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FCA confirms new rules for P2P platforms

On 4th June 2019 the Financial Conduct Authority (the “FCA”) published final rules for peer-to-peer (or P2P) lending platforms. The new rules are the result of the FCA’s consultation that launched in July 2018, with the FCA stating that the new rules are designed to help better protect investors and allow firms and fundraisers to operate in a long-term, sustainable manner.  The new rules and guidance will come into force on 9th December 2019, with the exception of certain rules relating to mortgages that are funded through P2P loans (explained in further detail below) which entered into force on the same day that the policy statement was published by the FCA.

Why have these new rules been introduced?

As we reported in our briefing at the time of the launch of the FCA’s consultation (which can be found here), the FCA’s objective in bringing in the new rules is to prevent harm to investors, without stifling innovation in the P2P sector and is in line with its commitment to keep regulation of the sector under review.  Christopher Woolard, Executive Director of Strategy and Competition at the FCA commented on 4th June 2019 that [the new rules] ‘are about enhancing protection for investors while allowing them to take up innovative investment opportunities. For P2P to continue to evolve sustainably, it is vital that investors receive the right level of protection.‘   The FCA had also identified a specific gap in consumer protection for customers who enter into a mortgage or take out home financing products through loan-based crowdfunding and proposed to extend the rules that apply to home finance providers to those who operate P2P lending platforms where at least one of the investors is not an authorised home finance provider.  These are the rules that entered into force on the same day that the policy statement was published by the FCA.

What do the new rules do?

The new rules implement the FCA’s proposals largely as set out in the consultation paper, although the FCA has added more guidance and clarification to deal with concerns raised by firms during the consultation process.  The FCA has stated that the proposals that generated the most feedback were those relating to the application of marketing restrictions to the P2P sector.  The changes introduced by the new rules extend the application of the marketing restrictions that currently apply to investment-based crowdfunding platforms (in relation to non-readily realisable securities) to the P2P sector. This includes bringing in a requirement for P2P platforms that communicate “direct offer” financial promotions to ensure that they only communicate such promotions to retail clients that:

  • are certified or self-certified as ‘sophisticated investors’ or are certified as ‘high net worth investors’;
  • confirm before a promotion is made that, in relation to the investment promoted, they will receive regulated investment advice or investment management services from an authorised person, or
  • are certified as a ‘restricted investor’; that is, they will not invest more than 10% of their net investible assets in P2P loans in the 12 months following certification.

Among other things, this new requirement means that retail customers who are classified as “restricted investors” are limited to investing a maximum of 10 per cent of their investible assets in P2P loans.  The FCA’s Policy Statement expressly states, however, that investors that initially fall within the restricted investor category can be reclassified as certified sophisticated investors (removing the 10% investment limit) if they have made two or more P2P investments in the past two years.

Where no advice is given to a retail client, the final rules also require P2P platforms to carry out an appropriateness assessment.  This requirement also currently applies to the investment-based crowdfunding platforms.  However, the final rules contain guidance on the topics that P2P platforms should consider including in the appropriateness assessment, including:

  • the nature of the client’s contractual relationship with the borrower, and with the platform;
  • the client’s exposure to the credit risk of the borrower;
  • that all capital is at risk
  • the fact that investments on the platform are not covered by the Financial Services Compensation Scheme;
  • that returns may vary over time;
  • that entering into P2P agreements or investing in a P2P portfolio is not comparable to depositing money in a savings account;
  • information on the platform’s risk mitigation measures, including in the event of its insolvency; and
  • the role of the platform and the scope of its services.

Overall, the FCA believes that the new rules strike an appropriate balance as they should allow the P2P sector to continue to market to new investors and to differentiate themselves, while also protecting investors. For crowdfunding firms who provide mortgage and home finance products to retail customers, the final rules extend the application of existing rules for the home finance sector to P2P platforms that offer such home finance products, where at least one of the investors is not an authorised home finance provider. The policy statement includes various other changes to the FCA rules which will impact the P2P lending sector.  In summary, the final rules include:

  • more explicit requirements to clarify what governance arrangements and systems and controls platforms need to have in place to support the outcomes they advertise relating to the P2P loans on their platforms, with a particular focus on credit risk assessment, risk management and fair valuation practices;
  • strengthening rules on plans firms need to have in place for the wind-down of P2P platforms if they fail; and
  • setting out the minimum information that P2P platforms need to provide to investors.

