The City watchdog will implement a cap for first time peer-to-peer (P2P) investors as it clamps down on the sector.
The Financial Conduct Authority (FCA) confirmed today that it will introduce a 10 per cent investment cap.
Investors must pass a test to prove they understand the risks involved, the regulator said.
The announcement comes just weeks after property finance firm Lendy collapsed into administration following an investigation by the FCA.
Christopher Woolard, FCA executive director of strategy, said: “For P2P to continue to evolve sustainably, it is vital that investors receive the right level of protection.”
Rhydian Lewis, chief executive of Ratesetter, which is one of the UK’s largest P2P lenders, said the investment limit “patronises normal people”.
However, he added that the rest of regulation will help to clean up the sector.
“No longer can our sector be dismissed as the Wild West of investing,” Lewis said.
“The cowboys are being driven out and the regulation is now on a par with mainstream savings and investment choices.”
Under the new rules plans for failing platforms will be strengthened and providers must offer a certain amount of information to investors.
Funding Circle co-founder James Meekings said: “We welcome today’s proposals. Funding Circle has consistently campaigned for industry regulation that protects consumers and raises industry standards.
“We look forward to working closely with the FCA on the implementation of these new rules.”
Platforms must implement the changes before 9 December.
P2P firms that provide home finance products will be required to apply the Mortgage and Home Finance Conduct of Business sourcebook immediately.