FCA finalises restriction on P2P marketing and other rules
PS19/14 sets out new rules in relation to loan-based (peer-to-peer or P2P) and investment-based crowdfunding platforms.
The FCA has decided to implement many of the proposed rules as consulted on in CP18/20 and has not made significant changes. The most significant proposal to be implemented by the FCA is the extension of the marketing restriction to P2P lenders (the restriction currently applies to investment-based crowdfunding platforms in relation to non-readily realisable securities). The proposal was largely implemented as consulted but the FCA has provided some additional clarifications and guidance in response to concerns and queries raised by respondents during the consultation process. The restriction is designed to protect new or less experienced investors, without stifling competition or innovation in the P2P market.
The marketing restriction
Under the new marking restriction rules, P2P platforms may only communicate "direct-offer financial promotions" to retail clients that are classified as either:
- certified high-net worth investors;
- certified sophisticated investors;
- self-certified sophisticated investors; or
- investors who are certified as "restricted investors".
Certified high-net-worth investors, certified sophisticated investors and self-certified sophisticated investors are concepts already used by legislation to define who certain fund products can be marketed to. These are generally seen as restrictive and it can often be difficult to find persons who are willing to make the necessary certifications on behalf of clients.
A certified restricted investor is also derived from existing FCA rules in respect of the promotion of non-readily realisable securities and is one who has signed a declaration that they have not and will not invest more than 10% of their net investible assets into P2P loans (or similar products) in the relevant 12 month period. The FCA has however clarified in the policy statement that investors can re-classify as sophisticated investors (thereby removing the 10% investment limit) when they have made two or more P2P investments in the past two years (as they will be considered to have more experience in this area).
Additionally, where no advice is provided to a retail client, the firm must test the investor's investment knowledge and experience by carrying out an appropriateness assessment in accordance with the rules in the Conduct of Business Sourcebook (COBS). The policy statement and final rules provide more information and guidance about what such an appropriateness assessment should include.
However, the final rules do provide some leeway for firms. The FCA has clarified that P2P platforms may provide prospective investors with certain information in their marketing materials before they go through the client classification process, provided that the defining elements of a "direct offer financial promotion" are not present in that communication. Information that can be provided includes: the identity of the borrower, the price or target rate, the term, the risk categorisation and a description of any securities. In practice, P2P platforms should be careful that communications do not contain details of how to apply or to make an offer or include an application form.
The clear view of the FCA in respect of these rules is that these products may not be suitable for mass retail investors and more diligence is required prior to onboarding new clients. P2P platforms which market their ability to sign up investors quickly and easily will need to think carefully about the client onboarding journey to ensure they can attract new customers whilst ensuring compliance with the new rules. However, in many cases firms are already performing these activities and it may be that the new rules can be accommodated through tweaks to current processes and a documentation exercise in order to ensure that full compliance can be demonstrated. The benefit of the FCA having aligned the new requirements with pre-existing regulatory concepts and definitions means that best practice approaches and guidance from other industries (particularly fund management) can be leveraged by P2P participants.
Alternatively, P2P platforms will be able to communicate a direct-offer promotion to a retail client if that client has confirmed, before such a promotion is made, that they have received regulated advice or investment management services from an authorised person in relation to the P2P investment promoted.
The FCA stated that the marketing restriction proposal generated the most feedback with some respondents arguing that a restriction was disproportionate. The FCA did consider applying the marketing restriction in a targeted way to those platforms with the most risky investment strategies, as suggested by some respondents. However, this was ultimately considered to be unworkable for a number of reasons, including that it would be a complex and resource intensive approach and could also create regulatory uncertainty.
In addition to finalising the marketing restriction, the policy statement also confirmed that the FCA is:
- introducing more explicit requirements to clarify what governance arrangements, systems and controls platforms need to have in place to support the outcomes they advertise;
- strengthening rules on plans for the wind-down of P2P platforms;
- setting out the minimum information and disclosure that P2P platforms need to provide to investors; and
- applying the Mortgage and Home Finance Conduct of Business sourcebook (MCOB) and other handbook requirements to P2P platforms that offer home finance products, where at least one of the investors is not an authorised home finance provider.
The new rules and guidance come into force on 9 December 2019 (the same implementation date as SMCR for solo-regulated firms) except for the application of MCOB to certain P2P platforms, which applies with immediate effect.