LEGAL experts have expressed concerns that the Financial Conduct Authority (FCA) may lump peer-to-peer lending in with riskier investment products as part of its crackdown on promotions.
The City watchdog sent a ‘Dear CEO’ letter to all regulated firms last month warning that their promotions should be clear and not misleading, which was followed up by a sector review document that warned against “headline grabbing returns” in financial products.
Its sector review appeared to categorise the P2P sector alongside contracts for difference (CFDs), structured products and spread betting – typically seen as risky and opaque investment sectors.
“Unsuitable investments in complex and risky products are an area of focus,” said the FCA.
“These products include CFDs, spread betting, structured products and investment-based crowdfunding. Loanbased (‘peer-to-peer’) crowdfunding is covered in the retail lending chapter [of the sector review].
“The complexity of these products means that consumers may find it difficult to assess the risks involved in investing in them,” the regulator added.
“This means they frequently overestimate potential returns and underestimate the potential for capital loss. Inappropriate sales tactics, such as the use of headline grabbing return figures or miscategorisation of retail investors as professional investors, can result in consumers investing in unsuitable products.”
Dena Chadderton, senior adviser at regulatory consultancy BWB Compliance, said it was important to differentiate between the risks presented in P2P and those in more complex financial products.
“With the right risk warnings, P2P lending is not difficult to understand and many loans are secured on underlying assets,” she said. “While there is capacity for capital loss, the investor can limit their exposure by diversifying their investment across asset classes or over a number of loans.
“Compare this to spreadbetting, where the investment is leveraged and the investor can have unlimited exposure to loss and we see a very different story.”
P2P lending platforms have questioned how the FCA sector review document was written.
“The way it is drafted, it is not clear whether loan-based crowdfunding is included in the ‘unsuitable investments’ theme or not,” said John Battersby, head of policy for RateSetter.
“Either way, I expect that the FCA would be concerned about any financial promotion or marketing which was not in line with their rules.
“If it was definitely included, you’d expect it to be added into the second sentence.
“In the other asset classes the risks of significant losses for investors are much greater than in P2P lending – there is no reason why P2P lending platforms cannot manage risk as well as traditional lenders, as they have access to the same information and processes.”
The City regulator has outlined its concerns about how P2P is promoted to retail investors in its post-implementation review of the sector. Sources have told Peer2Peer Finance News that they are expecting an imminent crackdown given the failure of Collateral and high levels of arrears on some platforms.
“The promotion of financial products is a key focus for the FCA, as seen from the ‘Dear CEO’ letter,” said Emily Morton, associate at UK law firm TLT.
“A policy statement on how this applies in the P2P lending sector is expected in the second quarter of this year.
“This stems from the fact that these products are often seen as more accessible than those aimed at institutional, sophisticated and high net-worth participants.
“Clarification from the FCA on these matters is always welcome. The challenge for the FCA will be to balance the need for investors and customers to be able to make an informed decision with appropriate safeguards, without unduly restricting access to the market or taking away from the innovative and competitive environment that P2P lending has created.”
The FCA declined to comment further on P2P promotions, only pointing to its consultation that highlighted concerns about platforms not communicating the true nature and risk of investments.
This article featured in the February edition of Peer2Peer Finance News, now available to read online.