarized above by 8th September 2016. For the full list of questions, see yesterday's News story on this site. Registered users' thoughts and feedback, via 'Contact Us', are welcomed.