On 4 June 2019, the Financial Conduct Authority (FCA) published Policy Statement (PS19/14) setting out final rules on loan-based (or ‘Peer-to-Peer’) and investment-based crowdfunding platforms and providing feedback to Consultation Paper (CP18/20) (Policy Statement). The Policy Statement primarily focuses on Peer-to-Peer (P2P) platforms, which are platforms that match potential investors with borrowers.
The new rules
The new rules aim to improve standards in the sector and protect investors, without however stifling innovation. The FCA adopted most of its original proposals in CP18/20, while providing clarifications where necessary to enhance regulatory certainty. In brief, the new rules relate to the following:
- Risk management framework – P2P platforms must put in place an appropriate risk management system to assess and price the credit risk of the loans that are listed on their platform. The Policy Statement clarifies the rules relating to risk management for the basic pricing of a loan as well as additional requirements for more complex models.
- Governance – There are new requirements relating to the establishment of independent risk management, internal audit and compliance functions. The Policy Statement also clarifies that the development and oversight of the risk management framework should be the responsibility of a person approved for a senior manager function under the Senior Managers and Certification Regime (SMCR), such as a director.
- Marketing restrictions – In general, P2P platforms may provide information on specific risk characteristics and investments offered. However, the new rules impose restrictions on ‘direct offer financial promotions’ to retail clients, which cover, for example, the provision of details on how to make an offer or application. For instance, these communications can only be made to certain types of retail investors (certified or self-certified ‘sophisticated investors’ or certified ‘high net worth investors’) or otherwise they should be subject to a 10% of net investible assets cap.
- Appropriateness assessment – P2P platforms must make an appropriateness assessment before an investor can submit an instruction to invest. The FCA has provided specific guidance on the risk factors to be covered in this assessment.
- Wind-down arrangements and the resolution manual – P2P platforms must have in place wind-down arrangements to ensure continuity of the contracts they facilitate should they cease their operations. They must also produce and keep up-to-date a ‘P2P resolution manual’ that would assist resolution in the event of insolvency.
- Minimum disclosure requirements – P2P platforms should provide investors with information about the role of the platform, the provision of any contingency fund, the practical impact of providing direct loans to borrowers under a P2P agreement and information about the investment.
- Mortgages and home finance – Where P2P platforms facilitate home finance products and at least one of the investors is not required to be authorised as a home finance provider, they will be subject to a number of rules under the FCA’s Mortgage and Home Finance: Conduct of Business sourcebook (MCOB).
The change which is expected to have the biggest impact is the restriction on retail investors – capping their investments to 10% of their investible assets. This could have a significant impact on businesses whose platform focuses on retail investors, both in terms of added compliance burden and potentially discouraging investment from retail investors.
The new rules will apply to P2P platforms from 9 December 2019, with the exception of the rules relating to home finance products. Those came into effect on 4 June 2019.