🔔 Peer-to-peer lending under the microscope

Crowdfunding, peer-to-peer provider, Lendy, collapsed into administration at the end of May this year, leaving many anxious customers unsure of whether they will get their money back.

Apparently, more than 20,000 customers have over £150m with the platform which has reportedly been struggling for some time with, according to press reports, more that £90m in default – some of which should have been repaid years ago. Lendy had offered returns of up to 12% on property development loans.

What is crowdfunding and peer-to-peer lending?

The term crowdfunding is used to describe ways in which people and businesses (including start-ups) raise money, typically through an internet-based platform. The platform matches those raising money with those seeking to invest.

Loan-based crowdfunding platforms – usually called peer-to-peer or P2P lending Platforms are a way for people and institutions to lend money directly to consumers or businesses, to make a financial return from interest payments and the repayment of capital over time.

This is basically what the banks and building societies do too – but the key difference between savings accounts with banks and building societies compared to P2P lending is that money deposited with the latter is not protected by the Financial Services Compensation Scheme – a critical distinction.

And the concern is that many people who invest into P2P, do not realise the risks involved.

The regulator announces new rules

In the wake of the worrying news surrounding Lendy, the FCA last week confirmed that it will be introducing new rules for the industry, including one that will place a 10% limit on the amount of P2P investments that ordinary investors can hold in their portfolios.  This is designed to protect new or less experienced investors and as a result will not apply to new retail customers who have received regulated financial advice.

The FCA confirmed that, following a long consultation, a number of new requirements for the sector will be imposed, which Christopher Woolard the FCA’s executive director of strategy and competition says, is to “enhance protection for investors while allowing them to take up innovative investment opportunities”.

Other rules being introduced include:

• More explicit requirements to clarify what governance arrangements, systems and controls that 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. 
• Introducing a requirement that an appropriateness assessment (to assess an investor’s knowledge and experience of P2P investments) be undertaken, where no advice has been given to the investor. We have also provided guidance on what the assessment should include.
• Setting out the minimum information that P2P platforms need to provide to investors.  
• Applying the Mortgage and Home Finance Conduct of Business sourcebook (MCOB) 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.

The new rules will come into force on 9 December 2019, although the final point mentioned above was required to be applied immediately (4th June 2019). It is hoped that these new rules will improve the standards in the sector.

Like anything, there will be good and bad firms in the P2P industry but the bottom line is that this type of investment carries a different risk to bank and building society accounts as your money is NOT covered by the Financial Services Compensation Scheme - and there are no guarantees that the rate you have been promised can be paid.

Having said that, hopefully these new rules will have a positive impact, so that those who choose to include P2P investing, will do so with their eyes wide open.