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Peer2Peer Finance News | November 22, 2017

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FCA to toughen rules on P2P

FCA to toughen rules on P2P
Suzie Neuwirth

THE CITY regulator has indicated it will implement stronger rules on the peer-to-peer lending sector, amid concerns that retail investors are not adequately informed about the risks.

The Financial Conduct Authority (FCA) said it would consider “setting investment limits to cap potential consumer harm” and suggested extending “mortgage-lending standards” to P2P platforms.

In its interim feedback statement, which was released on Friday morning, the FCA found that it is difficult for investors to compare platforms and to properly assess the risks involved. It said that financial promotions do not always meet its requirement to be “clear, fair and not misleading” and that the complex structures of some firms introduce operational risks and conflicts of interest that are not being managed sufficiently.

One particular area of concern for the regulator was the provision funds, which are held by a number of platforms including RateSetter and Zopa, which it said could give investors the false impression that their money is protected from losses like it would be in a bank deposit.

“The issue for us is how well investors understand the role of this provision fund,” FCA chief executive Andrew Bailey told Peer-to-Peer Finance News.

“How is it marketed? Because we have seen examples where the presence of the provision fund goes with the marketing that nobody has lost money in the fund, but you can’t in essence guarantee that.

“And thirdly how fairly is it used, bearing in mind the nature of P2P? Those raised some pretty big questions for us about how those funds operate, what role they play and how they’re marketed.”

The FCA questioned whether some P2P platforms were more like banks or collective investment schemes, due to practices such as “maturity mismatch” and auto-bid functions.

Read more: P2P platforms heading for FCA rejection 

“Maturity mismatch” is a controversial practice whereby platforms would lend out money on longer terms than they borrow. Most P2P lenders resolutely deny their involvement in maturity transformation, which is more commonly used in the banking sector.

The FCA plans to complete its consumer and market research in early 2017 and will publish a second consultation on rule changes in mid-2017, with any such rules coming into force in 2018.

Read more: FCA and Cambridge University join forces on P2P research  

The City watchdog first introduced P2P regulations in March 2014, after taking over from the Office of Fair Trading in overseeing the sector. It said at the time that it would undertake a full review of the rules in 2016.

It published a ‘call for input’ in July of this year, in which it expressed concerns about the transparency and due diligence of the platforms, as well as questioning whether investors were well enough informed as to the risks involved. The consultation closed on 8 September.

Read more: FCA approvals gather pace as CapitalStackers gets go-ahead