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Peer-to-peer lenders told to clean up poor practices or face crackdown

The financial regulator has sent a seven-page letter to peer-to-peer lending firms warning them the industry must clean up poor practices or face a “strong and rapid” crackdown.

Peer-to-peer firms match individual borrowers or companies with lenders willing to put money aside for longer, hunting for a good return. As the banking middleman is cut out, borrowers often get slightly lower rates, while lenders can sometimes earn 6%+, though the regulator has repeatedly said it’s concerned that many don’t understand the risks involved.

Now The Times has revealed that in a letter sent to 65 firms, the Financial Conduct Authority (FCA) has highlighted an array of problems with some lenders, including weaknesses in disclosure of information to clients, complicated charging structures and poor record-keeping.

The letter itself hasn’t been published, and when we contacted it today the FCA wouldn’t officially comment. But we understand that the contents of the letter quoted in The Times is correct.

For more on how this works, including a full breakdown of the risks, see our Peer-to-Peer Lending guide.

What is peer-to-peer lending?

Peer-to-peer lending websites are industrial-scale online financial matchmakers. They can allow borrowers to get slightly lower rates, while investors who offer loans get far improved headline rates, with the sites themselves profiting via a fee.

But investing your money this way is NOT like traditional saving, as there’s no savings safety guarantee and you could lose your money. It may also be hard to get your money out early and your cash may not be lent straightaway, so you may get no interest for a while. See our Peer-to-Peer Lending guide for a full list of risks.

What does the letter sent by the FCA say?

MoneySavingExpert.com hasn’t seen the text of the letter sent by the FCA, so we don’t know full details.

However, according to The Times, the FCA says in the letter that certain platforms have made “significant changes to their business models without notifying us”. It also adds that this is being driven by pressure on many in the industry to return profits, resulting in them taking “additional, opportunistic risks” in certain areas, and warns of “severe” consequences to the stability of platforms.

The letter reportedly says the FCA is “reviewing the adequacy of a number of firms’ financial resources” and says the industry must “act now” to clean up poor practices or face a “strong and rapid” crackdown.

For full details, see The Times’ story Peer-to-peer lenders given final warning by Financial Conduct Authority (you’ll need to register to read the whole article).

What else is the FCA doing on this?

In June 2019, the regulator published new rules designed to better protect investors, which all peer-to-peer firms will need to follow by 9 December 2019. These rules include a limit on how much new investors can put into peer-to-peer lending, new checks to ensure you have the knowledge and experience to invest and stronger rules on plans if a lender goes bust. See New FCA rules on peer-to-peer lending for more info.

By Callum Mason

Source: Money Saving Expert

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Peer closely – but carefully – at peer-to-peer property investments

The interest rates on peer-to-peer property investments may look appealing, but investors should tread carefully.

Whether you’re selling your house or buying wine, cutting out the middleman can help you secure a better deal. Peer-to-peer (P2P) lending works on this principle too. By bringing together investors and borrowers, a P2P platform can offer each party terms they wouldn’t have been able to access readily through a more traditional financial institution. For the investor, who lends the money, it’s the prospect of a higher return; for the borrower, it’s the potential for a cheaper rate, a faster application process (hours rather than days in the case of P2P business lending) and a higher probability of getting a loan.

A selective market for borrowers
For those seeking to invest directly in property, borrowing from a P2P is an option, but it’s a selective market. It doesn’t generally cater to people buying houses to live in, nor for investors who want a long-term mortgage (although some platforms, including Landbay and LendInvest offer buy-to-let mortgages with terms of up to 30 years). On the more standard buy-to-let products the rates aren’t especially low. Landbay offers a two-year fixed product at 3.09% for up to 75% loan-to-value (LTV), but it’s possible to secure rates of 1.59% and 1.73% from Post Office Money and Virgin Money respectively.

