Fox Williams’ Jon Segal, partner and head of fintech and alternative finance, Sona Ganatra, partner in the financial services regulatory investigations team, and Christopher Tanoh, associate in the financial services regulatory investigations team, reveal the next big regulatory challenges that P2P lenders can expect to face…
IT HAS BEEN A BANNER year for regulation. The Financial Conduct Authority (FCA) will soon introduce a series of strict new rules for peer-topeer lenders, aimed at enhancing protections for retail investors. This has led to enhanced scrutiny across the P2P sector, as platforms work on their compliance and risk management procedures.
But according to the legal experts at Fox Williams, this is just the beginning of a regulatory overhaul for the P2P sector.
“The FCA is clearly concerned about the viability of the loanbook and the true value of the underlying assets there,” says Sona Ganatra, a partner in the financial services regulatory investigations team at Fox Williams.
“However, from our perspective, the FCA is also focused upon the potential risk of fraud in the P2P sector – not so much at the lender end but more around how borrowers could potentially mislead investors in terms of what they are using the funds for.
“One of the things that we’re grappling with is to what extent the platform that sits in the middle is responsible for that or should be held accountable for it.”
This question of accountability is likely to become a major talking point in the P2P industry, and it is an issue that the FCA is already starting to examine.
Ganatra has noticed a growing emphasis from the FCA on the systems and controls that P2P platforms have, particularly when it comes to assessing new borrowers and new investors.
“We’ve seen greater scrutiny from the FCA’s supervision team in terms of asking more questions about what sort of updates you’re giving the lenders,” she says. “And I think for the platforms it’s throwing up a number of difficulties.
“We’ve seen a push towards a greater level of responsibility being put on the platforms themselves requiring them to monitor and investigate potential borrower misconduct and considering what sort of lender updates they’re providing once potential misconduct is identified.
“A number of legal issues are at play here – platforms need to be aware of their contractual obligations to lenders and borrowers, their regulatory obligations and at the same time, be mindful of potential litigation risk and insurance claims.”
One possible answer is to clarify the hierarchy of accountability in the terms and conditions attached to each P2P loan.
“This sometimes requires complex and bespoke legal assistance to understand where liabilities lie in the event a P2P loan defaults,” says Jon Segal, partner and head of fintech and alternative finance at Fox Williams. “The platform should work through where it could make recoveries from, especially if third party advisers are found to have been negligent.”
“The new FCA regulations require robust risk management policies and procedures, continuous review of those procedures and – where appropriate – an independent risk function as well,” warns Christopher Tanoh, associate in the financial services regulatory team at Fox Williams.
“The FCA has a fear that because P2P lending platforms are extremely complex, where a platform for whatever reason is unable to manage or administer the P2P contracts themselves, it will be quite difficult for a third party to do that unless the P2P itself has prepared those third parties for that eventuality.”
All of this suggests that December’s new regulations will mark the beginning of a new era in P2P regulation. Platforms will need to do everything they can to make sure they don’t get left behind.