City watchdog readies to launch a crackdown on peer-to-peer lending

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The FCA wants to make it easier for investors to understand the risks (Source: Getty)

The Financial Conduct Authority (FCA) is readying to launch a review of peer-to-peer (P2P) lending, with the aim of standardising practice between platforms to protect investors.

The FCA has been working on understanding issues in the P2P market after it put out a call for input last year, which found that it was difficult for investors to understand the differences between platforms and the risks they were taking.

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It said it would put out a consultation this year on new rules, which City A.M. understands is still on course to be published before the end of the year.

“I think the review is necessary, because we've seen a lot of issues in the industry over the years. Another notch up on control by the FCA would potentially be a good thing,” said Stuart Law of lender Assetz Capital.

“Some lenders have definitely treated the investors like a pool of money to be invested as they see fit – sometimes doing nothing like what the investors thought they would be investing in.”

But Law adds that it isn't just investors who are currently struggling with the system. Lenders too are finding it hard to toe the line and not slip into becoming a bank or a fund, which is made more difficult by the fact that there is very little regulation or legislation which actually defines P2P lending (the practice of taking money from investors to lend to another source).

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“The fewer words in regulation, the harder it can be to comply in some ways because there's less guidance. If the FCA were to publish a review, it would give better guidance,” said Law.

This problem has been hinted at by the FCA itself, which released a letter in February to chief executives of P2P or crowdfunding platforms warning them that they could theoretically be “taking deposits” within the meaning of the law.

If borrowers were to accept this money without the necessary regulatory permission, it would constitute a criminal offence.

Law hopes that the FCA will focus on standardising the due diligence procedures that platforms must perform and making them disclose more of the information they discover to investors, rather than saying that crowdfunding should be limited to sophisticated investors.

“To block investors from one of the few secure and strong income sources would be a mistake,” he said.

Read more:  Why investors should demand even greater levels of disclosure from P2P platforms