Jonathan Segal, partner and head of fintech and AltFi at Fox Williams, explains how the recent FCA rules were just the start of a new era of P2P regulation…
The new Financial Conduct Authority (FCA) regulations for peer-to-peer lenders are still just a few months old, but their long-term impact is already becoming apparent. As well as offering additional protection for consumers, the new rules are set to shake up the alternative lending community, changing the way that platforms are funded, founded, and advised.
Jonathan Segal (pictured), partner and head of fintech and AltFi at law firm Fox Williams, has been advising a number of P2P platforms as they navigate these new rules, and he has spotted a few emerging trends across the industry.
“P2P platforms now face additional costs in terms of customer acquisition, which will likely lead to a drop-off in the amount of retail money that is available,” Segal predicts, adding that this could force platforms to take on a mixture of funding, from both retail and institutional investors. The Financial Conduct Authority (FCA) has recently issued a temporary intervention on the marketing of speculative mini-bonds to retail investors – a temporary suspension that is likely to become permanent, says Segal.
This has led some platforms to put a halt to their plans to issue bonds to retail customers and consider other routes to market. “We have seen a retraction from the market where platforms are rethinking what they’re trying to achieve,” says Segal. “Sometimes there may not have been a particularly good reason why they were going down the bond route instead of the P2P route, so in one sense this might put P2P back in favour and some bond providers may move into the P2P space.”
One route they may take is to become an Appointed Representative (AR) of a Regulated Principal (RP), who will provide compliance-focused technology solutions while they run the actual business. This puts the onus on existing RPs – such as Rebuildingsociety – to become de facto regulators to their ARs. Rebuildingsociety has seen “significant interest” following the FCA’s suspension of IFISA-wrapped mini-bonds, but after consulting with Fox Williams, Rebuildingsociety’s compliance director Kylie Greeff has opted to take a “very conservative” approach to taking on new platforms.
“We have rejected many applications, including an expression of interest from a major European platform, wanting to operate in the UK market,” says Greeff. “A common reason for rejecting applications is that applicants want a P2P lending platform to arrange finance into projects in which they have an interest. We make it clear early on that there must be no conflict of interest in the transactions and lending undertaken on the platform.”
The complexities of the RP/ AR relationship require a strong adviser, and Fox Williams was one of the first firms to identify this vital gap in the market. Now Segal believes that the new regulations will lead to “a much greater need to get advisers involved to make sure that regulations are complied with.”
“Advisers play a critical role in helping principal firms,” agrees Greeff. “Rebuildingsociety is consulting with Fox Williams regarding its AR agreement and its suitability in a world where the AR networks are under scrutiny by the regulator.
“We are also working on a package of legal services which ARs can use in conjunction with our templates. There is no one-sizefits all-approach and this is where advisers are key to helping firms meet their objectives.”
This is just one of the surprising new innovations that the FCA regulations may have indirectly sparked. As long as platforms seek proper counsel, these innovations could lead to a prosperous new era in P2P.