The policy statement also refers to the FCA considering further whether operators of P2P lending platforms should hold additional regulatory capital.  While most of the respondents to the FCA’s consultation paper refer to any additional regulatory capital requirement being overly burdensome, the FCA has stated “We will consider if further action is appropriate”.

Investment based crowdfunding platforms

While the focus on this policy statement is the P2P lending industry, the FCA has also commented on the financial promotion requirements that currently apply to investment-based crowdfunding platforms.  Once the new rules enter into force on 9th December 2019, these requirements will also apply to P2P lending platforms. In summary, the FCA’s earlier consultation paper referred to the requirements that must be satisfied to classify an investor when marketing a “non-readily realisable security” (NRRS) or a “non-mainstream pooled investment” (NMPI).  The FCA has stated that respondents said that the relevant FCA rules set different expectations under the NMPI and NRRS regimes as to the checks or evidence-gathering that firms must undertake to satisfy themselves of a client’s classification.  It was noted that the NMPI rules explicitly require firms to take ‘reasonable steps’ to establish that a person falls within a particular category, whereas the NRRS rules do not explicitly set out such a requirement to take ‘reasonable steps’.  In addition to noting this difference, firms that responded to the FCA’s consultation paper requested more clarity on what constituted ‘reasonable steps’ for this purpose. Taking these comments into account, the FCA stated that “we are considering these comments in a broader context. This will include, where appropriate, consideration of the approach to be expected of P2P platforms which may update further the revised rules set out in this PS.  We expect to be able to comment further in due course. If we conclude that additional rules and guidance are needed, we will consult on our proposals”.

Source: Lexology

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City watchdog issues warning on investing in peer-to-peer loans

The UK financial watchdog has warned customers about investing in peer-to-peer lending through innovative finance ISAs (IFISAS).

The Financial Conduct Authority (FCA) said it had seen “high-risk” IFISAS, which invest money into products such as mini-bonds or peer-to-peer investments, being advertised alongside cash ISAs.

However, these types of investments may not be covered by the Financial Services Compensation Scheme, therefore customers may lose money and be unable to reclaim losses.

In a statement the FCA said: “Investments held in IFISAs are high-risk with the money ultimately being invested in products like mini-bonds or peer-to-peer investments.

“These types of investments may not be protected by the Financial Services Compensation Scheme so customers may lose money invested or find it hard to get back.

“Anyone considering investing in an IFISA should carefully consider where their money is being invested before purchasing an IFISA.”

The FCA’s warning follows the collapse of mini-bond firm London Capital & Finance, which put the investments of thousands of bondholders at risk.

The watchdog has called for an independent investigation into the regulation of LCF following its failure.

By Jessica Clark

Source: City AM

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FCA keeps close eye on UK commercial property funds

The UK financial watchdog is seeking daily updates from commercial property funds following significant withdrawals from the sector in December.

The UK Property sector saw £315m in outflows during December. It is seen as particularly vulnerable to any problems from Brexit, as international buyers are an important source of demand for commercial property.

At the same time, investors have become increasingly concerned about the weakness in the retail sector. Landlords are being forced to accept non-commercial terms from tenants in difficulties.

The FCA is taking an interest because the last time the sector saw significant outflows, the funds had to stop investors redeeming their shares. Investors couldn’t get their capital out for a period of time. This happened in the wake of the Brexit vote in 2016 and during the global financial crisis in 2008. The funds ultimately reopened and investors could trade as normal.

The largest funds, including those from M&G and LGIM, hold property shares and cash to help them meet redemptions. They would otherwise have to sell off large buildings quickly, which can be difficult. They may also need to sell their prize buildings – for which there is the strongest market – while hanging on to their existing, weaker buildings.

Investors using investment trusts to access the commercial property sector aren’t affected by the problems.

Source: Your Money

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FCA threatens clampdown on P2P lending

Regulators are considering making peer-to-peer lending and crowdfunding less accessible to investors who aren’t professional or very rich, says David Stevenson.

Can you be trusted to be a sensible investor? The Financial Conduct Authority (FCA) has been pondering whether investors looking to put some money to work in alternative finance are capable of making sensible and informed decisions about the range of products on offer. If they can’t, should their cash be channelled into more open, transparent, mass-market products, such as unit or investment trusts or exchange-traded funds?

