P2P: A Brave New World

Since early December 2019, anyone who has tried to invest on a peer-to-peer platform has noticed a string of changes, most notably the introduction of investor categorisation and the requirement to take (and pass) an appropriateness test.

This is due to new regulations from the Financial Conduct Authority (FCA) who are seeking to improve the internal governance and systems of peer-to-peer platforms whilst ensuring that only those investors who understand the features and risks can invest.

However, why have these new regulations been put in place and can they really help put trust back into a sector that has seen its fair share of bad press and insolvencies?

Contrary to popular belief, recent insolvencies within the sector have not caused a knee-jerk reaction at the regulator. These changes have been on the cards for years. If we cast our minds back to the beginning of 2014, we had the UK peer-to-peer market running towards the £1 billion. Peer-to-peer was quickly becoming a household name and there was a lack of consistency in marketing, disclosure and corporate governance.

At that time, the sector was regulated by the Office of Fair Trading and, in mid-2014, the regulatory torch was passed over to the Financial Conduct Authority (FCA). Initially, existing companies received provisional authorisation whilst new entrants had to go through a full FCA authorisation process.

The FCA used this time wisely to understand the peer-to-peer platforms, the investor base and develop a view on whether additional and / or more specific rules would be required. However, as we know over the last 18 months, whilst this was happening, cracks began to form, and this resulted in the failure of a few platforms.

After rounds of consultations, the FCA implemented its new rules for the peer-to-peer sector on 9 December 2019. One of the most visible changes to investors is the need to undertake an appropriateness test.  This has been implemented by the FCA so that only investors who adequately understand the features and risks of each platform and peer-to-peer in general are able to invest.

Looking around the sector, we see some variances in the way that each platform has interpreted and thus implemented the new rules. It will inevitably take some time for conformity to occur across the various platforms. In addition, we see the FCA seeking to clarify and enhance the new rules following a period of review and embedding during 2020.

Ultimately, peer-to-peer lending remains a bigger household name than it was five years ago. The introduction of new rules seeks to ensure it sits alongside historical more traditional investment classes and the key is for investors to assess each platform on its own merits, risk levels and usability.

We see 9 December 2019 as a turning point for a new, more professional, era for peer-to-peer lending with platforms demonstrating increased transparency, additional safeguards to mitigate platform risk and more accountability on the part of the individuals running p2p platforms.

The future looks very green indeed.