THE CITY watchdog has beefed up its scrutiny of the peer-to-peer lending sector in the wake of the Lendy collapse.
The Financial Conduct Authority (FCA) has faced criticism over its supervision of Lendy, having authorised the P2P property development lender just 10 months before it went into administration with a mountain of defaulted loans.
Industry insiders have noted a change in the FCA’s attitude in recent months as its reputation has been hit by the Lendy scandal as well as the fallout over the collapse of P2P lender Collateral and minibond provider London Capital & Finance.
Read more: Lendy investors must undergo new AML checks
The FCA visited a number of P2P property lending platforms over the summer to discuss risk management, including Octopus Choice, CrowdProperty and Relendex.
Michael Lynn, chief executive of Relendex, said the platform had a visit in July from an FCA team that focused on lending policy and processes.
“This was fairly rigorous but I am pleased to say that no issues arose,” he said.
“Some recommendations were made, which we have adopted.
“We are fairly sure that the visit was prompted by some of the P2P platform failures.”
Mike Bristow, chief executive of CrowdProperty, supported Lynn’s view that the visits were prompted by platform collapses and said that he thought the FCA was testing for areas of weak practices.
“We spent a full day explaining our business with good questions from the FCA team and they were impressed as we’ve always approached this market with expertise, rigour, the very best security, strategic perspective on building a long-term business and operating with the very best practices in the industry, hence our 100 per cent capital and interest payback track record over more than five years of lending,” he said.
Other platforms have also noticed a difference when dealing with the FCA’s authorisation team.
CapitalRise has been in the process of moving from an appointed representative to direct authorisation since August last year.
“We feel that the regulator is treating new authorisation applications with an increased level of scrutiny and this is something we see as very positive for the sector,” said Uma Rajah, chief executive of CapitalRise.
“We have been actively engaged in the authorisation process with information requests and data submissions flowing freely between ourselves and our case officer since then.
“I would say that the level of engagement and interaction has increased since February this year and that the breadth of the topics and depth of detail has increased in recent months.”
She said the dialogue with the regulator has been positive and they have built a “very healthy, collaborative relationship.”
Another industry source said that the FCA is using its “better working knowledge” of the different P2P lending models that it gained both in its review of the sector and since the Lendy scandal.
“Scrutiny from the authorisation and supervisory teams is a good thing and we would support the FCA putting the resource in upfront to make sure that process is robust, but not overly long in terms of time delays between questions,” the source said.
“I don’t think we are in a position where the scrutiny is disproportionate just yet.” The feeling of increased communication and scrutiny has been echoed by consultants working with P2P lending platforms across the sector.
“We do feel the process has become a bit more lengthy,” said Frank Brown, managing consultant at Bovill. “The FCA is looking for more comfort that the firms they are looking to authorise will be able to meet regulatory requirements on an ongoing basis.
“There is greater emphasis on competence of senior management and their background and more focus on the business plan, capital and wind down arrangements. “There is also more probing around operational resilience and the chosen IT platforms.”
However, Mark Turner, regulatory consultant for business adviser Duff & Phelps, warned it may deter some new entrants. “If you are a P2P lender moving from appointed representative to full authorisation or new to the market or existing, we are seeing increased scrutiny,” he said. “The FCA doesn’t want to stifle innovation but it has a duty to ensure customers understand what they are investing in.
“With the new regulations set out in the June policy statement, there is a higher bar that needs to be achieved in terms of ongoing compliance. “There may be some unintended consequences as it could deter new entrants but a tougher stance is broadly positive.”
The FCA has been contacted for comment.
This story originally appeared in the October print edition of Peer2Peer Finance News, which can be read here.