P2P Lenders Under Watch

The Financial Conduct Authority (FCA) has recently issued two portfolio letters that serve as a stern call action, specifically to loan based Peer-to-Peer (P2P) lenders and to investment based crowdfunding platforms (IBCF). Concerning the IBCF letter there is a demand for a rigorous understanding of business models and a strategic response to identified harms, including:

1. High Risk Investment Scrutiny: Platforms must assess any developments related to high risk investment repercussions, drawing on insights from PS22/10 to distinguish between exemplary and substandard practices.
2. Trading Venue Vigilance: There is an unequivocal expectation for platforms to exercise vigilant oversight over ‘bulletin boards’ and secondary markets, ensuring a clear demarcation remains between these platforms and a multilateral trading facility.
3. Financial Promotion Prerequisites: Firms wishing to continue utilising financial promotions must proactively secure the necessary permissions before the deadline of 6 February 2024, to benefit from transitional provisions.
4. Public Offer Platform Oversight: Operators of crowdfunding platforms must brace for the FCA’s authority to impose bespoke regulations on public offers of securities not listed on public markets, necessitating rigorous due diligence to safeguard against fraudulent activities.
5. Uncompromising Consumer Duty Compliance: The Consumer Duty stands as an unequivocal mandate. All firms are expected to have fully embedded this into their operations, with further elaboration on this to follow.

The FCA underscore an era of heightened accountability and precision in regulatory compliance, compelling platforms to fortify their operations and safeguard the interests of the investing public.

Both letters share similar messaging, however with particular focus to the second portfolio letter, the predominant message is to outline potential consumer and market harms arising from P2P lenders’ business models and to communicate strategies for mitigating such harms.

This letter is indicative of future supervisory engagement, and as such the FCA will evaluate if firms have taken appropriate actions to protect consumers and markets from these harms, using data from regulatory returns, direct information requests, and intelligence to identify high-risk firms.

Key Areas of Focus for P2P Firms:

The FCA is assessing the adherence to FCA PS22/10, which was introduced to improve the customer journey of restricted mass market investments, including P2P agreements. Broadly, the requirements contained in the policy statement are aimed at:

• Enhancing rules for high risk investments and firms approving financial promotions;
• Strengthening risk warnings, banning investment inducements;
• Introducing a cooling-off period and other positive friction measures; and
• Improving client categorisation and appropriateness testing.

in light of the review of implementation, firms are expected to review FCA findings and adopt good practices to improve consumer understanding and outcomes. The FCA will actively ensure compliance with the new rules.

Consumer Duty:

The Consumer Duty (Effective from July 2023) element of the letter describes how the FCA will supervise firms in the P2P sector. Firms are expected to prioritise consumer needs, ensuring good customer outcomes aligned with the four Consumer Duty outcomes (consumer understanding, products and services, price and value, consumer support).

The FCA reminds firms that it will use Consumer Duty to intervene against potential or occurring harms, supplementing regulatory returns with data requests to monitor firms’ compliance. This comes in the wake of consumers making an increasing number of complex decisions about how they invest long term savings for life events and in building support for later life. As such firms must ensure investors understand key aspects of their investments, including risks including liquidity issues, capital loss potential, and lack of Financial Services Compensation Scheme (FSCS) protection. Investors should be well informed about the due diligence conducted on the investment platform.

Firms will need to thoroughly assess borrowers, loan purposes, and any collateral, ensuring the investment is appropriate for retail investors. Complete and accurate information is crucial for informed decision-making. The FCA highlights the need for transparency and careful risk management on platforms offering loans to interconnected entities. Platforms must clearly justify their promotion of such loans and effectively manage conflicts of interest to prevent harm to investors. This is especially important in managing concentration risk and potential losses from defaults in connected loan portfolios, applicable to both selective and portfolio-based investment platforms.

Wind-Down Plans and Liquidity Monitoring:

The regulator reminds firms of the importance of having robust wind-down plans, including effective triggers and ‘liquidity buffers’ for an orderly wind-down. Annual assessments of liquid resources and wind-down plans are required, ensuring readiness for an orderly wind-down if necessary.

The FCA will review firms’ wind-down plans and may require firms to make additional capital injections or restrict new retail investor loans if preparations are inadequate.

Self-Certification Attestation: Firms are asked to submit a formal statement, confirming compliance with the above actions, identifying senior accountable individuals, and providing the FCA with updates.

Preparation is essential:

Finally, the FCA emphasises the growing significance of data in its supervisory approach and plans to enhance its sector-specific data collection. Similar to other areas, the FCA will issue data requests to firms, complementing standard regulatory returns. This additional data will aid better monitoring of firm behaviours and business models, identifying anomalies, and assessing those posing the highest risk of harm. This strategy aims to detect potential issues earlier, enabling swifter and more decisive interventions when necessary.

In meeting the specifications set out by the FCA, Objectivus is positioned to enable your firm to meet the obligations established by the regulator. As such should you require assistance on any of the areas covered above, we encourage you to reach out at info@objectivus.com