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Peer2Peer Finance News | September 19, 2019

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City watchdog signals increased scrutiny of P2P sector

City watchdog signals increased scrutiny of P2P sector
Marc Shoffman

THE FINANCIAL Conduct Authority (FCA) may take enforcement action over the collapse of Lendy and is considering how to monitor the Innovative Finance ISA (IFISA) market more effectively.

The revelations came out of a Treasury Select Committee hearing with FCA chief executive Andrew Bailey (pictured) this week.

He was grilled on the work of the regulator and in particular its handling of the suspension of withdrawals from Neil Woodford’s Equity Income fund, as well as the collapse of London Capital & Finance.

These topics were Bailey’s key focus, but he also provided some useful indicators of what work the FCA could be undertaking in the P2P sector in the future.

Lendy

Bailey was asked what he thought went wrong with collapsed P2P property lending platform Lendy.

He admitted that there were regulatory restrictions on payments in and out of the firm since October 2018 but said he could not reveal any more as there was enforcement action in process.

Collateral

Collateral went into administration last year and investors have complained that the FCA register misled them about the extent of the P2P lender’s permissions.

Bailey said an investigation was ongoing.

“It was on our interim permission register, which was set up for consumer credit firms, which included P2P,” he said.

“It appears – and I am saying this carefully, because of the investigation – that there was a fraudulent re-registering of the information, which made the firm appear what it was not.

“We are investigating that. We are in very close contact. We have had a lot of complaints and MPs’ letters; put it that way. We will deal with those. I am very conscious of that case. It is a very unfortunate case.”

Innovative Finance ISAs

The FCA faced backlash from the P2P lending sector in April when it released an alert warning about the risks of Innovative Finance ISAs (IFISAs).

There was particular concern from the industry at the time – and by MPs at the meeting – over the timing of the warning, which was issued at the height of ISA season.

“We felt that the level of understanding of the difference between the riskiness of a cash ISA and an IFISA was not well understood,” he told MPs.

“We have had substantial pushback on this but we have not given way.

“We felt that for the unsophisticated investor, we had to introduce a limit of the maximum part of their net investable resources that they could put into it.

“There are just too many examples coming our way of what is absolutely tragic, which is people saying, ‘I put my life savings into this thing.’ We cannot leave people in that situation.”

Asked about there being a low level of complaints in the P2P lending sector, Bailey added that there are always low levels of complaints until something goes wrong.

“It is a binary world at that point,” he said.

“One of the products of the financial crisis, quite sensibly, is that we moved activity off the balance sheets of banks.

“We did that quite deliberately. There were too many illiquid assets on the balance sheets of banks in the crisis, across many countries and generally across the world. Therefore, the non-bank sector has grown.

“The consequence of that when we come into this area, whether it be crowdfunding, P2P or mini-bonds in their broadest sense, is that some of the riskier investments are moved out into this world.

“Therefore there has to be a clear understanding of the risks that go with this because we have not experienced an economic downturn in this world yet.

“This industry has not yet faced up to the consequences of an economic downturn.”

Bailey said that the regulator should have a more structured relationship with HMRC and the Treasury with regard to oversight of the IFISA market, adding that the make-up of the tax wrapper was a policy issue for government departments.