THE FINANCIAL Conduct Authority (FCA) has proposed stringent new measures to protect investors in the event that a platform should go out of business.
The City regulator said in its long-awaited consultation paper on Friday that it plans to “strengthen rules” on wind-down procedures within the peer-to-peer lending sector, to ensure arrangements “take account of the practical challenges that platforms could face”.
The continued functioning of the complex IT infrastructure used by P2P platforms was one example of a ‘practical challenge’ cited by the FCA.
While reviewing the sector, the FCA said that it “identified inadequacies with the comprehensiveness and effectiveness of some P2P platforms’ wind-down arrangements should the platform fail”. In some cases, the regulator said that it was “unclear whether reasonable steps have been taken to put such arrangements in place”.
Under current rules, any P2P platform must seek approval from the FCA before it shuts down its business. However, the circumstances of this wind-down process have been less clear, as evidenced by this year’s Collateral controversy.
In February, P2P lender Collateral hit the headlines when it went into administration without any clearly defined wind-down plans. The platform – which did not have full authorisation from the FCA – appointed Refresh Recovery to administer its closure. Refresh Recovery claimed that Collateral’s wind-down policy had been “tacitly approved” by the regulator in 2017, but in June the FCA won court approval to replace Refresh Recovery with its own choice of administrator, BDO.
The FCA now plans to add new guidance to ensure that any platform considering closure notifies the regulator in writing.
The FCA’s consultation paper also highlighted a number of risks which need to be considered by both platforms and their customers.
It pointed out that the harm to investors could be “considerable” if platforms are not able to wind down or transfer their business, adding that investors could be forced to retrieve their money directly from the borrowers. However, since most platforms spread investments across a number of loans, this could prove difficult.
Furthermore, the regulator expressed concern that investors may not be aware of the potential risks of platform closure before making their financial decisions. As such, the FCA is proposing new disclosure requirements which tell investors exactly what will happen to their money if the platform ceases to operate.
“Our proposals do not aim for a one-size-fits-all approach, or to ensure that investors never lose money,” read the report. “But they do seek to improve platforms plans and preparedness for their possible failure, to protect investors.”
Elsewhere in the paper, the FCA warned that investors could “in practice” be exposed to the credit risk of the platform as well as the underlying loans if the loan portfolio cannot be administered successfully.
The regulator also suggested that platforms could obtain prior consent from investors to fund the continued cost of management and administration of their respective loans through, or that investors and borrowers arrange the transfer of the service of managing and administration of P2P agreements from the platform to another firm.