Money allocated by new retail investors into peer to peer platforms (P2P) in the UK is set to be capped by the FCA, as part of fresh efforts to support the market while protecting consumers.
The regulator has confirmed its plans to limit the amount fresh investors can put into P2P loans to 10 percent of their investable assets. The only exception to the rule will be if they receive regulated financial advice before engaging in P2P lending.
P2P lending is a system which offers savers aiming for higher returns than conventional saving accounts the chance to lend to companies and individuals looking to borrow money.
The decision proceeds previously reported problems in the P2P lending industry, such as Lendy entering administration with £165 million in outstanding loans, despite the group receiving full FCA approval.
Interest in P2P lending has soared in the past decade, with P2P companies lending a record £6.1 billion last year. However, concerns have developed at the FCA about the amount of risk inexperienced investors are attempting to take on.
The new cap will come into effect on 9 December 2019. Alongside the new limits, there will also be more explicit requirements for P2P platforms to clarify what governance arrangements, systems and controls platforms need to be in place to support the outcomes they advertise. This will include a particular focus on credit risk assessment, risk management and fair valuation practices.
The rules on winding down P2P platforms if they fail will also be toughened, and the platforms will be required to assess investors’ understanding of P2P investments if no formal advice has been given to them. P2P platforms will also have a minimum information requirement to provide to investors about its business.
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. For P2P to continue to evolve sustainably, it is vital that investors receive the right level of protection.”
Laura Suter, personal finance analyst at investment platform AJ Bell, was unconvinced that the specific focus on peer to peer lending and the cap on investments was the right course of action.
She said: “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.” the decision to full explain the potential risks involved in peer to peer lending.
Nevertheless, Ms Suter praised the FCA's efforts to highlight the risks of P2P lending to investors.
She said: “The regulator’s moves to ensure peer-to-peer providers spell out the risks of the investments to customers should be encouraged, particularly looking at how providers manage the risk of a borrower defaulting and how they reach their example interest rate figures. The latest ISA season highlighted the flood of marketing from peer-to-peer lenders, some of which made comparisons with cash ISA rates or didn’t fully highlight the risks involved in the sector.”