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.