I realise this all sounds a bit policy-wonkish, but when it comes to the world of alternative finance, especially peer-to-peer (P2P) lending, this regulatory attitude may be about to have a direct impact on your investments. A few weeks ago, the FCA produced a consultation paper entitled “Loan-based (‘peer-to-peer’) and investment-based crowdfunding platforms: feedback on our post-implementation review and proposed changes to the regulatory framework”.

These fussy new rules…

Most of the suggestions in the paper are good old-fashioned common sense, designed to make P2P lending more mainstream and less risky. But one key proposal stands out like a sore thumb. The regulators suggest that future P2P investment “promotions” should only be able to target the following groups: those certified or self-certified as sophisticated investors, those certified as high net worth investors, those under advisement from an authorised person, and those who certify they will not invest more than 10% of their net investable portfolio in P2P agreements.

So, to be clear, in the future, if you are a new customer at, say, Zopa, Ratesetter or Funding Circle looking to bolster your income, you’ll have to prove you are independently wealthy or a finance professional, or certify that you only have 10% of your portfolio in online lending.

The reaction of many experienced private investors has been negative, to put it mildly. The industry website www.altfi.com, of which I am an executive director, asked for views. M. Thomas said the FCA “has once again demonstrated its antipathy towards individual… investors and the original spirit of P2P (to cut out the middleman)… these FCA proposals demonstrate a nanny-state mentality – people must be protected against themselves”.

Another unnamed pensioner added that “as a former company director, I’m well able to decide for myself what investments I make, and have no plans to reduce my current level of P2P lending (30% of my total). The FCA may wish to reflect on the fact that had its predecessor been rather better at monitoring the activities of Equitable Life, many of us would now have less need to consider some higher-risk investments in our retirement.”

…wouldn’t work

Many investors I’ve talked to with an interest in alternative finance are deeply troubled. Most simply intend to ignore the changes, even if they come in. And that, of course, is the real problem with any form of regulatory overreach. The intended beneficiaries simply ignore the good intentions and just fib and say whatever the regulator wants to hear. Witness the world of stockbroking, where investors already have to self-certify if they want to deal in securitised options such as covered warrants. Most retail stockbrokers send out pointless forms asking all the right questions about attitudes to risk. Most of them know full well that investors who sign the forms aren’t entirely truthful but connive in the charade.

But even if these changes were easy to apply, I’m not convinced they are fair. Is P2P really that risky? In effect, the regulators are saying online lending is as risky as, say, crowdfunding. With all due respect to successful crowdfunding platforms such as Seedrs and Crowdcube, the risk from investing in start-ups is immeasurably higher than that from lending to consumers or even established small companies with clear credit track records. With the former, most experienced investors are used to the idea that a large proportion of their investee companies won’t make it. With online lending, most credit investors (institutions are active in this space) don’t expect losses to exceed 5%-10%, even in the worst years.

Even if policymakers are worried about risk, there is a better way of managing this downside – sharper, smarter regulation. Or as Rhydian Lewis of P2P lending platform Ratesetter puts it, rather than block access, why not “eliminate the high-risk elements of P2P lending and… keep it accessible”? Wouldn’t it be better to close down rubbish platforms, force through far greater transparency about risks and impose heavy penalties for rule-breakers? Why should the wealthy or financial professionals be the only ones to benefit from an alternative to the lacklustre yields on offer at high-street savings institutions – most of which haven’t even passed on the recent increase in the Bank of England base interest rate?

Source: Money Week

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New rules for peer-to-peer lending announced by FCA

The popularity of peer-to-peer (P2P) lending has increased exponentially in recent years, with nearly £10 billion being transferred through such platforms in the past ten years. In an attempt to fix “increasingly complex business structures”, the FCA has announced new plans for new rules for peer-to-peer (P2P) lending.

The FCA has announced new plans which will see a crackdown on P2P lending and the loan-based crowdfunding industry in general following concerns that consumers are at risk of investing in things they do not understand.

P2P lending was last reviewed by the FCA in December 2016, announcing at the time, its plans to address the gap in protections for customers. Since then it has monitored the situation and noted the variety of loan-based crowdfunding business models, of which some are becoming increasingly complex. Whilst the FCA regulates loan-based crowdfunding (also known as P2P lending) and investment-based crowdfunding (which falls outside of the FCA’s present review), the FCA does not regulate donation-based or reward-based crowdfunding (hence, both of these fall outside of the FCA’s review).