But go more niche and the P2P lenders come into their own. For instance, LendInvest’s five-year fixed rate of 3.19% at 65% (LTV) for buy-to-letters who are limited companies is very competitive in that market. It is possible to go lower with Keystone’s 2.99% rate, but this comes with a 2% fee, double the fee charged by LendInvest.

However, the primary focus for the P2P platforms is short-term lending, especially for bridging and development finance. For example, on its residential bridging products, LendInvest offers rates from 0.55% a month for up to 18 months on properties with an LTV of 50% or less. It is possible to edge below these rates – specialist lender Precise Mortgages offers bridging from 0.49% – but with other factors such as fees and terms also important, the P2P platforms look appealing.

Choose your risk level when lending
These platforms rely on investors to fund their lending, so this is another way to gain access to the property market. The returns of the property-backed loans you are financing will be linked to the fortunes of the housing market.

It’s possible to select the level of risk you can tolerate. Some platforms will allocate your money to a selection of loans while others allow you to select those you want based on factors such as the interest rate and LTV. Minimum investments of £1,000 are standard, although it is possible to start with just £100 with Landbay. Given the breadth of risk, rates vary. LendInvest quotes a target annual return of 4%-7%, while Landbay flags up an annualised projected return of up to 3.54%.

Importantly, however, these rates are far from guaranteed. Any defaults will erode the return and investors’ capital is at risk. Sarah Coles of fund platform Hargreaves Lansdown points out that just because your investment is secured against the properties backing the loans, it doesn’t mean you would get all your money back in the event of a forced sale.

How will P2P fare in a downturn?
Note too that P2P platforms have yet to experience a severe downturn, while they’re also not covered by the Financial Services Compensation Scheme (FSCS).

There are already signs that the market is getting tougher. Demand for loans has fallen. At the end of May, property platform Lendy went into administration. This left more than 20,000 of Lendy’s individual investors exploring legal action to recover the £165m plus they had invested. A catalogue of errors may lie behind Lendy’s spiral into administration, but the Financial Conduct Authority (FCA), the City regulator, is keen to ensure that investors don’t fall victim to the overambitious marketing claims of P2P lenders.

It is also introducing a cap on the amount they can allocate to P2P arrangements. To avoid overexposure to risk, this is set at 10% of investable assets where the investor hasn’t taken financial advice. Platforms will also have to “assess investors’ knowledge and experience”, says the FCA.

Expect a shake-out
The upshot, according to Matt Hopkins of accountancy group BDO, is not that the P2P market is a bubble about to burst, but that there is likely to be a shake-out over the next few years as tougher conditions lead to consolidation in the number of platforms. We may end up with a handful of larger platforms alongside a few niche ones. In the meantime, given the recent turbulence in the sector and the uncertain macroeconomic outlook, investors should tread extremely carefully.

By: Sam Barrett

Source: Money Week

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Property schemes are confusing for investors

Investors are struggling to understand the risks in property investment platforms, research has found.

Secured property lender Fitzrovia Finance polled the clients of 20 of the top UK schemes and found three quarters wrongly believed first charge secured loans were riskier than second charge mezzanine options, while seven per cent did not know which was riskier.

The study, carried out in June, also showed 18 per cent of retail investors felt some of the property investment platforms failed to clearly explain the level of risk involved in their investments, and that returns ranged from a modest 2.8 per cent to 15 per cent, reflecting a significant variance in risk and return.

Brad Bauman, Fitzrovia Finance’s chief executive officer, said: “The industry must strive to ensure that each opportunity promoted to private investors is clearly explained, the risks are transparent and the returns appropriate. This will help ensure that investors have the necessary information they need before deciding to invest.

“There are some ‘property’ investment opportunities being offered to private investors where, for example, the returns are 8 per cent or 14 per cent – or even higher. These will include a lot of features that represent higher levels of risk such as second charge loans or unsecured debt, and this must be clearly explained to investors.”

Property investment platforms facilitate investment in individual properties or a property portfolio, and often promise high returns.

They have started to sprout up in recent years in many guises including crowdfunding, P2P lending, real estate investment trusts and bonds, and their aim is often to provide retail investors with access to property investments.

