Three times the FCA has unfairly labelled P2P lending as ‘high risk’

Peer-to-peer lending has been lumped together with high-risk investments yet again by the Financial Conduct Authority (FCA), here are three other times the sector has been bitten by the City watchdog.

The FCA published proposals last week to strengthen its financial promotion rules for high-risk investments.

It questioned whether marketing restrictions and rules on financial promotions were tough enough for what it described as high-risk investment products such as mini-bonds, the cryptoassets market and P2P lending.

P2P lending of course has its risks, as with any products, but some may question why it is being associated with mini-bonds and cryptoassets when it is the only one out of the three that is fully regulated.

Investors have had to complete appropriateness tests to use P2P lending platforms since December 2019.

Tougher wind-down rules were also introduced and that has seen firms such as Growth Street and Orca close in an orderly fashion.

Investors are still awaiting money back from the collapses of Collateral, Lendy and FundingSecure but these lenders fell before the 2019 regulations came in and it is questionable whether tougher rules would have prevented their failures.

The P2P lending sector has been here before though despite persistently low levels of complaints about the product.

Here are three other times P2P lending has been branded alongside high-risk and unregulated products.

Innovative Finance ISA warning

The FCA chose the final days of the 2018/2019 tax year to issue a warning about investing in Innovative Finance ISAs (IFISAs).

The regulator said it has seen evidence that IFISAs are being promoted alongside cash ISAs and urged consumers to “carefully consider where their money is being invested” before purchasing the “high risk” product.

P2P lending platforms criticised the FCA’s comments, arguing it does not differentiate between the various types of P2P lending, some of which are less risky than investing in stock markets.

Google ads

The City regulator came under fire in February 2020 for spending money on Google adverts to warn consumers about “high risk” investments such as P2P lending.

The search term ‘ISA’ brought up an FCA advert that links to a webpage called “high return investments”.

“We have seen too many examples of consumers searching online for high-return savings and investments, investing in high risk investments and then losing all their money,” the FCA warned.

“If high returns are being promised or even suggested, then this means there are higher risks associated with the investment.”

P2P was listed as an example, alongside other types of investments deemed as high risk by the regulator such as cryptoassets and mini-bonds.

Mini-bonds ban

The collapse of London Capital & Finance has shown the perils of a lack of mini-bond regulation.

No-one would argue against the FCA’s ban on retail investors putting money into the product.

However, many in the P2P lending sector were perplexed when the FCA extended the scope of the ban to include listed bonds with similar features to speculative illiquid securities and which are not regularly traded.

The UK Crowdfunding Association (UKCFA), which represents a number of equity and loan-based crowdfunding platforms, said that the new proposals “will have little or no effect” in stopping the marketing of unregulated mini-bonds to retail investors.

“Instead we believe that the proposed permanent ban is unnecessarily damaging to legitimate regulated crowdfunding firms with proven track records, who were some of the first to whistleblow to the FCA about the practices of these unregulated firms as they emerged over the last few years including meeting directly with the chief executive of the FCA in summer 2019,” the UKCFA said.

P2P lending has always welcomed regulation and adapted to new rules.

Platforms will now prepare for the next hurdle the FCA presents.