The City watchdog has been urged to differentiate between good and bad practices in the peer-to-peer property development lending space, rather than implement a blanket ban on investor marketing.
Following feedback to its call for input on consumer investments, the Financial Conduct Authority (FCA) published proposals to strengthen its financial promotion rules for high-risk investments, including P2P lending.
The FCA noted similarities between P2P agreements – using the example of a property development loan – and speculative illiquid securities (SISs) and raised the question of whether this should impact the marketing of such products to retail investors.
P2P property development lender Capitalstackers has called for the regulator to discern between different types of lenders and practices, rather than potentially imposing a blanket ban on marketing, like it did with mini-bonds.
The platform argued that direct lending – where an investor lends to a single borrower for a specific project – is better than auto-investing across multiple loans, as the investor can do their own due diligence on the project.
Capitalstackers also contended that manual lending can result in better liquidity, as investors get their money returned once that specific project comes to fruition.
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The platform suggested that the rules should allow investors the freedom to seek higher returns on portions of their portfolios where they are happy to accept higher risk, and where they have sufficient information to property assess that risk.
“Should we be regulating to prevent platforms from promoting secured lending opportunities to sophisticated and high-net-worth investors, where risks have been made transparent and they will be fairly compensated for the risks they choose to take?” Capitalstackers said in a blog post on its website.
“Is it not sufficient to make it clear how and when an investor can get repaid rather than shut them out altogether?”
The platform warned that a blanket ban on the promotion of P2P property development loans would prevent sophisticated and high-net-worth investors from accessing the sector.
“The threat is that P2P property development lending is very much in the FCA’s sights and could end up being closed off as an investment vehicle as we go back to you only being able to invest in property through institutional funds (in which case think low yields and high costs),” Capitalstackers said.
“Developers would be forced into the institutionally backed debt fund market, removing an extremely important funding plank that’s been in place for some 10 years.”
The platform called for investors to respond to the FCA’s consultation by the 1 July deadline.
“Where a P2P agreement has similar features to a SIS (for example where it is a loan to a property developer) there is the possibility for arbitrage,” the FCA said in its proposals.
“In other words, a property developer could still seek retail investment through a P2P platform instead of issuing a mini bond, and this P2P agreement could still be mass marketed.
“We are seeking views on whether (and why) you think the existing requirements for P2P platforms are adequate to protect retail investors from the risks of P2P agreements which share features with SISs.
“Or should the mass marketing ban be extended to P2P agreements which have the relevant features of a SIS, and if so, what evidence of harm to consumers is there? We also want to hear about the potential impact of any change in this area, in particular how many consumers and P2P agreements might be affected, and what this change would cost firms and borrowers.”
Do you have a view on the FCA proposals relating to P2P property development lending that you would like to share with the Peer2Peer Finance News team? Feel free to email us directly at firstname.lastname@example.org.