Financial watchdog imposes restrictions on peer-to-peer investing

4 June 2019

Retail investors will be restricted to having just 10% of their investments in peer-to-peer (P2P) loans, according to new rules from the Financial Conduct Authority (FCA).

Following a consultation, the City Watchdog has introduced a raft of new rules intended to protect investors in P2P.

The most notable change is the FCA’s new 10% limit on investments in P2P. Retail investors new to the sector will be restricted to having just 10% of their investible assets in P2P loans.

This will not apply, though, for those that have received financial advice.

How the cap will work is unclear at this stage. According to the FCA, industry figures argued that enforcing the cap would require customers to reveal information about their wealth which would be “intrusive and off-putting in an online context.”

Laura Suter, personal finance analyst at investment platform AJ Bell says: “It will be interesting to see how investors have to calculate and declare their investible assets to ensure they don’t exceed the cap.”

The FCA has also announced other measures designed to protect P2P investors, including a requirement for P2P providers to assess investors’ knowledge of the P2P before they invest.

The regulator is also introducing news rules for marketing, requiring providers to clearly spell out the potential risks involved.

Ms Suter welcomes this. She says: “The latest Isa season highlighted the flood of marketing from P2P lenders, some of which made comparisons with Cash Isa rates or didn’t fully highlight the risks involved in the sector.”

As P2P has grown more popular in recent years, with the last quarter of 2018 seeing more than £800 million of new lending from P2P platforms, regulators have been keeping a closer eye on the sector.

Christopher Woolard, executive director of strategy and competition at the FCA, says: “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.”

Untested market

Critics argue the industry has yet to pass the test of time, with only one firm currently in the space – Zopa – predating the global financial crisis.

Rhydian Lewis, chief executive of another of the larger P2P platform providers Ratesetter, comments: “Rather than a 'clampdown' this is a validation of our mission to open the asset class of loans to everyone, not just the rich.

"The limit on savers’ first investment is unnecessary and just patronises normal people. But the other aspects of the regulation mean savers can invest with confidence that P2P lending is particularly well regulated and here to stay.

"No longer can our sector be dismissed as the 'Wild West of investing': the cowboys are being driven out and the regulation is now on a par with mainstream savings and investment choices. We are confident that RateSetter’s growth is set to snowball from here – especially our Isa."

In April the FCA  warned that mini-bonds and P2P loans held within the Isa wrapper are “high risk”.

The warning was issued following evidence that Innovative Finance Isas (Ifisas) are being promoted alongside Cash Isas despite the latter offering far more protection, as the first £85,000 is shielded by the Financial Service Compensation Scheme (FSCS) even if the bank or building society goes bust.

This protection does not apply to mini-bonds or P2P loans. Moreover, whereas Cash Isas are relatively risk-free, aside from capital being potentially eroded through inflation, the same cannot be said for the Ifisa. 

In addition, there has been the recent collapse of a mini-bond run by London Capital and Finance, which promised returns of 6.5% to 8% a year. It went into administration at the end of January, leaving 11,000 investors at risk of losing most of their money as only 20% is expected to be recovered. The mini-bond was available in the Ifisa wrapper.

A month earlier the FCA told London Capital and Finance to withdraw its marketing material, which it said was “misleading”. The FCA has been told by the government to conduct an independent review of the way it handled the collapse, which will consider whether the regulator was too slow to act.

This article first appeared on our sister website Money Observer

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