Regulation: Raising the bar
Tougher rules on ‘high-risk’ investments – including peer-to-peer lending – are expected next year. Michael Lloyd investigates the prospect of additional regulation…
More regulation is coming for the peer-to-peer lending sector, just two years on from the post-implementation review. In the year ahead, the City regulator is expected to clamp down even harder on the P2P industry, introducing new rules that will make it harder for restricted retail investors to access parts of the market.
And the Financial Conduct Authority (FCA) continues to classify P2P lending as a ‘high-risk’ product, alongside unregulated investments such as cryptocurrencies.
Many industry stakeholders have already sounded the alarm, worrying that the sector may soon be overregulated to the point where it will no longer be a viable investment option for retail investors.
Gillian Roche-Saunders, partner at Adempi Associates, says she would not suggest more regulation for P2P, as more time is needed for the previous changes to be embedded and assessed before further changes are proposed.
“If you were just looking at P2P, we wouldn’t suggest more regulation at present but the FCA’s concerns around retail investments are industry-wide and it is very likely that P2P will be caught up in the planned changes,” Roche-Saunders says.
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In October 2021, the regulator published a three-year strategy to enhance consumer protections and said it is aiming to halve the number of consumers putting money into high-risk investments who indicate a low risk tolerance or demonstrate the characteristics of vulnerability by 2025.
And last month, the FCA said that it expects to publish a policy statement on strengthening financial promotion rules for high-risk investments, including P2P lending, in the second quarter of next year.
Platforms and stakeholders believe the FCA will make it tougher for ordinary retail investors to take part in this asset class, perhaps through additional restrictions or suitability checks, and are worried that this could effectively reduce the number of people who can invest in P2P.
“I think they’ll tighten up the framework and there’ll be more hurdles for retail lenders to jump over in relation to putting money into these so-called high-risk investments,” says Frank Wessely, partner at advisory firm Quantuma.
“We know what the FCA’s targets are in terms of reducing retail investment into high-risk lending opportunities on P2P platforms and I have no doubt this will be a step going forward to the FCA achieving that goal.
“Ultimately it will mean less choice for retail investors if these restrictions come into force as predicted.”
The FCA’s upcoming policy statement on strengthening rules for high-risk investments stems from a discussion paper earlier this year, which also set out proposals for a possible mass marketing ban for P2P agreements which have similar features to speculative illiquid securities.
The FCA noted similarities between P2P agreements – using the example of a property development loan – and speculative illiquid securities and raised the question of whether this should impact the marketing of such products to retail investors. P2P development lending platforms were particularly dismayed by these proposals.
Neil Faulkner, managing director of P2P ratings and research firm 4thWay, does not understand the City watchdog’s thinking when it comes to possible marketing restrictions on P2P property development loans, but warns that this may come to pass.
Read more: What does the future hold for P2P lending?
“Development lending is not the safest form of P2P lending in aggregate, but it has a wide spread of risks, with a large part of the P2P market focused on the safest side of development lending,” he says.
“Despite this, I think there’s a reasonably high risk that the FCA will go ahead with a ban. Once it launches a consultation, it often determines new regulations along the lines it was hinting at in advance.”
Platform bosses and other stakeholders have expressed their concerns about the tightening of the regulatory screw on the sector.
Stuart Law, chief executive of Assetz Capital, says increased retail restrictions will mean more platforms will leave the space in favour of institutional capital and only those that are not as high quality, and thus unable to pass the due diligence of institutions, will remain.
He says that banning the mass marketing of P2P property development loans would lead to the closure of many platforms with no alternative funding, restrict investment options for everyday investors and harm the small- and medium-sized enterprise (SME) housebuilding industry.
“I don’t think it should happen, but I think it’s definitely possible that it could and that would cause immense detriment to the housebuilder industry and investors earning money from that,” Law says.
“I’m worried if the wrong decisions will be made. The reason we’re worried is if we’re put in the same box as land banking and cryptocurrency – if the FCA makes the wrong decision many more platforms will close. There would be big investor detriment if the regulation changed, as it would close a lot of companies.”