One of the easiest ways to invest is through P2P lending, where investors lend money to borrowers, with the cash secured against residential and commercial properties or new-build developments.

Fitzrovia’s findings followed last month’s announcement that later this year the FCA will introduce new rules which will mean individuals will not be permitted to have more than 10 per cent of their assets in peer-to-peer investments, unless they have taken financial advice.

The rules are designed to prevent investors taking what the regulator considers excessive risk, and will require platforms to assess casual investors’ knowledge and experience of P2P before they allow them to invest.

There will also be a more explicit requirement to clarify what governance arrangements, systems and controls platforms need to have in place to support the outcomes they advertise.

Christopher Woolard, executive director for strategy and competition at the FCA, said: “These changes 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.”

By James Colasanti

Source: FT Adviser

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P2P lending offers an attractive entry point into property investment

For investors the current turbulent economic environment has made the trade-off between risk and return somewhat more challenging that it has been for a few years. Volatility in the equity markets at the end of last year saw stocks ricochet from record highs to post their biggest fall since 2008 – with the FTSE-100 ending down 12.5% at the end of December 2018. And while stocks bounced back in the first quarter, many are understandably wary.

In such a climate, it’s not surprising that investors are turning to asset classes that might be considered somewhat more stable such as property or bonds. Yet buying property remains expensive and buy-to-let investment is a far less attractive option than it once was.

This is where P2P lending platforms may offer a solution. Less costly than buy-to-let investment, I believe P2P property platforms provide the perfect entry into bricks and mortar investment while offering highly attractive returns.

Buy-to-let investors under pressure

Traditional routes into property investment are being squeezed as never before. The stamp duty surcharge on additional properties introduced in 2016 has made investing in a buy-to-let portfolio more expensive.

Meanwhile, some landlords now face an uphill battle getting mortgages at all, thanks to tighter lending restrictions ushered in by the Prudential Regulation Authority (PRA) at the start of 2017. And this month sees another tranche of mortgage interest tax relief disappear driving up costs once more for buy-to-let investors.

All of this has led to an 80% fall in new lending on buy-to-let properties in two years from £25bn to just £5bn. As a result, many investors spooked by the volatility in the equity markets and put off by the cost and increasing administration associated with buy-to-let investing have begun to look to alternatives such as P2P lending.

In their simplest form, P2P platforms connect those with money to invest with those looking to borrow, enabling investors to target solid returns without the rollercoaster volatility of the stock market, while benefiting from reduced transaction costs.

Additionally, P2P performance has proven to be robust with many of the largest P2P lenders delivering yields of around 4-5%. In 2015, P2P was approved to be included within the ISA wrapper, so interest earned through eligible P2P platforms can now be tax-free.

The rise of P2P, together with a decade of low interest rates has inspired many would-be savers to seek alternatives to traditional banks saving accounts to boost their income.

Lending is robust too. Last year, P2P lending volumes stood at £3bn, according to figures compiled the UK P2P Finance Association (P2PFA), while P2P lending to date now stands at £15bn and within this property-based P2P lending, in particular, is experiencing healthy demand.

Two main routes into P2P property investment

Property-backed P2P lending has become increasingly popular with investors because the loans are secured against bricks and mortar, reducing risk of capital loss, yet maintaining the healthy returns on offer.

There are two main ways to invest in property through a P2P lender.

The first, property crowdfunding is possibly the most familiar. It allows investors a fractional share of a property along with others over a lengthy period of time. Investors stand to make a profit as a property’s value rises over time, along with a share of potential profits from rent (which could be thought of as similar to a stock’s dividend). Of course, ownership also carries the risk of losses if property values drop, if there are void periods and owning a fraction of a property if things go wrong can create headaches in terms of determining the order in which multiple investors should be compensated.

