PEER-TO-PEER platforms are being urged to look beyond focusing on appropriateness tests and improve their standards more generally, in response to the Financial Conduct Authority’s (FCA) regulatory overhaul.
The City watchdog this week unveiled final rules to reform regulation of the P2P sector, with headlines focusing on the introduction of marketing restrictions and appropriateness tests, but Andrew Holgate, chief executive of fintech consultancy Equivito, suggested it is wrong to focus solely on this change.
“There will be many P2P platforms that will focus on the appropriateness test as being the major implication to come out of the FCA document,” he said.
“However, we feel that they miss the main point about this document, which in our opinion, is about the credit and risk management within P2P platforms.
“There are indications that the FCA would like all platforms to move to more stringent risk controls and possible prudential regulations, such as those that the banks operate under.
“We believe that this is the future direction of where the FCA what to take the industry.
“This shouldn’t be viewed with derision by the industry, but welcome as appropriate measures to protect the retail investor.”
Holgate said the market needs to move to a “closer commonality” of how risk is assessed, but said P2P lenders are likely to be more technologically efficient at doing this than banks.
Meanwhile, Claire Madden, managing partner at private client investment business Connection Capital, said P2P platforms are going to have to up their game in terms of evaluating investor suitability and offering better information.
“P2P can offer some attractive opportunities to private investors who can be certified as ‘sophisticated’ because they have the requisite experience and net worth to take on more advanced types of investments,” she said.
“But P2P often involves more opaque and complex structures than some of the more traditional investment options the majority of ‘retail’ investors are used to. It’s much harder for them to properly assess the risks without good advice.
“They’re also less likely to hold a very diversified range of assets across a well-balanced portfolio, to limit the damage should an investment fail.
“These new rules are likely to put enormous pressure on business models designed on a low-cost, high-volume basis, so we could well see some further shake-out of the P2P market ahead.”
Read more: Feature: Playing by the rules