The top financial watchdog, the Financial Conduct Authority, has published a paper on proposed regulation of the way high-risk investments are promoted.
The Financial Conduct Authority (FCA) said it is planning to ban the promotion of investor incentives, such as new joiner or refer-a-friend bonuses, to strengthen appropriateness tests by – for example – removing the ease of retakes, and to improve risk warnings on ads.
The regulator also wants to put peer-to-peer agreements under the banner of ‘restricted mass market investments’, alongside cryptocurrency and non-readily realisable securities, in order to rationalise its current rules after firms reported that its handbook was difficult to navigate.
The FCA has invited feedback on its proposals by 23 March and intends to confirm its final rules this summer.
Here’s the reaction from some P2P platforms and industry stakeholders.
UK Crowdfunding Association (UKCFA) spokesperson
“The overall direction of these proposals is good – strengthening the customer journey to improve awareness and understanding of relevant risks across the whole industry for all products is to be applauded.
“It is good to see the FCA’s willingness to carry out innovative consumer research as well as listen to the voices of the 2,500 customers of crowdfunding and P2P platforms who contributed to the consultation via our own survey last year.
“We will now take a closer look at the detail of the changes the FCA is proposing and feedback on how effective or not we believe these changes will be in practice, given our real-world experience of how customers actually make decisions.”
Atuksha Poonwassie, co-founder and managing director of Simple Crowdfunding
“It is good that the FCA is listening to platform owners and other industry leaders regarding any potential impact and harm to lenders and borrowers and the industry as a whole before consulting.
“Overall, none of the areas covered are a surprise and I welcome the approach. We now need to review the proposals to determine any unintended business impact, considering operational changes, market access and more.
“I am also pleased that the survey conducted by the UKCFA last year that received 2,500 responses from investors has also been considered and referenced in this CP22/2.”
Nicola Horlick, chief executive of Money&Co
“I think it is necessary to have these safeguards to protect consumers. The internet has made it much easier for less experienced investors to buy products that may be totally unsuitable for them. P2P loans are totally illiquid, and some are very high risk.
“Our loans are not high risk as we ensure that there is asset backing to protect our lenders.
“Nonetheless, I think that these are only suitable investments for high-net-worth and sophisticated investors and should not be the subject of expensive consumer advertising campaigns.”
Narinder Khattoare, chief executive of Kuflink
“The move by the FCA demonstrates that they have properly considered industry feedback and come to the conclusion that customer detriment for P2P retail customers is not in the same category as higher risk ventures.
“At Kuflink, our investors have not lost a penny of their investments since we began and because of the confidence we have in the projects posted on our platform, we also invest our own funds alongside those of our retail customers.
“Lastly, we secure loans against the property on which the projects are based. In the event of foreclosure, sale of the property should more than cover our investors.”
Historical Performance And IFISA Process Guide
That figure is the result of over £24 million of loans facilitated on the site, as we bring individuals looking for a good return on capital together with carefully vetted small companies seeking funds for growth. Bear in mind that lenders’ capital is at risk. Read warnings on site before committing capital.
All loans on site are eligible to be held in a Money&Co. Innovative Finance Individual Savings Account (IFISA), up to the annual ISA limit of £20,000. Such loans offer lenders tax-free income. Our offering is an Innovative Finance ISA (IFISA) that can hold the peer-to-peer (P2P) business loans that Money&Co. facilitates. For the purposes of this article, the terms ISA and IFISA are interchangeable.
So here’s our guide to the process:
The ISA allowance for 2020/21 is unchanged from last tax year at £20,000, allowing a married couple to put £40,000 into a tax-free environment. Over three years, an investment of this scale in two Money&Co. Innovative Finance ISAs would generate £8,400 of income completely free of tax. We’re assuming a 7 per cent return, net of charges and free of tax here.
Once you have made your initial commitment, you might then consider diversifying – buying a spread of loans. To do this, you can go into the “loans for sale” market. All loans bought in this market also qualify for IFISA tax benefits.
Risk: Security, Access, Yield
Do consider not just the return, but the security and the ease of access to your investment. We write regularly about these three key factors. Here’s one of several earlier articles on security, access and yield.