The rising cost of maintaining appointed representatives (ARs) has led to a shift in the principal market, Peer2Peer Finance News has learned.
Over the past few months, tightening regulatory restrictions from the Financial Conduct Authority (FCA) have forced several principal companies to increase their prices, or to stop offering AR services altogether.
Last year, ShareIn decided to stop taking on ARs after a regulatory clampdown on speculative securities made it too costly to continue.
ShareIn’s chief executive Jude Cook told Peer2Peer Finance News that “the FCA’s expectations on a principal are so onerous it doesn’t stack up for us financially anymore.” She added that ShareIn would not be offering AR services to any new clients, and will be retaining just five clients as ARs.
ShareIn recommended compliance specialists I-Fact as an alternative principal, and it is believed that a number of former ShareIn clients are in the process of migrating over. However, they will likely see their monthly fees rise as a result.
I-Fact’s director John Derry-Collins said that his firm has always charged higher fees than its competitors, and added that he believes that most principal firms have been undercharging for their services. He warned that the cheaper providers “haven’t really been delivering a high enough service.”
“The reality of what it’s going to cost them, to have the research and the highly-paid people you need to offer services to the ARs, can be a bit daunting,” explained Derry-Collins. “So really the economics haven’t quite worked out for them.
“ARs have got to think about paying thousands of pounds to get to a higher standard because that’s what they need.”
A number of P2P lenders have also raised concerns about the cost of being a principal in the current regulatory environment. They have warned that ARs are at greater risk of failure due to their size, and this risk is effectively absorbed by the principal.
Lee Birkett, chief executive and co-founder of JustUs, said that “the costs of getting approved by the regulator and getting a license are too restrictive”.
“There’s no value as an appointed representative,” Birkett added. “All the value is in the principal business because the principal holds the clients and revenues. They are just a broker for the principal.”
Mike Bristow, chief executive and co-founder of CrowdProperty, pointed out that smaller platforms are less robust, which increases the risk of failure.
“I personally think all platforms should be directly regulated,” he said.
“Platforms don’t fail because they are ARs, they fail because they’re small, under-resourced, do not have enough capabilities and can’t make their capabilities work. This is more likely to happen to an AR because they’re smaller.”
“I think ARs carry a lot of risk,” added Stuart Law, chief executive of Assetz Capital.
“There’s an ocean between the skill sets in an FCA-regulated firm and the skill sets in an AR relying on a top company overseeing them.
“In one case it’s the FCA and other case the firm. I think that carries enormous risks for the sector.”
Read more: How the government distorted the P2P market