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Peer2Peer Finance News | September 18, 2019

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Proposed investor restrictions threaten P2P sector’s growth

Proposed investor restrictions threaten P2P sector’s growth
Marc Shoffman

THE PEER-TO-PEER lending industry has blasted the City watchdog’s proposed investor restrictions as unfair, costly and damaging to the sector’s future.

P2P platforms have been busy digesting the Financial Conduct Authority’s (FCA’s) long-awaited post-implementation review of the sector – released over the summer – and while most are happy with plans for heightened transparency and loanbook disclosure, there are concerns over proposed marketing restrictions and appropriateness tests  for investors.

These proposals would make P2P lending platforms become the preserve of sophisticated, high-net-worth or ‘restricted’ investors, akin to crowd bond providers like Abundance and alternative investment firms such as Goji.

By cutting out the average retail investor, the industry fears that these changes could drastically reduce the number of P2P investors and subsequently lessen the amount of finance available for borrowers.

“It will definitely limit growth of the sector in terms of access to investing,” Stuart Law, chief executive of business P2P lender Assetz Capital, told Peer2Peer Finance News.

“There will be fewer retail investors as a result of these changes, we think that’s a bad thing as it is an alternative form of income. Everybody knows this isn’t a bank account, it’s an investment and a sensible choice for those wanting a balanced portfolio with investment at risk, the warnings are already available.”

If implemented, the rule changes would mean that P2P investors would have to confirm their status as sophisticated, high-networth or ‘restricted’ – the latter meaning that they are limited to investing a maximum of 10 per cent of their net investible portfolio in P2P.

Read more: Here’s what the industry thinks of the FCA review

Investors would then have to complete and pass an appropriateness test that assesses their attitude to risk and loss.

Law warned that borrowers would also suffer from such a move, as fewer investors would mean an increase in rates due to less supply.

“If you can’t raise all the money from retail you will start to raise it through other routes, such as institutional, which creates another layer of fees,” he said.

“That then takes democratisation of finance back a step and isn’t providing an alternative to the bank.”

Amer Bhatti, chief compliance officer at P2P short-term loans provider Welendus, agreed that these changes would make P2P less open to everyone. “Access to P2P should be open and inclusive,” Bhatti told P2PFN.

“With transparent information, individuals should be able to make decisions without rules imposed by the regulator.

“You don’t want to have only the high net worth taking advantage of P2P returns as this leaves others going to bank.”

Read more: FCA: ‘We are not shutting the public out of P2P’

These concerns have been echoed by other platforms such as RateSetter, which warned such restrictions pose questions around “personal freedom, fair competition and financial exclusion”.

“The proposals on marketing restrictions are disproportionate in view of the risk profile of P2P lending, at least when it is done through reputable platforms,” a RateSetter spokesperson said.

“The danger is that this could set back progress on financial inclusion and competition in financial services. The proposals reflect what is already in place for equity crowdfunding, however, that type of investment has a very different risk profile to P2P lending.”

The proposed changes could impact a substantial portion of the P2P sector’s private investors, many of whom see P2P as a key element of their portfolio in an era of historically low interest rates.

The newly-released Peer2Peer Finance News annual survey found that 85 per cent of investors polled have more than 10 per cent of their portfolio in P2P platforms (for full results see the September issue).

The plans have also raised eyebrows in the wider investment space.

Adrian Lowcock, head of personal investing at investment platform Willis Owen, said the suggested changes  “would effectively limit the size of the market  and the opportunities they present.”

He said that many P2P investors would not be classed as sophisticated and labelled the regulator “overzealous” in its approach.

“The FCA doesn’t prevent investors from having more than 10 per cent exposure in other high-risk assets such as alternative investment market shares or emerging markets so  this seems a bit excessive,” he added.

However, Jake Wombwell-Povey, chief executive of Goji – which already provides appropriateness tests for investors – says the firm has not experienced any issues as a result.

“The majority of our investors categorise themselves as restricted,” he said.

“Everyone then has to complete a test that focuses on the specifics of the investment, looking at if they understand their capital is at risk or that there is no Financial Services Compensation Scheme protection.

“It’s not rocket science, no-one has ever failed it.” Jonathan Segal, head of fintech at law firm Fox Williams, said no-one should be cut out in theory, but investors may be put off by an extra layer of administration.

“If someone isn’t capable of answering many of the appropriateness questions then they shouldn’t be investing in the riskier platforms, particularly where you self-select loans,” he added.

“Arguably, other more mature platforms that are more diversified and build the portfolio for you may question the need for the tests and probably feel more hard done by as the potential for loss by investors is a lot lower.”

This article featured in the September issue of Peer2Peer Finance News, now available to read online