The evolving regulatory framework
Peter Wilson, senior associate in the financial services regulatory group at law firm Taylor Wessing, explains why the Financial Conduct Authority’s scrutiny is good for the sector
The global economy is still rehabilitating following the financial crisis. Governments and central bankers, with their hands on the tillers of the real economy, are looking at ways to unlock funding sources to promote economic growth.
In the UK, government policy is supporting the development of alternative sources of finance for individuals and small- and medium-sized enterprises (SMEs). Recent additions to the financial services family are peer-to-peer lending platforms.
As a sector, P2P has grown rapidly and the UK Financial Conduct Authority (FCA) has recently outlined aspects of the market that pose risk of consumer detriment.
P2P is a newly-emerging sector, and many of the firms operating in the UK are still in the process of moving from interim to full FCA authorisation. One dynamic at play is that certain firms may not be granted full FCA authorised status if assessed not to be operating at a sufficient standard.
Read more: P2P regulation: Uncertain times
This would leave their existing borrower and lender clients at risk as these businesses will be unable continue to operate without permission. Concerns have also been expressed about the enduring stability of the sector.
Consequently, the FCA’s role is to ensure the P2P sector develops in a sustainable manner that provides appropriate consumer protections and enables competitive forces to operate in the interests of consumers. As a result of these and other concerns, in its feedback statement from December 2016 (FS16/13), the FCA confirmed that it will consult on new rules for the P2P sector during 2017.
In late February 2017 and in advance of its anticipated 2017 rule consultation, the FCA wrote to all P2P firms due to a concern that some P2P firms have lent borrowed funds (for onward lending) to lending businesses who do not have the required permission to carry on the regulated activity of “accepting deposits”.
The FCA has said that any P2P firm that facilitates acceptance of deposits by borrowers who do not have the correct deposit taking licence is at risk of being in breach of certain FCA principles and threshold conditions. It has said they should immediately stop this practice and, where necessary, take remedial action.
Read more: Responsible regulation
In FS16/13, the FCA gave P2P firms an indication of how it will develop its supervisory oversight of the sector. Some areas where P2P firms should anticipate potential rule changes or FCA interventions include: additional requirements or restrictions on cross-investment; enhanced standards for investor disclosures; measures to mitigate perceived regulatory arbitrage between more complex P2P business models and other financial services sectors, including asset management and banking; strengthened wind-down plans; extending FCA mortgage-lending rules to P2P platforms that facilitate residential mortgage contracts; and potential interventions on inappropriate preferential treatment being given to institutional investors.
Read more: FCA to toughen rules on P2P
Following the 2016 Budget, the Innovative Finance ISA (IFISA) was created to allow for the inclusion of P2P lending in the basket of qualifying ISA assets. Therefore, the FCA’s decision to sharpen its regulatory approach in advance of the inevitable further P2P sector growth that IFISAs will bring is not surprising. With its consumer protection mandate, the FCA would not wish retail investors to be exposed to avoidable risk factors.
With a public keen to embrace the new opportunities that technology brings and a permissive governmental, fiscal and regulatory environment, the P2P sector is well placed to be a success, hopefully with buoyed confidence given that the FCA is taking a thorough look at practices in this sector.