New FCA Laws on P2P Investment: What Are They and What’s Changed?
At the end of last year (Monday 9th December), a new set of FCA Regulations were introduced for Peer to Peer lending platforms, requiring a far more robust accreditation process for those looking to invest.
Below Finance Monthly hears from Steve Moss, Founder and CEO at P2P lending specialists Sourced Capital, on the ins and outs of the FCA regulations, the overall plans behind the new rules and what investors can expect when applying for financing.
These stricter onboarding measures now require potential investors to answer a number of questions focused around investment, to ensure they possess the required knowledge to make educated decisions when investing, thus improving the sector for investors from a quality control standpoint and ensuring they receive a greater level of security and protection, a positive for P2P lending industry as a whole.
At our firm we place investor welfare at the heart of their business model and see these regulatory changes as the first step towards a more transparent, investor-friendly sector. We’ve recently invested in a new platform that provides a simpler and easier user experience for customers in anticipation of these industry changes, so that while standards progress, the ease at which someone can invest remains the same.
The platform means that customers can transfer their ISAs online and use it to invest in property instantly with e-wallet control on their integrated dashboard. Investors can also invest with their SIPP or SSAS pension, or regularly with cash. The company also uses regtech processes such as an anti-money laundering check (AMC) and know your customer (KYC) identification checks. The AMC and KYC checks are in place to verify the identity of individuals carrying out financial transactions and screen them against global watchlists.
But while Sourced Capital has worked hard to keep the process as straight forward as possible, these latest changes have still left some investors a little deterred, so what should you expect when tackling these newly introduced questions?
The areas covered to ensure investor knowledge are quite robust and include but are not limited to topics such as: –
- The nature of the client’s contractual relationship with the borrower, and with the platform.
- The client’s exposure to the credit risk of the borrower.
- Their understanding that all capital is at risk.
- The understanding that investments in P2P lending are not covered by FSCS.
- That your returns may vary over time, that entering into P2P agreements or investing in a P2P portfolio is not comparable to depositing money in a savings account.
- That where a platform has not adopted any risk mitigation measures, the extent of any capital losses is likely to be greater than if risk mitigation measures were adopted by the platform, the role of the platform and the scope of its services, including what the platform does and does not do on behalf of lenders.
- The risks to the management and administration of a P2P agreement or P2P portfolio in the event of the platform becoming insolvent or otherwise failing.
While this may sound daunting, the process is designed to really boost the level of investor knowledge and this will be gauged through questions such as:
When Underwriting a Loan for a New Project Sourced Capital will:
❌ Do no Due Diligence at all as Lenders Will Do Their Own Research
✅ Sourced Capital Carries out Due Diligence Internally and Remotely. Though Lenders Are Advised to Carry Out Their Own Research on Every Investment They Make.
How should you manage the risk of your investments?
❌ Put all my money into Peer to Peer Lending
✅ Build a diversified investment portfolio covering many different investment classes after seeking independent financial advice
I Have Invested with Sourced Capital and Received Great Returns, This Means:
❌ I Will Continue to Always Receive Great Returns, My Capital is Not at Risk.
✅ Past Performance of Investments is Not an Indication of Future Performance. Each Investment I Make Should be Considered Individually
These stricter onboarding measures now require potential investors to answer a number of questions focused around investment, to ensure they possess the required knowledge to make educated decisions when investing, thus improving the sector for investors from a quality control standpoint and ensuring they receive a greater level of security and protection.
But are these measures enough?
They are at the very least, a step in the right direction.
The Peer 2 Peer sector has received some stick over the years and as you’ll find with all business areas, there are certain less scrupulous types that sometimes drive this, whilst some of us have been working hard to raise the bar. These latest regulatory changes by the FCA are a positive step in the right direction in terms of improving standards and investor welfare across the board, and the extensive knowledge now required will ensure that investors are far more educated than previously and not only does this help them in terms of the decisions they will make, but it helps improve the quality of the sector as a whole.
Of course, there is always more that can be done and until this is introduced at the top level, it’s the responsibility of us as sector professionals to drive positive change. For example, all our investors get a first charge against the property invested in, which gives a greater level of protection and lowers risk but is something that not all platforms do.
We always recommend that investors only opt for FCA approved companies which again reduces risk, while we also only loan at maximum loan to value of 70%. We also offer all investors the chance to view a project and to learn directly from us which again, is something that other platforms don’t offer, but for us, it provides greater transparency and trust while helping improve knowledge on a particular investment.