Considered a simpler method, P2P property lenders advance money to property developers to either build small developments or refurbish old buildings into residential accommodation. The loans are for far shorter periods, so investors lose the potential for a windfall return on the longer-term investment in a buy-to-let property that is gaining in value each year. But the returns are generally more predictable and in some cases the investor, or some P2P platforms such as Blend Network, have the first charge on the loan should anything go wrong meaning the risk of significant losses is relatively small.

Investing outside of London offers greater rewards

We believe the biggest growth has recently been in this second area of lending to the broader residential space, which includes bridge funding, small family builders and developers of flats for sale to buy-to-let landlords.

Of course, all P2P property lending is not without risk. Investors should be aware that many platforms offer loans in higher risk assets and cities, which, as at least one recent high-profile case has shown, run a greater risk of default.

Property developers concentrating on prime, city-centre locations – sectors which generally have peaked in recent years, should in our opinion largely be avoided, while loans on high-value properties we believe should be assessed with caution. Moreover, in our experience, small builders who tend to operate in niche, higher-margin markets are less exposed to market volatility than London’s buy-to-let landlords.

We have developed a different model, which focuses on affordable housing, outside London, in less overbought regions where there is still the potential to secure robust returns. We have so far lent out some £6m, with an average return of close to 12% and had no defaults.

Essentially, P2P property investment can offer robust fixed yields, backed by physical property assets. With due diligence undertaken by the P2P platform and available to potential investors, loans are likely to be advanced to borrowers that have credible plans for their properties and pose little risk to investors while at the same time offering investors greater liquidity and more attractive returns than may be found in traditional property investments. That said, we always advise investors to do their own due diligence.

Source: Mortgage Introducer

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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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4 ways to increase your savings in 2019

Everyone wants to increase their savings. Yet with most UK savings accounts offering abysmal interest rates at present, this is easier said than done. That said, there definitely are ways to boost your total if you’re willing to use your initiative or to take on a little risk. Today I’m going to show you some ways in which you could earn a higher interest rate than the 1.5% being offered on savings accounts in 2019.

Bank accounts
One approach is to take advantage of bank accounts that offer higher interest rates on smaller sums of money.

For example, Tesco Bank’s current account currently pays 3% on savings up to £3,000, as long as you pay in £750 per month and make three direct debits. Each individual can have two of these accounts, meaning that a couple could potentially earn 3% on £12,000 (4 x £3,000), which equates to £360 interest per year.

Other accounts that could be worth a look include the TSB Classic account, which pays 5% on up to £1,500, and the Nationwide FlexDirect which pays 5% fixed for a year on up to £2,500, although both have conditions.

Fixed-term savings
If you don’t need access to your money in the short term, another easy way to pick up a higher interest rate is to invest your cash in a ‘fixed-rate’ savings account for a certain period of time. For example, the Post Office is currently offering a rate of 1.9% on its one-year fixed-term savings account.

While the rates on two-year and five-year products are higher than one-year options, I wouldn’t recommend locking money away for longer than a year, as UK interest rates could rise in the future, meaning that interest rates on savings accounts could improve too.

Peer-to-peer lending
If you’re keen to earn a higher rate than 3% on your money, consider peer-to-peer (P2P) lending. This is where you lend your money to other people, or businesses, through a P2P platform. Through popular UK platforms such as Zopa, Funding Circle, and Ratesetter it’s not hard to earn rates of 4% or higher. Having said that, it’s important to note that P2P lending is riskier than putting your money in a bank account. Borrowers can struggle with repayments meaning you might not get back all of your money. Furthermore, given that P2P lending is a relatively new industry, we don’t know how it will perform if the economy collapses. So it’s worth proceeding with caution here – it’s probably not wise to put your entire life savings into P2P lending.

Dividend stocks
Finally, if you’re serious about increasing your savings, consider investing some money in dividend stocks. These are companies that pay shareholders regular cash payments out of their profits several times a year. Right now, there are some fantastic yields on offer from some of the UK’s largest companies, such as 6% from Shell, 6% from HSBC and 8% from British American Tobacco. With these kinds of stocks, it not hard to start building up a passive income stream.

