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FCA publishes rules for P2P lending
Today the FCA (Financial Conduct Authority) have published the policy statement "The FCA’s regulatory approach to crowdfunding over the internet, and the promotion of non-readily realisable securities by other media". The response was as we had expected. We welcome the majority of these rules, but we had argued that peer-to-peer lending should fall within the remit of the Financial Services Compensation Scheme where the platform itself failed.
The FCA stated:
We received 41 responses to the question we asked about this proposal. Of these, 28 agreed that loan-based crowdfunding platforms should not fall within the remit of the FSCS and 13 disagreed.
Some of the respondents who agreed with our proposal made additional observations:
- Some felt that this situation should be kept under review as, while it is appropriate at present, since the market is embryonic, this may change in the future if loan-based crowdfunding becomes a significant investment for a large proportion of investors
- The fact that a platform is not within the remit of the FSCS must be made clear to investors.
- Platforms should also make clear that un-lent funds are held in a bank account which would be within the remit of the FSCS.
Respondents who said that loan-based crowdfunding platforms should fall within the FSCS remit made the following points:
- Most of these respondents felt that loan-based crowdfunding should be treated in the same way as other investments as this would give additional protection to investors where a platform fails, or if the firm running the platform used client funds for its own purposes, was negligent or committed fraud.
- Others made the point that lack of recourse to the FSCS could reduce new investment.
- One respondent suggested that platforms should be within the FSCS remit if this only leads to a small charge for firms.
- One respondent thought that requiring the firms running platforms to meet minimum prudential requirements seems contradictory to a lack of recourse to the FSCS.
We agree with the respondents who noted that it is important for the regulatory framework to be proportionate, especially while the market is young and growing. Bringing these firms within the FSCS remit would impose additional regulatory costs, which may be quite significant.
We do not consider that it would currently be proportionate to include loan-based crowdfunding platforms within the FSCS remit. As loan-based crowdfunding is not currently within the FSCS remit, we do not expect this to lead to a reduction in new investment. Firms should ensure that investors understand the risks involved.
Other protections that we are introducing – such as the minimum capital standards and the requirement for firms to have arrangements in place to continue to administer loans in the event that the platform fails – should provide adequate protection at this time. We do not consider that it is contradictory for these firms to be subject to some regulatory requirements but not others.
Overall, we believe that the approach we are adopting is proportionate and appropriate for the market and the risks it carries at present.
We have committed to review the crowdfunding market and our regulatory framework for it in 2016 and, at that stage, will consider again whether loanbased crowdfunding should be within the remit of the FSCS.
We hope that the FCA will change its mind, as lenders have lost money when platforms have failed because they were unable to recover payments from borrowers. Retail lenders would be unable to perform sufficient due diligence on the platform itself and if there is a failure this would seriously damage the peer-to-peer lending sector.