As part of its ongoing monitoring, the FCA has also noted poor practice among some firms in the crowdfunding industry. The proposals detailed below aim to improve standards in the sector whilst still leaving scope for further innovation.

The consultation is aimed at establishing views on the following proposals:

  • Proposals to ensure investors receive clear and accurate information about a potential investment and understand the risks involved
  • Ensure investors are adequately remunerated for the risk they are taking
  • Transparent and robust systems for assessing the risk, value and price of loans, and fair/transparent charges to investors
  • Promote good governance and orderly business practices
  • Proposals to extend existing marketing restrictions for investment-based crowdfunding platforms to loan-based platforms

Executive director of strategy and competition for the FCA, Christopher Woolard has stated that: “The changes we’re proposing are about ensuring sustainable development of the market and appropriate consumer protections. We believe that loan-based crowdfunding can play a valuable role in providing finance to small businesses and individuals but it’s essential that regulation stays up to date as markets develop.”

Equally, the FCA was keen to ensure that not all P2P lenders were criticised, noting that some “P2P platforms already have more robust systems and controls in place”.

The new proposals will also see tighter provisions when alternative funding is used for home loans. The FCA will seek to enforce its Mortgage and Home Finance: Conduct of Business rules on P2P platforms if they begin to deal in the residential lending market.

The FCA is asking for responses to the consultation by 27 October 2018 before it publishes rules in a Policy Statement later this year.

Source: Lexology

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Tougher P2P lending rules proposed over poor practice concerns

The city watchdog has proposed a number of measures to tighten up control of the peer-to-peer lending sector following concerns about poor practice and potential risks to investors.

The Financial Conduct Authority (FCA) has opened a consultation on loan-based crowdfunding platforms (peer-to-peer) following its original review of the sector in 2016.

It said since then, it’s observed that the new and growing area has become increasingly complex and has found evidence of “poor business practices” that could cause actual or potential harm to investors.

For example, P2P platforms have a much more active role by taking decisions on behalf of investors, structuring the loans they’re exposed to, and splitting loans across a number of investors (lenders) in order to receive a target rate of return.

Given the focus on headline rates, investors may not be aware of the exact level of risk they’re being exposed to. Further, the FCA said investors may not be receiving full information on charging structures, wind-down arrangements and record keeping.

Customers may also be buying unsuitable products, may be receiving poor treatment, may not be remunerated fairly for the level of risk they’re taking, and could be paying excessive costs for a platform’s services.

As a result, it has today proposed the following measures to ensure investors are given clearer information about investments, charges and risk:

  • When a platform advertises a target rate of return, it should be achievable, and for investors to understand and be fairly remunerated for the risks they’re exposed to
  • Where P2P platforms price loans or choose loans on behalf of investors, they need to clarify what systems and controls are in place to support the outcomes advertised
  • Strengthening rules on plans for the wind-down of P2P platforms, such as for the IT infrastructure to continue for the benefit of investors.

Christopher Woolard, executive director of strategy and competition at the FCA, said: “When we introduced new rules for crowdfunding, we said we’d review the market as it developed. We believe that loan-based crowdfunding can play a valuable role in providing finance to small businesses and individuals but it’s essential that regulation stays up-to-date as markets develop.

“The changes we’re proposing are about ensuring sustainable development of the market and appropriate consumer protections.”

The consultation closes on 27 October and the FCA expects to publish the new rules later this year.

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UK buyers need more help to find cheaper mortgage deals, says FCA

Plans to make it easier for mortgage borrowers to shop around have been proposed by the City regulator, after it found nearly one in three people fail to find the cheapest deal.

The Financial Conduct Authority (FCA) said these people could have saved £550 per year with a lower-priced deal. It is also exploring ways to help “mortgage prisoners” – longstanding customers who are trapped in their existing deal – to switch.

Publishing its interim report into the mortgage market, the FCA said it had found that competition was working well for many people. But it also identified ways in which the market could work better.

Mortgage debt accounts for more than 80% of total UK household liabilities, so selecting a deal is one of the most important financial decisions consumers have to take, but it can be a difficult one to get right, the FCA said.

