Guest Blog: Peer to Peer Lending and FCA Regulation


What does the future of P2P hold?

Assetz Capital is a peer-to-peer (P2P) lending platform, providing a link between investors and borrowers, providing finance to small and medium sized enterprises and funding property developers. Andrew Holgate, Founder and Director of Assetz Capital Group, has many years experience in insolvency and helping business manage their debt and improve profitability. His knowledge in this field is vast, and he has kindly provided us with answers to a few questions below on the FCA PS14/4 Regulation and how it impacts the P2P community. The Regulation was introduced on 1st April 2014 to regulate the P2P market.

What is the investor impact of the new FCA Regulation?

On the surface of it, the impact for investors is minimal, and most investors won’t have noticed a substantial change. The rules came into force in April, and directly affect the platforms. The rules chiefly cover business practices in general (more on that later) and marketing. The FCA rules appear to be designed mainly to protect retail investors, and there are lots of rules on how P2P platforms position themselves. These rules are fairly unobjectionable – P2P lenders can’t market their offerings as ‘savings products’, for example, since there’s risk involved, and platforms must be transparent about rates of return, losses etc. Responsible platforms (the vast majority) were doing this anyway, so changes were relatively minimal. On the business practice side, there are lots of stipulations which are in place to ensure business continuity and relative safety for investors. Platforms must have a segregated account for client money, for example, and platforms must also have a plan in place to ensure that investors still receive their interest from borrowers even if the platform itself goes bust.

There were no real surprises and most platforms had been operating in the way that the FCA stipulated anyway, which is a good thing. What the rules should do is stop any new ‘rogue operators’ – it would be much harder now for a platform to start without the proper lender protections in place.

Identifying differences between loan based and investment based crowd funding

There are many differences, but the key distinction is that P2P lending is used to cover loans that are expected to be repaid over a specified period. This compares to what’s usually known as crowdfunding, where investments are either for equity (e.g. 20 per cent of a business), a reward (e.g. a free meal at the new restaurant the investor is funding) or simply for goodwill. The second two are classed as donation-based crowdfunding, and are unregulated.

However, loan-based crowdfunding and investment based crowdfunding are both regulated. Typically, investment-based crowdfunding is in early stage companies – sometimes pre-launch. As a result, it’s expected to be high risk, but potentially very high return – in the FCA’s own words, “it is very likely that you will lose all your money”. For successful investments, there’s no fixed period over which you can expect a return. From an investor’s point of view, loan-based crowdfunding has lower default rates (platforms routinely publish these figures) and investors can expect a fixed return on successful investments.

An update on ISAs: Can they be used as part of your investment portfolio?

According to George Osborne, yes. In practice, no! Although Osborne announced in his budget that it would be possible for investors to include P2P loans in their NISA allowance, it’s not yet possible to do so. This is essentially because it’s so difficult to administer (I could give you lots of information on why, but don’t want to bore you!). As a result, the Treasury has set up a working party to work out the best way to proceed, and P2P lenders – ourselves included – are advising on ways that this could work. We should expect an idea of how the process will work soon, but in practice investors probably won’t be able to take advantage of this until the end of the current tax year.

If you would like to learn more about P2P Lending and Investment join us for the inaugural Peer to Peer Lending and Investment Briefing on 15th October in London, to hear from top UK online platforms, on how investors can capitalise on the opportunities that P2P offers. Visit the website here.

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