PLATFORMS still have plenty of questions regarding the new Financial Conduct Authority (FCA) peer-to-peer lending rules, so we decided that the time was right to host our second Breakfast Briefing – this time around the topic of the regulation deadline.
Held in the modern surroundings of The Soho Hotel, our panel included Gilbert van Roon, founder and chief executive of FinTech Compliance, Lisa Best, research manager at Intelligent Partnership and Frank Brown, managing consultant at Bovill.
Speaking under Chatham House rules, our panel answered a series of questions from moderator (and Peer2Peer Finance News editor-in-chief) Suzie Neuwirth, before the discussion was opened up to the floor and a lively Q&A.
It quickly became clear that despite the regulator’s best efforts, a lot of confusion still surrounds the upcoming regulations and how they should be enacted. While some had faith that the FCA would forgive minor oversights, others felt that the regulator would show no flexibility whatsoever when it comes to issues such as the introduction of the appropriateness test, and company wind-down plans.
The invite-only event – which was supported by headline sponsor FinTech Compliance and sponsors Bovill and Cartwrights – was attended by chief executives and compliance heads from many different peer-to-peer platforms, as well as government officials and regulation experts. The discussion spilled out into the halls of The Soho Hotel after the briefing concluded and a number of new professional relationships were formed. Read on to get a sense of how the industry feels about 9 December and beyond…
On 9 December, after a lengthy post-implementation review of the sector, the FCA’s new regulations came into effect.
The rule changes include the mandatory introduction of appropriateness tests and self-certification questionnaires for new investors; tougher requirements on wind-down plans; greater transparency and disclosure; and explicit clarification of the risks involved with P2P lending.
By early November, most of the platforms represented at the Breakfast Briefing were well on their way to meeting these requirements, but it soon became clear that for all their specificity, there was still some ambiguity around the minutiae of the regulations.
One thing everyone could agree on was that some of the regulations will be more difficult to achieve than others. For example, firms which manage portfolios of P2P loans are considered to be more complex than those that don’t. In these cases, the FCA is likely to expect to see a much more robust structure in place which will stand up to independent scrutiny. They will have to set out a full risk management process detailing how they intend to achieve their targets.
In fact, some of the compliance experts at the Breakfast Briefing suggested that firms which manage large loan portfolios may require an independent compliance officer, an independent risk-management function and an independent internal audit function in order to assure the FCA that they are able to properly enforce the new marketing restrictions.
Regarding the wind-down policies, platforms were warned that the FCA would be expecting an incredibly detailed approach. Each firm will have to have a resolution manual in place which is separate from the Client Assets Resolution Pack (CAS RP) and separate from the business continuity plan. Each platform will also have to inform clients of the wind-down arrangements that are in place, including how and where client money will be held if there’s a failure of the firm or a transfer of the business.
Most of the industry stakeholders present agreed that this seems to be the FCA’s main area of focus. In fact, there are firms now being established that focus entirely on P2P wind-down arrangements, underlining the importance of getting this right. While every platform has to have a detailed wind-down plan in place by 9 December, it has to be a living document which is refreshed and updated as frequently as possible. A well-organised firm should have a flawless wind-down policy that they never need to use.
One of the major sticking points for P2P lenders has been the FCA’s insistence that retail investors should not invest more than 10 per cent of their portfolio (excluding property) in P2P platforms. However, some of the attendees at the Breakfast Briefing identified an easy workaround – if a platform has a retail client who has made two or more investments in P2P loans within the last two years, they can technically be reclassified as a sophisticated investor.
This brought us to the thorny issue of appropriateness tests. Since the Breakfast Briefing, several platforms have unveiled their own appropriateness tests, and it is notable that there is no standard template in use. Instead, each individual platform must follow the FCA’s guidance and create a bespoke test which can answer questions about an investor’s understanding of, for example, the way the loans are priced, the way these loans are operated, and how client money is held.
Some compliance experts warned that the FCA is also going to be looking out for any improvements in financial promotions, including clearer provision of any information that might be relevant for investors. This will apply to all external marketing materials, as well as client-facing communications.
Opinions were split on how the FCA might respond to breaches in the rules. While some compliance specialists urged platforms to have honest internal conversations and keep customer protection at the heart of every decision, others said that they see the FCA taking a more forgiving approach to implementation and adhering to the concept of best endeavour. These opposing views stirred up some conflict in the room and it was revealed that the FCA had already begun visiting the offices of some platforms to see how their regulatory preparations were going. This suggested a more robust approach to compliance, it was argued. On the other hand, as a regulatory body whose core mission is to promote innovation in the financial sector, surely there must be some leeway for those platforms who are acting in good faith, even if they haven’t managed to meet the FCA’s standards?
The cost of meeting the new regulatory requirements was brought up repeatedly. The FCA appears to expect all firms to spend more on compliance, yet at the same time they are asking platforms to offer fairer pricing for retail clients, which sends a mixed message on where financial priorities should lie, particularly for smaller platforms.
One of the key concerns among platforms was the possibility that the higher cost of compliance may have a knock-on effect on borrower pricing, which could then eat into any profits or – worse – target investor rates.
Everyone present agreed that there will be more platform failures over the next months and years, even with the new FCA regulations in place. And ironically, a major factor in future consolidation could be the regulations themselves. The cost of complying with the new rules has been estimated at anywhere between £25,000 and several hundred thousand pounds – an amount that may not be feasible for some of the smaller companies.
Furthermore, the detail required by the regulator may mean that some firms have to hire in-house compliance officers or seek third-party advice. However, attendees were broadly positive about the industry’s ability to enact the new rules and use them to their advantage.
One potential upside of the new regulations is that it could make financial advisers more likely to start recommending P2P investments to their clients. In fact, some platforms have already started to use their enhanced compliance measures as a selling point to advisers and retail clients. This could have the benefit of adding credibility to the P2P sector, and promoting the risk management practices of the best platforms.
Platforms also agreed that these new regulations are unlikely to be the last major regulatory shifts that the sector will experience. As the outcome of the upcoming rules becomes clear, the FCA is likely to review what the industry has done and fill in any gaps in compliance. This may or may not involve feedback from the wider P2P community, so all firms should make sure that they are in a position to enact new compliance directives as quickly as possible.
For those platforms who are still worried about meeting the 9 December deadline, the advice was simple: get cracking, be mindful of the facts and make sure your house is in order.