It’s been five years since the Financial Conduct Authority took over regulation of the peer-to-peer lending sector. With new rules coming into effect this December, is the industry happy with the watchdog’s efforts so far?
IT HAS BEEN FIVE YEARS since the Financial Conduct Authority (FCA) took over the regulation of the peer-to-peer lending sector, but in some ways it feels like it is just getting started.
Following lengthy authorisation processes and the culmination of a post-implementation review of the sector, the regulator is making its presence felt.
P2P lenders are bracing themselves for a number of regulatory changes later this year. The first relates to the implementation of the FCA’s final rules on the sector and the second is the Senior Managers and Certification Regime (SMCR), which will apply to all FCA-authorised firms.
The City watchdog is applying stricter rules on a number of areas including wind-down plans and investor protections. On the same day – 9 December – SMCR will also come into effect, requiring each lender to adopt a culture of accountability at every level.
“It’s set to be a busy autumn,” says Gillian Roche-Saunders, a partner at regulation consultancy BWB Compliance. “Getting ready for just one of these regulations involves a fair amount of work for all concerned.”
Most P2P platforms are now in the final stages of preparing for the new regulations, but the process has led to a bit of soul searching about the relationship between the FCA and the alternative lending sector, and how it might change in the future. In off-record conversations, several platforms told Peer2Peer Finance News that they were concerned about the FCA’s lack of knowledge about the P2P sector – at least in the early years.
“I think the FCA started out with a certain understanding of what the concept of P2P was,” says John Gillespie, a veteran of RateSetter and chief executive of newly-launched P2P platform Square Deal Finance. “But I don’t think they fully understood how different the platforms actually were. When they actually started to engage with the different platforms they found that they had slightly different models and they didn’t necessarily map to their idea of how they should be working.”
This is a view echoed across the P2P landscape. In the early days, the FCA gave platforms the distinct impression that it was struggling to define P2P lending – the pace of change in the sector meant that no sooner had one platform model been unpacked, a totally new type of platform had been created. Today, P2P platforms can touch on everything from consumer lending, to business financing, to remortgaging, cryptocurrency trading and asset-backed loans.
The FCA has more than 3,700 members of staff, but the vast majority of these employees focus on the big hitters of the UK finance market – asset managers, day traders and high street banks. The minority who work with the P2P sector have had to learn about this brand new industry from the ground up, while also keeping up with the latest innovations.
What’s more, regulation of the P2P industry came at a time when the FCA was also just beginning to regulate credit brokers – at one point there were approximately 50,000 new firms and individuals waiting to get onto the FCA register. As a result, P2P regulation was slow to take off.
“The FCA was stretched, given their new responsibilities and perhaps caught short by a fast-moving new industry,” says Andrew Holgate, Assetz Capital co-founder and chief executive at fintech consultancy Equitivo. “That seems to be changing though.”
The new regulations, which were unveiled in June, are the result of years of research and industry consultation on behalf of the FCA and they have been largely welcomed as necessary as the alternative lending sector enters its next stage of growth.
“The FCA has faced scrutiny of its regulation of the P2P sector recently,” says Sam McCollum, legal director at TLT Solicitors. “However, the rules announced in PS19/14 show that the FCA is committed to regulating the industry in a way that strikes a difficult balance between seeking to prevent harm to investors, whilst not stifling growth, and this has been welcomed by many P2P providers.”
The new rules require platforms to introduce appropriateness tests and restrict their marketing to sophisticated and high-net-worth investors, people receiving regulated investment advice, or those who certify that they will not invest more than 10 per cent of their portfolio in P2P.
Other key points in the document included ramped-up disclosure requirements and more clarity around wind-down plans in the event that a platform goes under.
However, there is still some way to go. For instance, the concept of a loan can be easily misrepresented in the current working of the rules. In P2P, loans can sometimes be called loan parts, or contracts, or investments. From the regulator’s point of view, they are treating the lender as a loan provider, but this may not always be true – the lending platform could be trading in loan parts, or acting as an aggregate or intermediary between borrowers and lenders.
