The UK financial watchdog is limiting investments in peer-to-peer (P2P) agreements for retail customers to 10% of investable assets.
The changes apply to those who have not invested in the sector previously and are intended to ensure they “do not over-expose themselves to risk”.
They will not, however, apply to new retail customers who have received regulated financial advice.
What is peer-to-peer?
P2P enables people to lend money to individuals and businesses using the platform as a middleman.
The borrower gets a lower interest rate than they would from a bank, while the lender receives a higher rate of return than from a typical savings account.
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.”
Arbitrary limit that is hard to inform
But not everyone agrees.
“Peer-to-peer platforms have been dealt a blow by the regulator today,” remarked Laura Suter, personal finance analyst at investment platform AJ Bell.
“From December, anyone wanting to invest in peer-to-peer will now have to pass a test to show they understand the risks they involved, and new investors will be limited to having 10% of their assets in the sector.
“Providers will also be restricted in how they market products in the future, stopping mass advertising campaigns.”
She added that “the industry argued this limit is arbitrary and hard to enforce, but the regulator is pressing ahead regardless”.
“Investors will now also have to answer questions about peer-to-peer before they’re allowed to invest, to ensure they understand they’re not covered by the Financial Services Compensation Scheme, how the loans work, and the risk warnings,” Suter added.
Balancing two needs
The FCA said it is introducing the rules “to prevent harm to investors, without stifling innovation in the P2P sector”.
In addition to investor restrictions, the 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.
- Applying the Mortgage and Home Finance Conduct of Business (MCOB) sourcebook and other Handbook requirements to P2P platforms that offer home finance products, where at least one of the investors is not an authorised home finance provider.
With the exception of the MCOB rule, which come into effect immediately, platforms have until 9 December to implement the changes.