Of course, stocks are riskier than cash and in the short term, share prices can be volatile, meaning you might not get back what you invested. However, research has shown that over the long term, stocks tend to generate returns of around 7%-10% per year on average, which is far higher than the returns from cash savings in the current low-interest-rate environment.

Source: Yahoo Finance UK

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Breaking down the lending barriers

Peer-to-peer lending may not be a familiar part of an adviser’s arsenal, but interest in the area is on the rise and the industry’s overall growth rates add weight to its suggestion that it is moving into the mainstream.

However, a recent paper by the FCA that has suggested consumers are at risk of harm shows there is work to be done to convince more advisers of its merits.

At its heart, P2P is a way of for consumers to lend money to companies and individuals – via platforms, which either set interest rates themselves (the most common method, as Table 1 shows) or allow consumers to do so.

The attraction is that these rates are typically substantially higher than can be found elsewhere. But as always, the greater yields come at the expense of higher risk of default, and P2P is not covered by the Financial Services Compensation Scheme.

For intermediaries, such lending might provide a useful option when catering for clients with short-term time horizons, such as one to three years, in cases where equities pose too much of a risk to capital and cash is unable to match inflation.

The sector’s relative infancy has meant the number of advisers dipping their toes in remains fairly small. But providers say they are starting to see a notable uptick in intermediaries using P2P for client recommendations.

“A few years ago very few financial advisers were using [P2P]. But we’ve now got 1,100 advisers registered on the platform, and adding more and more every day,” says Sam Handfield-Jones, chief product officer at Octopus, who adds his company’s loan book has grown to in excess of £250m.

“They range from advisers having 10, 20, 40, 50 clients on [the platform], through to advisers using it to solve really specific problems or one or two clients, so it’s still massively varied as to how it’s used.”

Nathan Mead-Wellings, director at London-based advice firm Finura Partners, says more clients are starting to broach the subject. “There is an interest among the higher net worth to get into the lending space where they have reasonable knowledge of asset-backed lending in particular,” he says.

“Familiarity with larger platforms such as Ratesetter is also filtering down. These clients are often prepared to view these as high-risk investments and are aware that they lack FSCS protection.”

Growth and responsibility

Growth in the sector has certainly been eye-catching. Data compiled by the UK Peer2Peer Finance Association shows cumulative lending had risen to nearly £9bn in the first quarter of 2018, a jump of more than 50 per cent from the second quarter of 2017. Almost two-thirds of this lending was shared between two providers – Funding Circle and Zopa, the longest running P2P platform.

Greater regulation is inevitable in any new sector that starts to gain popularity with consumers. Back in 2016, FCA chief executive Andrew Bailey remarked of P2P: “It’s a fast-moving, evolving industry. Some of the directions in which it’s going are posing some quite big challenges in terms of transparency and fairness.

“Those are the things that we’ll be considering when it comes to the point of proposing and making rules. We always try to balance innovation and competition against having a fair and transparent environment.”

Two years later, in July 2018, the watchdog subsequently unveiled a 156-page consultation paper in a bid to address potential problems in the space.

The regulator identified poor business practices, particularly on some P2P platforms. These related to “disclosure of information to clients, charging structures, wind-down arrangements and record keeping”, it said.

The report also highlighted a number of potential and ongoing harms that may impact investors, such as poor quality or unsuitable products, poor treatment of customers, and high prices.

Gonçalo de Vasconcelos, chief executive at crowdfunding platform SyndicateRoom, says the real surprise was a proposed clampdown on promotional activity by P2P providers.

Investors in the space could now face the same kind of marketing restrictions that already apply to the investment-based crowdfunding sector. These require providers to ensure they only target their promotions at advisers or sophisticated/wealthy investors, or else those who certify they will not invest more than 10 per cent of their assets in “readily realisable” securities.