The regulator said that while there was little evidence that current arrangements between firms were leading to poor consumer outcomes, there was no easy way for people to be confident at an early stage of the mortgage products they qualify for.

This is a significant impediment to shopping around, and about 30% of customers fail to find the cheapest mortgage for them, it said. On average, these consumers were paying approximately £550 per year more over the introductory period of their mortgage compared with the cheaper product.

One approach could involve lenders making the necessary eligibility and other qualification criteria available to other market participants consistently at an earlier stage, the FCA suggested. This should help brokers and also create other opportunities for new online tools, it said.

The FCA also proposed making it easier for people to compare mortgage brokers, saying it intended to work with the broker sector to develop ways to compare deals.

The report said: “We found that on average a consumer’s choice of intermediary makes a difference to the eventual cost of their mortgage. In particular, we have observed links between more expensive mortgages and intermediaries that typically place business with fewer lenders. But there are few tools to help consumers choose an intermediary.”

Christopher Woolard, the FCA’s executive director of strategy and competition, said: “For many the market is working well with high levels of consumer engagement. However, we believe that things could work better with more innovative tools to help consumers.

“There are also a number of longstanding borrowers that have kept up to date with their mortgage repayments but are unable to get a new mortgage deal; we want to explore ways that we, and the industry, can help them.”

The FCA also outlined how “mortgage prisoners” could be better helped, many of whom took out interest-only deals before the financial crisis. Stricter lending practices since the crisis have made it harder for these customers to find a cheaper mortgage.

The regulator suggested there could be an industry-wide agreement for lenders to approve applications for a new mortgage deal from existing customers whose most recent mortgage was taken out before the financial crisis and who are up to date with their payments.

The FCA will consult on the findings and proposed remedies, with a final report due around the end of the year.

Source: The Guardian

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FCA Seeks To Set Free ‘Mortgage Prisoners’

The City watchdog is calling for reforms to help “mortgage prisoners” who are stuck on high borrowing rates but not allowed to switch.

Tens of thousands of home owners who took out loans before the financial crisis are trapped on lenders’ standard interest rates because of changes to rules on whether they can afford repayments.

It means that even if they have been paying off their mortgages every month they may not qualify to switch to a deal which is cheaper.

The Financial Conduct Authority (FCA) is to consider seeking an industry-wide agreement to approve applications from those who took mortgages out before the crisis and are up-to-date with payments.

But this would only help a small fraction of the estimated 150,000 stuck in this position and for the rest it is seeking talks to find other “possible solutions”.

The findings are part of an interim report by the FCA into the mortgage market which found that around 30% of customers are failing to find the cheapest mortgage for them, typically overpaying by £550 a year over the introductory period of the loan.

It also said that there were around 800,000 consumers who could switch at the end of introductory periods, but did not, to cheaper two-year deals that would typically save them £1,000 a year.

The watchdog wants to make it easier for consumers to work out at an early stage for which mortgages they qualify to make it easier for them to assess and compare those products.

More broadly, however, the FCA found there were “high levels of choice and consumer engagement” in the mortgage market.

Home buyers today typically take out long-term mortgage contracts with short fixed interest rate periods at the start, after which the deal changes to a standard “reversion” rate which is typically higher.

The FCA found that more than three-quarters of consumers switched to a new deal within six months of moving to a reversion rate – but that leaves a substantial minority who do not.

It also identified a relatively small proportion of borrowers known as “mortgage prisoners”.

These are consumers “who took out a mortgage pre-crisis, are on a reversion rate and up-to-date with repayments, and would benefit from switching to a new deal but cannot”.

That is because, since the crisis, there have been major changes to lending practices and rules aimed at ending the problem of people borrowing more than they could afford.

In the case of “mortgage prisoners” it may mean that they are effectively told a deal is too expensive for them to take on even though they are currently paying more.

The FCA believes there are 30,000 such customers with authorised mortgage lenders and a further 120,000 on a reversion rate whose mortgages have been sold on to non-regulated firms.

A proposed agreement between lenders to approve applications from these borrowers for mortgages would help around 10,000 from the first group, who have home loans with lenders that remain “active” in the mortgage market.

The FCA said that for the rest it would discuss possible solutions with relevant firms, consumer groups and the Government.

Source: Juice Brighton