Regulator wants tougher guidelines for peer-to-peer lenders and crowdfunding sites

The financial regulator has proposed a new set of rules across both P2P and crowdfunding companies. But what does it want to change and how will it affect investors?

The Financial Conduct Authority (FCA) has announced a consultation on a raft of new proposals around the regulation of the peer to peer (P2P) lending and crowdfunding sectors.

Both peer-to-peer (P2P) lenders such as Zopa, Funding Circle and RateSetter and crowdfunding platforms are likely to have to tighten up the way they operate ahead of regulation coming in next April.

Industry figures have already said this could lead to some start-up companies going bust because they’re not able to afford to implement the necessary checks and balances required by the regulator.

FCA proposals

The FCA has said both types of companies will need to adhere to certain standards, such as making sure proper credit checks are made when investors sign up.

But it has initially lumped together P2P companies and crowdfunding platforms in the new proposals when they are arguably very different things.

A spokesperson for Funding Circle said this confusion will be cleared up “over the coming weeks” as “they are two quite separate industries”.

The FCA will announce final measures on 19th December ahead of regulation beginning on 1st April.

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Peer-to-peer lenders

By advertising high returns of 5% and upwards, there is a risk P2P lenders are luring in customers who aren’t aware of the associated risks, the FCA has said in its proposals.

Referring to investors as “savers” is also misleading and “may be problematic” as this kind of investing, where individuals are linked up and the middle man – the bank – is cut out, is more high risk then opening a savings account.

Information about a website, such as its bad debt rates, needs to be clearly presented and risk and warnings must not be downplayed. A "resolution plan" should be set up in case a loan collapses so the lender does not lose out.

There will also need to be a 14-day cooling-off period introduced to give borrowers and savers the chance to opt out of a loan agreement or a second-chance platform to sell on loans.

Many existing companies are already adhering to these standards. RateSetter, for example, has a standby fund which is used to cover payments if a borrower defaults.

Crowdfunding

Crowdfunding, on the other hand, works by connecting groups of people together to raise money for a business.

In return, investors can either be given shares or a cut of future profits.

These companies should only be targeting people who are aware of the "high risks" associated with them, the FCA said. And 'unsophisticated investors' should only be allowed to invest a maximum of 10% of their own savings to minimise potential losses.

Crowdfunding platforms will also need to assess “appropriateness” of an investor before allowing them to put money into the scheme. And if any information across the platform is deemed to be financial advice, the FCA will need to give permission for this to be published first.

In the consultation document, the FCA was at pains to point the high number of start-ups that fail.

FSCS protection

When regulation is bought in, investors in these firms won’t have recourse to the Financial Services Compensation Scheme (FSCS), which covers up to £85,000 of savings held under any one banking licence.

The FCA said “when looking at the amount of loss investors might suffer if a platform failed and the amount that would be covered by the FSCS, it is not clear that there is justification to include them within the FSCS jurisdiction”.

But it also says in practice there might be some money made available in limited circumstances such as if either the platform or the bank in which the money is held failed before the money was invested.

Most P2P lenders already have a safety fund set up which should cover any shortfalls.

Winners and losers

The P2P industry has grown rapidly in the past year and bringing in official regulation will give it more credibility and should further boost customer numbers.

“We very much welcome the FCA’s regulation for P2P lending which we feel will help take P2P to a wider consumer audience,” says Giles Andrews, chief executive and co-founder of Zopa.

“The regulation outlined makes common sense and includes a number of rules that we have in place and already adhere to which is a positive sign,” he adds.

James Meekings, co-founder of Funding Circle, echoed this sentiment: “The industry has been in conversation with regulators for many months and today's outcome is very positive. The FCA has shown foresight in striking the balance between enabling the industry to continue to flourish while ensuring the protection of consumers and businesses."

As the industry grows ,start-up companies have been rapidly appearing and there is some concern, as this sector is currently unregulated, that companies are being set up without proper safety nets in place.

Regulation is set to weed out the companies which aren’t best placed for the P2P market and those which haven’t set up the correct checks and balances.

But by the time it is implemented the FCA will need to have ironed out the proposals and have clear guidelines for both crowdfunding platforms and P2P lenders in place, and ideally clearly differentiate between these two very different areas.

What do you think of these proposals? Too much or too little? Have you invested in crowdfunding projects? Let us know in the Comments box below.

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More on P2P lending and crowdfunding:

Crowdfunding: how to invest in start-ups with as little as £10

LendInvest: the first peer-to-peer mortgage lender

Savers' cash 'under threat at start-up peer-to-peer companies'

FundingKnight: new peer-to-peer lender offering 11.4% returns

Nicola Horlick delivers big boost for crowdfunding