Mr de Vasconcelos says: “The changes to the P2P sector were mostly unnecessary and slightly over the top. The unintended consequence, or perhaps intended, is that everyday investors see P2P as this spooky, dangerous thing that it isn’t – just look at the track record of the main P2P platforms for more than 10 years now.”

But some say this track record is rightly treated with scepticism.

Mr Mead-Wellings says: “It can be hard to run due diligence on the different platforms and understand the default rates/profitability and so on, but mostly [the issue] is that few have been tested in a downturn. It would be interesting to see what the average credit profile of their borrowers and lenders is.”

Mr Handfield-Jones adds: “Advisers are where they should be, cautious about adopting new things. They have an obligation to protect their clients’ money and the sector is 11 to 12 years old – so it’s still new.”

Mr Vasconcelos concedes the example of an adviser who took an interest in one of his company’s products, but ultimately would not show it to clients because it lacked a three-year track record.

He says: “It’s not worth them running the risk due to regulatory reasons. The two main barriers for advisers to get involved are lack of knowledge and being risk-adverse. The most sophisticated advisers are on it, but it’s still a very small percentage of the market.”

The task for providers is to assess how the industry can evolve in an adviser-friendly way.

Medical attraction

Another obstacle to more advisers and consumers embracing the asset class is accessibility. Mr Handfield-Jones says encouraging more self-invested personal pension providers to permit P2P investments is one of Octopus’s key aims.

Just two providers are currently on board, and regulators’ growing suspicion of unregulated investments held within Sipps may mean others are reluctant to take the plunge. But Mr Handfield-Jones notes those in the decumulation phase often seek to access parts of their money on a number of different time horizons, a preference he says can chime with P2P.

He explains: “An adviser will rarely recommend equity exposure on a sub three-year time horizon, yet if you’re buying multi-asset funds and selling them down to fund income in decumulation, you’re effectively buying equities and selling them down on a sub-three year. But because it’s wrapped up in the multi-asset fund it’s not so obvious.

“When you’re talking about portfolio construction, decumulation and income drawdown, maintaining that capital within your Sipp wrapper is an important part of that and will be the big switch to [push P2P lending into the] mainstream.”

Providers also claim advisers may end up using P2P to support client objectives in relation to their businesses.

Mr Handfield-Jones says he has seen a sharp rise in medical workers, such as doctors and dentists, who fund private work through a limited company, investing the business’s capital into P2P.

“They don’t want to take out the dividends and pay dividend tax, but if you’ve got a company bank account with a high street bank you’re going to be earning negative interest. So the idea of putting your balance sheet to work a bit harder is quite appealing,” he says.

As ever, ensuring that all clients’ eggs are not in one basket will be paramount in such situations.

Losing interest

One initiative that was previously predicted as a game changer for P2P was the Innovative Finance Isa. Introduced in April 2016, the IFISA enabled peer-to-peer lending to be accessed in a tax-efficient wrapper for the first time. Rates on offer from such propositions extended all the way up to 13 per cent, suggesting the risks involved in P2P may be greater than some claim.

Take-up rates began at very low levels, but £290m was invested during the 2017-18 tax year, a sharp uptick on the £36m invested in the Isa’s first 12 months of existence.

Mr Handfield-Jones says: “The first year was a little bit underwhelming. The year just gone has been much stronger, and we expect this year to be double or triple what we did last year.”

He adds the first-year results could largely be attributed to the lack of providers in the market. Low savings rates remain the most obvious way in which providers can attract investors, especially as cash Isas can be transferred without the need for new funds to be committed. But consumer’s love affair with cash, regardless of its suitability, is proving difficult to change.

“You’re seeing solid adoption, but in the context of seeing £40bn into cash Isas it’s still a drop in the ocean. And that’s where the opportunity is – you’re talking about hundreds of millions of pounds of lost interest in the UK,” Mr Handfield-Jones adds.

That is a problem faced by the investment industry more generally. But with lending platforms having yet to experience real hardship, the question of whether P2P is a suitable replacement may not be answered until the next economic downturn.

Source: FT Adviser

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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.