THE FINANCIAL Conduct Authority’s (FCA’s) updated rules for the peer-to-peer lending sector come into effect on 9 December, but smaller platforms with fewer resources may struggle to meet the deadline, industry sources have warned.
“These new regulations are pretty onerous, particularly for smaller firms,” said Stuart Law, chief executive of Assetz Capital. “It’s been a massive project for us – it’s so big we’re spending hundreds of thousands of pounds on additional assistance externally to give us the manpower to get through this by December. We have 100 people on staff but we still need third-party assistance. We do sometimes wonder how on earth the smaller firms are going to manage.”
Some industry stakeholders have predicted that smaller firms may simply shutter their business if they are unable to adjust to the financial and administrative cost of the new FCA rules.
“If you’re running a platform that has originated below £20m and you have a large cost base it’s unlikely that the business is profitable. Significant changes to systems and processes can be pretty cumbersome under these conditions,” said Iain Niblock, chief executive and co-founder of Orca Money. “The platforms are likely to try their hardest to adhere to the new regulations but the regulatory burden might weed out some smaller P2P platforms.”
The FCA’s updated rules mandate all platforms to implement an appropriateness test for new investors, while retail investors must pledge to put no more than 10 per cent of their net portfolio into P2P loans. The City watchdog also requires greater disclosure around wind-down plans and governance.
Christopher Tanoh, an associate at law firm Fox Williams, believes this may lead some platforms to shut themselves off to retail money in order to avoid the cumbersome compliance burden.
“The new regulations come from having to deal with retail investors,” he said. “But what we might see – and I’m starting to hear it already – is that the platforms themselves will actually turn off the retail investment and simply obtain money from other financial institutions and funds instead.
“They have obviously got the infrastructure in place to originate the loan, and service the loan, but it’s the compliance burden which is crippling.”
However, the new rules could bring new opportunities as well as challenges.
David Bradley-Ward, chief executive at Ablrate, said that the new regulations represent “a fork in the road for P2P”. He added that “there is a massive opportunity for platforms like us to go wildly the other way with more data, more tools, more analytics, better loan portfolio management, and better risk analysis, which is what we are working on now.”
In general, most platforms were already operating quite close to the regulations anyway, said Niblock, but the introduction of the new rules will certainly lead to some significant changes across the P2P sector.