However, some platforms are less worried about further regulations, accepting the new rules as a necessary part of doing business.
“I’m not concerned,” says Atuksha Poonwassie, co-founder and managing director of Simple Crowdfunding.
“We know this space is constantly evolving and as long as the proposals or suggestions are not hindering platforms that are trying to do things properly and the conversations happen with operating businesses then it’s an evolving marketplace and that’s okay.”
However, the consensus among platforms and industry stakeholders appears to be that additional rules are not required, as the current legislation is more than sufficient and any more would threaten the closure of platforms.
The UK Crowdfunding Association (UKCFA) has repeatedly argued that additional rules could only serve to push out platforms supplying their loans into the unregulated space or overseas.
Earlier in the year, the UKCFA surveyed 2,512 investors on their views of the asset class and found that lenders investing in regulated crowdfunding or P2P platforms tend to have a good understanding of risk, while many were against the idea of being restricted from seeing certain investments altogether. The industry trade body used this research to respond to the FCA’s discussion paper.
“I don’t understand the need for change,” a spokesperson from the UKCFA says.
“As our research showed, customers of regulated platforms demonstrated a high level of understanding of the risks of the investments they were making and whilst no one is saying it’s a low-risk investment, we don’t think it’s clear to put regulated firms alongside unregulated firms when it comes to considering what’s high risk.
“The UKCFA will continue to argue that classifying investments in this way is not the best approach to encourage better customer outcomes in the retail investment market.”
Earlier this year the FCA wrote to P2P platforms to warn them that all secondary market transactions must be priced fairly. The regulator also used the ‘Dear CEO’ letter to underline the need for a credible wind-down plan.
Read more: Mike Carter vows 36H Group has a future despite Zopa’s P2P exit
Assetz Capital’s Law says both of these have been requirements already and the regulations are “completely satisfactory”. He says the FCA just needs to better monitor and enforce the current rules.
“We don’t need new regulation, we need existing regulation applied firmly and fairly,” he says.
“I still believe regulation is absolutely where it needs to be, it doesn’t need to be worse, it just needs to be enforced. The problems we’ve seen have been down to a lack of oversight.”
Lee Birkett, chief executive of JustUs, agrees that the rules are sufficient and warns of the danger of overregulation, but says that the FCA has ramped up its monitoring of platforms.
“The regulatory bar has been raised considerably and the work they have done is in-depth and is a solid foundation going forward for those that remain,” he says.
“With the amount of work by the regulator over the last few years I’d imagine most would have had an in-depth audit of their financial promotions. There’s plenty of regulation, you don’t want to overregulate it anymore because it will close the sector down.”
Some industry stakeholders have gone further and questioned whether the FCA is up to the job of governing the P2P sector following several scandals such as the collapse of P2P platforms Lendy and Collateral and mini-bond provider London Capital & Finance.
Jonathan Segal, partner and head of fintech and alternative finance at law firm Fox Williams, says the FCA has tightened its P2P platform authorisation process and may be looking to introduce further regulation to “right some of its historic wrongs”.
“The FCA is introducing regulations which will make operating P2P platforms much more difficult, both in sourcing new investors and operating on a day-to-day basis,” he says.
Whether the FCA is looking to introduce further regulation to right historic wrongs or not, P2P platforms are worried about the effect that this will have on an industry that has shown a willingness to adapt to multiple regulatory hurdles, even amidst an economic crisis.
Furthermore, there are whispered concerns that the FCA may not fully understand the P2P sector – as evidenced by the ‘high risk’ label and debate over whether P2P property development loans are speculative illiquid securities.
Stakeholders have told Peer2Peer Finance News that they wholeheartedly believe the rules are sufficient and think the FCA should just monitor platforms better.
Hopefully the FCA will listen to all industry input when it draws up its policy statement. But for now, platforms are waiting with bated breath to find out what the future of the industry will look like.
Read more: Five regulatory changes to expect from the FCA in 2022
