Finance watchdog plans tougher rules for UK peer-to-peer lenders to 'strengthen investor protection'

Funding CircleFunding CircleFunding Circle’s co-founders, from left, Andrew Mullinger, Samir Desai, and James Meekings.

Britain’s finance watchdog is proposing tougher rules on disclosure and transparency for peer-to-peer lending platforms, after a 6-month review into the growing industry.

The Financial Conduct Authority (FCA) on Friday released the initial findings of its review into crowdfunding — a term it uses to cover both crowdfunded equity schemes like Crowdcube and peer-to-peer loan providers such as Funding Circle.

The inquiry, launched in July, found that:

  • It’s difficult to compare platforms to each other;
  • Risks are hard to assess;
  • Financial promotions do not always meet requirements to be “clear, fair and not misleading;”
  • Increasingly complex structures are introducing new risks and conflicts of interest;
  • Provision funds, which platforms like RateSetter offer to cover a certain amount of investor losses, “introduce risks to investors that are not adequately disclosed and may not be sufficiently understood by investors;”
  • Wind-down plans, put in place to take care of loans in case firms go bust, are not adequate;
  • Some platforms client money handling standards are not up to scratch.

The watchdog says in its report: “While we have identified some issues about the investment-based crowdfunding market, most of our attention at this time is on issues in relation to loan-based crowdfunding.”

Falling transparency and rising complexity among peer-to-peer lenders is a theme throughout the FCA’s 48-page report. The watchdog writes at one point: “Firms’ desire to maintain confidence in platforms has occasionally led to firms acting in a nontransparent manner, masking true loan performance and exposing investors to risks.”

The FCA highlights intervention by platforms to influence loans it has made and lending to provision funds. The regulator does not name any platforms, but RateSetter has both made an on-balance loan to a business it crowdfunded a loan for and restructured its provision funds to allow bail-ins.

A spokesperson for RateSetter told Business Insider: “We provide more disclosure around our Provision Fund than any other platform, and are proud of its track record of ensuring that no individual investor has ever lost a penny on RateSetter, although of course this is not a guarantee for the future.

“We’ll continue to work with the FCA to ensure that our Provision Fund works in the interests of our investors.”

As a result of its initial findings, the FCA is proposing tougher new rules, including more mandated risk disclosures, strengthening wind-down rules, and restrictions on cross-platform investments.

FCA CEO Andrew Bailey says in an emailed statement: “Our focus is ensuring that investor protections are appropriate for the risks in the crowdfunding sector while continuing to promote effective competition in the interests of consumers.

“Based on our findings to date, we believe it is necessary to strengthen investor protection in a number of areas. We plan to consult next year on new rules to address the issues we have identified.”

The findings also go some way to explaining why Britain’s three largest peer-to-peer lenders — Funding Circle, Zopa, and RateSetter — have yet to be authorised by the regulator. Business Insider reported earlier this week that the platforms were facing delays and a lack of communication from the FCA.

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