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FCA restricts P2P lending in UK to retail investors

By Marianne Curphey

New retail customers will only be allowed to invest 10 per cent of their investable assets into a P2P product

New rules which restrict Peer to Peer (P2P) lending for retail investors have come into force following a number of high profile company collapses.

In effect, it means P2P lenders will have to be able to show evidence that their marketing material is a fair reflection of risk and reward, and that they do not market the product to investors who are inexperienced.

Retail customers who are new to the P2P market will only be allowed to invest 10 per cent of their investable assets into a P2P product from today.

The new rules, introduced by the Financial Conduct Authority, the City watchdog, mean that investors cannot put more than 10 per cent of their assets into the sector. Those companies and platforms which sell P2P products must ensure investors have sufficient knowledge and experience of P2P investments before allowing them to invest.

The FCA's intervention followed the high-profile collapse of P2P property lender Lendy in May, which left investors £152m (€180m, $200m) out of pocket. It emerged last week that funds recovered during the administration process will be shared with the firm's creditors.

The move by the FCA is aimed at ensuring that retail investors do not take on excessive amounts of risk when taking part in P2P lending, which involves lending money to individuals or businesses through online services that match lenders with borrowers. While they have a large number of institutional investors, P2P lending has recently become popular with retail investors because they offer much higher interest rates on money lent than can be achieved through a savings account with a high street bank.

However, the potential return comes at a much greater risk than a retail savings deposit, and the FCA has acted to ensure that retail investors do not take on too much. The investment restriction will not apply to new retail customers who have received regulated financial advice.

Potential investors who have not received financial advice will have to self-certify and face questions over their experience of the product.

Christopher Woolard, Executive Director of Strategy and Competition at the FCA said when the changes were announced in June 2019: “These changes are about enhancing protection for investors while allowing them to take up innovative investment opportunities. For P2P to continue to evolve sustainably, it is vital that investors receive the right level of protection.”

The new rules cover:

• More explicit requirements to clarify what governance arrangements, systems and controls platforms need to have in place to support the outcomes they advertise, with a particular focus on credit risk assessment, risk management and fair valuation practices.

• Strengthening rules on plans for the wind-down of P2P platforms if they fail.

• Introducing a requirement that platforms assess investors’ knowledge and experience of P2P investments where no advice has been given to them.

• Setting out the minimum information that P2P platforms need to provide to investors.

The FCA said it will continue to closely monitor the P2P market as it develops further.

In effect, it means P2P lenders will have to be able to show evidence that their marketing material is a fair reflection of risk and reward, and that they do not market the product to investors who are inexperienced.

FURTHER READING: China cracks down on corrupt P2P lenders

FURTHER READING: P2P lender Zopa close to securing 130m funding to become a retail bank

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