Regarding the collapse of P2P property platform Lendy, FCA chief Andrew Bailey wrote that the regulator was still trying to define what a ‘creditor’ is within the confines of that particular case. This is a continuation of an ongoing theme, whereby words get defined and redefined as the sector evolves.
“At one point we tried to call our users savers but it’s not a savings product,” says Gillespie. “Then it was lending, then it was investing, then it was lending again. So, even regardless of the regulator that’s been an issue for a long time of description and classification in the way the person in the street would be able to understand something.”
“I think the FCA has had an awful lot to learn in a short period of time,” says Christine Farnish, former chair of trade body the Peer-to-Finance Association and now Zopa’s P2P board chair.
“When P2P regulation first came along in 2014 the FCA hadn’t really dealt seriously with any sort of grand new type of business model before and so I think they found it quite challenging both from a resource and policy perspective.”
This led to a laborious authorisation process which left some platforms waiting for more than two years to receive full regulatory approval.
In response to criticism of lengthy approval processes, an FCA spokesperson said: “It is important that applications from firms wishing to be fully authorised are properly considered and that the firms meet rigorous standards. How long it takes to consider an application depends on a number of factors including the completeness of the application, the complexity of the business, and the firm’s demonstrated compliance with regulatory requirements.
“We work closely with individual firms to ensure are authorised as quickly as possible, however it is important that we take time to make the right decision.”
Farnish believes that the FCA has landed in a “fairly risk averse” place, in its efforts to oversimplify the increasingly diverse P2P market. “Of course the downside of that is that the lower risk platforms are now saddled with exactly the same regulatory regime as the high risk,” she adds.
At its worst, regulation can create barriers to entry for new firms, while stifling innovation in larger, more established platforms, and a number of P2P operators are nervous about this new era of active yet risk-averse regulation.
“There has to be a degree of capability and operational competence and sustainability to the business which means you need to be properly capitalised before you can launch,” says Gillespie.
“You can’t run on a shoestring, and that’s probably a good thing to be honest. But it does mean it is harder for new entrants to get into the industry.”
It is unrealistic to expect to FCA to be all things to all people – its remit is to “prevent harm to investors, without stifling innovation in the P2P sector,” and this is a lofty ambition, even without the rapid pace of change. But the FCA is not alone in its desire to make P2P lending safer. While the regulator is frequently criticised by P2P insiders, this criticism is always constructive. Everyone seems to have a view on how the FCA can perform its role more effectively.
“The FCA have got a tough job on their hands, not just in P2P but across the board,” says Holgate. “Generally they do a good job, but I think FCA regulation still misses tighter controls over newer innovations around provision funds and how they are funded and used.”
“My worry is that the sector could be completely killed off by heavy handed regulation that isn’t truly risk based and doesn’t differentiate between different platforms,” adds Farnish. “The FCA has to think differently when it comes to P2P lending.”
If she was in charge, Farnish says she would introduce real-time monitoring using digital systems and data. She would also encourage FCA employees to expand their understanding of P2P.
“I’m not sure that everyone at the FCA really understands what P2P lending or crowdfunding really is,” she says. “I think they just need to force themselves to go up the learning curve and put some smart people into the monitoring in real time of the platforms that they’ve already authorised.”
But more than anything, industry insiders have repeatedly told Peer2Peer Finance News that they want to see the FCA standing up for alternative lenders and showing the world that the UK’s P2P sector is fulfilling an important role in the UK economy.
“The most useful thing would be to hear a very strong statement from the regulator and government that they believe and support P2P,” says Gillespie. “That they believe that it’s here to stay and they’re not going to do anything to stop it. I would like to hear them issue a strong, positive statement about how it’s helping retail investors achieve stable returns on what is being predicted to be a long-term, low-yield environment.”
The FCA may have taken a while to find its bearings in the world of P2P, but by welcoming the input of the industry at large and prioritising investor safety and platform innovation, the FCA is showing its support for the P2P sector in its own quiet way.
This article featured in the September issue of Peer2Peer Finance News, now available to read online.