P2P set for regulation

Sam Cordon

October 24, 2013

Consumers who want to invest in small or start-up businesses via crowdfunding platforms will receive clearer information about the business in which they are investing under proposed new rules published today by the regulator.

The changes relate to peer-to-peer lending and equity investment-based crowdfunding, the two types of crowdfunding that need regulatory oversight.

Christopher Woolard, director of policy, risk and research at the FCA, said: “Consumers need to be clear on what they’re getting into and what the risks of crowdfunding are.

“Our rules provide this clarity and extra protection for consumers, balanced by a desire to ensure firms and individuals continue to have access to this innovative source of funding.”

Under the proposed new rules consumers willing to lend money to companies through peer-to-peer crowdfunding websites will receive explanations of the key features of the loans as standard.

They will also benefit from an assessment of the creditworthiness of borrowers before granting credit, and crowdfunding sites or platforms will need plans in place to ensure loan repayments continue even if a crowdfunding company collapses.

A 14 day cooling off period will allow both borrower and lender to withdraw without penalty from the agreement if either changes their mind. New prudential requirements will also be phased in.

The move has been welcomed by the peer-to-peer industry as a positive move which will enhance the reputation of the industry.

Christian Faes, co-founder and director of LendInvest, said: “LendInvest is glad that online P2P lending platforms are going to be regulated by the FCA.

“Regulation is a positive thing for the industry. It ensures that the players in the market are reputable and that appropriate investor protections will be put in place – which at the end of the day will bring about investor confidence in electronic P2P as an asset class.

“The regulation of online P2P trading platforms presents London with the opportunity to be a global player in the rapidly evolving peer-to-peer lending market.

“London is the home of global finance and with a sensible regime for P2P London can be at the epicentre of global financial innovation.”

RateSetter founder and CEO Rhydian Lewis was also pleased with the news: “Today fires the starting pistol on what will be a period of significant growth for the peer-to-peer lending industry. We agree with the FCA’s approach to differentiate between debt and equity crowdfunding models – to reflect the reality that lending is a lower risk investment opportunity – and we are encouraged by the regulator’s view that peer-to-peer lending is likely to continue to grow and provide real competition in financial services.

“Today’s proposals strike a balance between enhanced consumer protection and consumer choice. We’ve campaigned hard for peer-to-peer lending to be brought under the FCA’s remit and are delighted by the draft policy published today.”

Stuart Law, CEO of Assetz Capital,said this could mean consolidation in the industry. Commenting he said: “The FCA’s planned regulation will make the industry far more credible and could wipe out a significant number of P2P lenders in the process.

“Well-established, credible peer-to-peer firms will have no problems in adapting to the new regulations, and I’m confident that we meet or exceed the recommendations already. However, I expect that many small, recent P2P lending platforms won’t survive regulation – it’ll be an enormous drain on resources and a very tough process for them but such guidance and rules are necessary to strengthen the industry further, increasing consumer confidence in the process.

“Moreover, expect to see consolidation in the industry as large, well-established platforms buy up smaller companies which would otherwise be at risk.”

The FCA has also proposed new rules for investment-based crowdfunding which is already regulated.

The paper makes clear the FCA’s belief that these investments should only be promoted to those who understand the inherent risks or have the financial capacity to cope with any losses.

The proposals will make the crowdfunding market more accessible, help foster competition and facilitate access to alternative finance options while also providing additional consumer protection.

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