FCA warns against “tick-box” approach for appropriateness tests
THE Financial Conduct Authority (FCA) has outlined how an investor suitability test could look but said it is up to individual platforms to devise their own assessment method.
The City watchdog has confirmed plans to restrict marketing of P2P investments to those who are certified or self-certify as sophisticated investors, those who are certified as high-net-worth investors, people receiving regulated investment advice, or those who certify that they will not invest more than 10 per cent of their net investible portfolio in P2P loans.
Firms will have to carry out appropriateness assessments on potential customers.
The FCA said a platform should consider using a range of questions, for example, provided in a multiple-choice format, for the assessment, but warned against a “tick-box approach.”
The test should assess the investor’s understanding of the nature of the contractual relationship with the borrower and the platform, and their exposure to the risks of P2P lending.
Read more: FCA warns platforms must be more open about defaults
They should also be aware that there is no Financial Services Compensation Scheme protection and that returns may vary and it is not comparable with a savings account.
The assessment must also make investors aware of the risk that they may be unable to exit a P2P agreement before maturity, even where the platform operates a secondary market; and the role of the P2P platform and the scope of its services, including what the platform does and does not do on behalf of lenders.
There has been one change to the regulator’s original proposals, as firms will still be allowed to provide information on specific investments before clients are categorised.
The platform can provide details of specific P2P loans or P2P portfolios on offer, such as the identity of borrowers, the price or target rate, the term, the risk categorisation, a description of any security interest, insurance, guarantee or other risk mitigation measures adopted by the platform.
Read more: FCA says it is not shutting out retail P2P investors
“The industry may wish to develop some standard metrics or characteristics to further help consumers to compare the different platforms and investments,” the FCA said.
“Retail clients will have to be identified by platforms as the sort of client to whom they can communicate promotions containing full information about the investment, including details of how to apply.”
The FCA also admitted that it explored whether it would be possible to apply the marketing restriction in a targeted way, to those platforms with the most risky investment strategies, as suggested by some respondents
But it concluded that this would just encourage platforms to move away from certain business models.