Secondary markets under scrutiny as FCA crackdown continues
Peer-to-peer lending platforms must ensure that all secondary market transactions are priced fairly or risk losing their secondary market privileges, the City regulator has warned.
In a 25 May letter to the board of directors of P2P lending platforms – which has been published today – the Financial Conduct Authority (FCA) laid out its concerns around the management of P2P secondary markets.
Andrew Kay, head of department, retail lending supervision at the FCA, pointed out that some platforms use their discretionary powers to transfer the loans of existing clients to new clients wishing to invest.
For example, an investor may not be allowed to choose which loans to sell but will indicate what monetary amount they wish to sell, and the platform then decides which loans to try to sell up to the stated amount. The platform also has a significant role in pricing the loans when these change hands.
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“In practice, this has often resulted in a slower release of early exit requests,” Kay wrote.
“However, given the impact of Covid-19 on borrowers’ creditworthiness, there is a real risk that firms might be either unable to accurately price loans, or incentivised to transfer loans from one client to another at prices that do not reflect the risk profile of the loan.
“We will continue to intervene should we see failures in this regard,” he added.
The FCA used the letter to remind firms that its rules state that “where a P2P firm that determines the price of P2P agreements is facilitating an exit for a lender before the maturity date of a P2P agreement, it must ensure that the price offered for exiting the P2P agreement is fair and appropriate”, and “that a platform must review the valuation of each P2P agreement where it is facilitating an exit for a lender before the maturity date of that P2P agreement.”
If a platform cannot comply with these requirements, they must suspend secondary trading.
Elsewhere in the letter, the FCA encouraged P2P platforms to prioritise liquidity monitoring as a part of their wind-down plans, in order to be able to quickly identify any potential cashflow triggers which could impact on the availability of the business.
“Our recent supervisory work leaves us generally dissatisfied with the wind-down plans that we have reviewed,” Kay said.
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“All had assumed a voluntary wind-down, and none had adequately identified the triggers that might realistically allow for a solvent wind-down to be invoked.
“Additionally, where a firm’s surplus liquid resources are forecast to be lower than the total net costs of wind-down (including any ‘buffer’), you should rectify this immediately and provide evidence of how you have done so to the FCA.”
Platforms were given three weeks, starting 25 May 2021, to confirm to the FCA the amount of money that has been ringfenced to adequately fund a wind-down, and an explanation of why this amount is appropriate.
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