James Dingwall, founder, and chief executive of Thistle Initiatives, delves into the current compliance challenges facing the peer-to-peer lending sector
It’s fair to say that the alternative lending sector has faced challenges in recent years, with the regulator’s beady eye right on point. The Financial Conduct Authority (FCA) has scrutinised mini-bonds and listed bonds and has now turned its focus to peer-to-peer lending.
The FCA paper CP20/08 has the required outcome that mini-bonds and most listed bonds now deemed “speculative illiquid securities” should not be promoted to the general retail market. These types of investments were generally promoted to retail investors, often via an Innovative Finance ISA.
The decision to effectively ban the promotion of such products to the general retail market was partly prompted by the demise of providers such as London Capital & Finance and Blackmore Bonds but also because of other issues identified by the regulator. The FCA’s concerns were centered around higher-risk lending to individuals using misleading financial promotions, limited assessments of suitability and a lack of due diligence on investments.
Meanwhile, the P2P sector is not without its own troubles. Lendy tumbled into administration in May 2019 owing investors £152m, followed by Funding Secure. We have seen several platforms cease to lend in 2020 and there are likely to be more closures. Due to these issues with the alternative lending sector, customer perception of P2P is changing.
Customer acquisition costs are increasing. Most platforms are struggling to attract new investors. It’s a difficult time. There are also greater regulatory requirements. P2P platforms need to ensure their financial promotions are compliant, that they conduct appropriate due diligence and that the investor understands the risks involved.
The FCA recently introduced investor marketing restrictions for the sector, mandating platforms to offer appropriateness tests to all potential investors. It’s important that investors understand that P2P is a high-risk, illiquid investment, with no secondary market on many platforms and no financial services compensation scheme coverage. There is also a requirement for adequate due diligence. It’s fair to say that the FCA guidance has evolved over the years.
We do, however, all know the rules of engagement: comply with the FCA requirements on issuing credit; comply with your own credit policy; and comply with what you have promised your investor in your terms and conditions. The outcome should platforms fail any of these test points is general redress. However, it should be noted that any failure is not limited to one investor, but to all investors who invested at that time or in that particular investment.
Therefore, platforms could end up having to redress every investor, especially if they failed to conduct adequate due diligence on a specific investment. With an increased number of P2P firms heading towards administration and claims management companies hovering like hungry birds of prey, this might just turn into a bigger problem than we all think.
However, it is important to underline that success in this market can still be achieved and it has been great to see some platforms performing well despite this economic environment. My advice is simple: know your risks. Platforms need to assess financial promotions regularly, make their suitability test specific to the risks of their platform and proactively review their due diligence.
This can be done internally, or via specialists. I would also recommend reading and answering questions from CP20/08 to understand how that guidance would affect your business model if such rules were to come into force.
Thistle Initiatives is an award-winning compliance consultancy, offering expert advice and support across the financial services sector. For more information on the range of services we offer, visit thistleinitiatives.co.uk or call 0207 436 0630 to speak to a member of the team.