The Financial Conduct Authority is bringing in new rules to regulate the peer-to-peer sector just a week after Lendy called in administrators.
The regulator is putting a limit in place so that retail investors can only invest a maximum of 10% of their portfolio in peer-to-peer. This will stop investors “over-exposing” themselves to risk, the FCA says. This restriction will not apply to retail customers who have received regulated financial advice, however. Where investors have not received advice, P2P platforms will have to assess customers’ “knowledge and experience” of peer-to-peer investments.
The FCA had been widely expected to bring in these rules after warning of the risks in April. It said at the time that investors often do not know what they are putting their money into and they may not be covered by the Financial Services Compensation Scheme (FSCS).
Christopher Woolard, executive director of strategy and competition at the FCA said: “These changes are about enhancing protection for investors while allowing them to take up innovative investment opportunities.”
AJ Bell’s personal finance analyst Laura Suter said the industry believes that the 10% limit “is arbitrary and hard to enforce, but the regulator is pressing ahead regardless”.
She added: “The flood of money to peer-to-peer in recent years has placed a spotlight on the sector, but it’s baffling that this limit is in place for peer-to-peer but not for other high-risk investment areas, such as cryptocurrencies, for example.”
Balancing Act
The FCA is trying to strike a tricky balance between “investor protection”, which is one of its statutory goals, and encouraging innovation in a fast-growing investment area – the rules are “designed to prevent harm to investors, without stifling innovation”.
Rhydian Lewis, chief executive at P2P platform RateSetter, said: "The limit on savers’ first investment is unnecessary and just patronises normal people. But the other aspects of the regulation mean savers can invest with confidence that P2P lending is particularly well regulated and here to stay."
With the collapse of Lendy fresh in regulators’ minds, the FCA has set out minimum information that peer-to-peer lenders need to give potential and existing customers. Neil Faulkner, founder of P2P comparison site 4th Way, said when news of Lendy’s collapse emerged: "Lendy was notorious in the industry for providing very little information about its people, processes and performance. P2P lending and other investors can learn lessons from this."
It is understood that there were more than £160 million of outstanding loans on the platform with more than £90 million in default. The new FCA rules will also cover how collapsed firms in the sector are dealt with by regulators.
The regulator is requiring firms to be more explicit about how they can achieve their investment goals, with a particular focus on governance, risk management and how peer-to-peer loans are valued.
How Does P2P Work?
Investors making loans to individuals or companies through a middleman website or platform.
The Government responded to the growing demand for peer-to-peer products by launching the Innovative Finance ISA in 2016. This allows investors to gain returns free of capital gains tax and income tax. But crucially, P2P does not offer the same capital protection of a Cash Isa, where up to £85,000 is protected in the event of a firm going under. This limit was raised under the FSCS after the credit crunch after a number of savings such as Northern Rock and Bradford & Bingley ran into trouble.
Many investors in London Capital Finance, a mini bond firm that collapsed this year, believed that their money was protected under the FSCS. While these were not peer-to-peer loans, the scandal – which has prompted an investigation into the FCA – highlights the issues over the marketing of investment products and whether they are suitable for investors.
