Following on from the draft consultation (CP18/20) the FCA, and sitting alongside the final rules on creditworthiness (PS18/19), both of which were issued last summer, the P2P sector has been waiting on tenterhooks to see the full breadth of change when the FCA announces the changes across all the rules that apply to the sector.

1. PS 19/14
July 2019
The FCA tightens grip
on the P2P sector

2. What does PS19/14
mean for the
sector?

3. • Following on from the draft consultation (CP18/20) the FCA, and
sitting alongside the final rules on creditworthiness (PS18/19), both of
which were issued last summer, the P2P sector has been waiting on
tenterhooks to see the full breadth of change when the FCA
announces the changes across all the rules that apply to the sector.
• On 4 June 2019 the policy statement confirming the position,
PS19/14: Loan-based (‘peer-to-peer’) and investment-based
crowdfunding platforms: Feedback to CP18/20 and final rules, was
published. It sets out are series of significant changes for the sector
that P2P firms need to get ready to embrace.
Introduction

4. • The days of “light touch” regulation for the P2P sector are well and
truly over. The changes span all areas of platforms’ business and in
many places are more prescriptive than existing rules for other
sectors, and at least bring P2P lenders up to the same degree of
regulation.
• That’s not entirely bad news as this provides an opportunity to truly
understand what the FCA expects of firms, now that the regulatory
has taken the time to fully look under the bonnet of the industry, which
hopefully brings to an end a period of uncertainty and constant
iterations to adjust to changing requirements shared by supervisory or
authorisations staff on a case-by-case basis.
Introduction

5. • At the heart of this regulatory change, is something easily understood
and explainable. The FCA states that it aims through these new rules
to ensure that enhance investor protection across the sector. It
therefore comes as no surprise that some of the key changes include:
increased disclosures to investors, effective risk management
framework, marketing restrictions and, quite controversially for some,
changes to appropriateness checks.
• The deadline to implement changes is 9 December, which of course is
the same as the first SM&CR implementation deadline. Below we
highlight some key changes P2P platforms should start implementing
now.
Introduction

6. we sought to develop a regulatory
framework that balanced the need to secure
an appropriate degree of protection for
consumers with a desire to ensure that the
market could continue to develop and
support competition through, for example,
innovation.
FCA, PS19/14

7. Marketing and
Appropriateness

8. • One change that has been subject to much debate is the requirement
for platforms to carry out an appropriateness assessment which helps
determine a client’s knowledge and experience of the P2P investment
before the platform can allow a client to invest. This should be done if
a client you do not have confirmation that a retail client is being
advised.
• Platforms will need to consider a range of questions which will help
assess the investor’s understanding of risk. This includes their
exposure to the credit risk of the borrower, their capital being at risk,
illiquidity and risk management and administration of a P2P
agreement, FSCS cover, insolvency risk and other matters.
•
• What must be covered is far more prescriptive that we have seen
before but the principle of what is to be achieved remains. Critically, it
is not sufficient for platforms to merely adopt a tick box approach.
Appropriateness

9. • Furthermore, platforms are only able to market to ‘sophisticated
investors’, ‘high net worth investors’, retail clients confirming they will
receive regulated investment advised or who will be certified as a
restricted investor – which means they will not invest more than 10%
of their net investible assets in 12 months following certification. This
10% limit is designed to ensure that less experience customers are
appropriately protected and once they have more experience.
• Additionally, platforms will be able to offer specific details on a P2P
loan for example; the identity of the borrower, target rate, price, term,
risk categorisation and a description of the security interest before a
client has been classified. However, it must not include elements of a
direct offer financial promotion (e.g an application form). The purpose
of this is to help clients get access to more information and distinguish
between a wide range of offering.
Marketing

10. Governance and
Risk Management

11. Governance Arrangements
• Governance is a key regulatory theme of the year with SM&CR on
the horizon for solo-regulated firms. Specifically, for P2P platforms,
the FCA’s new rules seek to strengthen governance arrangements
through requirements to establish independent risk management and
internal audit function and maintain a permanent and effective
compliance function which operates effectively.
• Following concerns raised previously about the proportionality of
such requirements, the FCA has confirmed that platforms will need to
consider the ‘nature, scale and complexity’ threshold when
determining whether these functions should be independent.
• ‘Discretionary platforms’ that choose investor’s portfolio and set the
price of loans are likely to meet this threshold.

12. Risk Management Framework
• Additionally, as firms start making preparations for the biggest
regulatory change of the year- SM&CR it would be important to
consider who has overall responsibility of a platform’s risk
management framework.
• Under new rules, platforms will be expected to give overall
responsibility to an individual for the establishment and maintenance
of a platform’s Risk Management Framework (RMF) and this
individual would need to be allocated to a person approved for a
Senior Manager Function (‘SMF’).
• The regulator does not expect a compliance officer to hold this RMF
responsibility as the function is required to be independent.

13. • Further measures adopted also include, in relation to the pricing of a
loan, platforms:
• Gathering sufficient information about the borrower to make
competent assessment of their risk;
• Categorising borrowers by their credit risk in systematic and
structured ay
• Setting the price of the agreement so it is fair and
appropriate, reflecting the risk profile of the borrower.
• These measures highlight the inadequacy of disclosure and seek to
ensure that platforms price loans fairly and adequately and aim to get
platforms to demonstrate high quality risk management and minimise
risk investors are exposed to.
Risk Management Framework

14. Risk Management Framework
• Practically this may involve demonstrating that a platform uses
appropriate data and has robust modelling to calculate target rates
effectively.
• By using an adequate RMF, the platform should be able to achieve
the rate of return with a reasonable level of confidence.
• COBS 8.12.16 also requires platforms to review the valuation of each
P2P agreement under specific circumstances which include; when a
P2P agreement is originated and where the platform considers the
borrower is unlikely to meet obligations. The list provided is not
exhaustive and the frequency would depend on the platform’s
business model.

15. Disclosures and
Definitions

16. • With a great emphasis on investor protection, it should come as no
surprise that platforms will be required to make additional ongoing
disclosures. Some of these disclosures include publishing ‘outcomes
statements’ which include the expected and actual default rate of all
P2P agreements by risk category, a summary of assumptions used to
determine expected default rates and the actual return achieved.
• Additionally, in relation to contingency funds platforms will need to
include specific risk warnings, for example making it clear that the
operation of a fund does not guarantee payment in the event of
defaults. Platforms will also be expected to publish specific policies
with set disclosures on how the fund works and how it is performing.
Disclosures

17. • The FCA has finalised the definition of default as consulted on in
order to bring more comparability and consistency to the market.
• Under this new definition, a loan will have defaulted when the
borrower is past the contractual payment due date by more than 90
days, or 180 days for property loans.
• If a loan is likely to default, a platform should not wait 90 days (or 180
days for property P2P loans) before revaluing it and disclosing details
of that loan in its ongoing disclosures to investors.
Definition of default

18. Next Steps
You have until 9 December to
implement the changes in
PS19/14.
Much of this is worth doing in
conjunction with your SM&CR
implementation as some
policies and processes will be
affected by both regime
changes.

19. We use the word ‘partner’ to refer to a member of the LLP or an employee
or consultant with equivalent standing and qualifications.
Do get in touch if
we can help!
Bates Wells Compliance
Bates Wells & Braithwaite London LLP
10 Queen Street Place
London EC4R 1BE
Bateswells.co.uk
Tel: +44 (0) 20 7551 7777