The long awaited changes to P2P lending regulations in the UK are finally here. Today, the Financial Conduct Authority (FCA) announced that the new rules for peer to peer lending platforms have been set and will come into effect on December 9, 2019.
The biggest change here is around investor protections and it is also the most controversial piece. Investors will no longer be able to put more than 10% of their investable assets into peer to peer lending. Some people considered that number too low and somewhat arbitrary as many investors today have far more of their net worth in the peer to peer lending industry.
Another controversial part of the new rules is the introduction of an “appropriateness test” for investors. From December 9, 2019, P2P lending platforms will need to carry out an appropriateness assessment that considers a client’s knowledge and experience of P2P lending before the platform can accept a new investment. Not only that but platforms will be restricted to those people who are certified or self-certify as sophisticated investors, making it much more difficult for the industry to attract new investors.
Here are more highlights of the new regulations:
- Introducing more explicit requirements to clarify what governance arrangements, systems and controls platforms need to have in place to support the outcomes they advertise. These new rules focus particularly on credit risk assessment, risk management and fair valuation practices, especially for platforms with more complex business models.
- Strengthening rules on plans for the wind-down of P2P platforms.
- Applying marketing restrictions to P2P platforms, designed to protect new or less experienced investors. We have also clarified the practical implication of these new rules as they apply to P2P agreements.
- Introducing a requirement that an appropriateness assessment (to assess an investor’s knowledge and experience of P2P investments) be undertaken, where no advice has been given to the investor. We have also provided guidance on what the assessment should include.
- Setting out the minimum information that P2P platforms need to provide to investors
It has been interesting seeing the reaction of the mainstream press. We have headlines like (from the FT) UK financial regulator clamps down on peer-to-peer investment, (from The Telegragh) Peer-to-peer crackdown: investors limited to 10pc of their wealth or (from Yahoo Finance) Finance watchdog announces crackdown on peer-to-peer lenders. The casual reader could be forgiven for thinking that something was amiss in the peer to peer lending sector and the FCA had to clamp down on some bad practices.
The reality is that this review has been planned for many years. The FCA first released their regulations of peer to peer lending back in 2014. The intention was always to do a review of these rules in a few years and adjust where necessary. So, the changes announced today by the FCA were actually more than five years in the making. There are few surprises here and the industry has been broadly supportive as you can see from this article on P2P Finance News.
The leading trade group in the UK, the P2P Finance Association, is also supportive of the new rules. Here is what Chairman Paul Smee had to say:
Much of what is included in the FCA policy statement published today reflects what is already good practice in the peer to peer lending market and we welcome that. We are pleased that the FCA recognises the significant and positive impact which peer-to-peer lending has on the economy, as the sector becomes a mature feature of the UK financial services landscape; and we consider that overall they are proposing a proportionate way forward for regulation.
The timing of the release of the new rules is interesting. Just last week we learned that Lendy, one of the largest property-focused p2p lending platforms, has gone into administration with more than 50% of the loan book in default. There was a somewhat public outcry as more than 20,000 investors could lose a substantial amount of their principal in this bankruptcy. Lendy was just authorized by the FCA in 2018.
Like most regulations there is a lot to dislike in the FCA’s proposal. But the industry is clear that to gain the public’s trust they need to be supportive of regulation and for the most part that is what is happening here. While the smaller platforms will find these new rules onerous and potentially even life threatening the larger and more successful platforms will adapt and move on.
Next year is shaping up to be a very interesting one for the UK peer to peer lending industry. I expect we will see a few more platforms go into administration which will be tough on everyone. But once this transition is behind us the platforms that remain should have the confidence of the investing public and investors will be better informed about the risks.
You can read the entire 102 page Policy Statement here.