In April 2016, when the Innovative Finance ISA was introduced, all firms that were authorised to give financial advice on investments were automatically granted permission by the Financial Conduct Authority (FCA) to advise on ‘peer-to-peer agreements’.
Gillian Roche-Saunders, a partner at law firm Bates Wells Braithwaite, has now urged financial advisers to roll up their sleeves and get to grips with fintech lending platforms in the wake of an FCA consultation into the sector.
In an interview with the Financial Adviser publication, Ms Roche-Saunders said: “If you were looking at the peer-to-peer market I think the key thing to think about is to really understand the model the platform is offering as well as the underlying lending itself.”
She said the range of fintech lending models had been demonstrated in a consultation paper published by the FCA in July. The consultation has now ended, and the City watchdog is aiming to publish new rules for the sector in the second quarter of 2019.
Ms Roche-Saunders, who advises financial services firms on regulatory issues, said: “There are lots of different models. That was something that really came through in the FCA’s paper: some where it’s just one individual lending to another individual, others were it’s far more diversified, almost going into a portfolio where you’re automatically investing across a platform.
“Each of those poses different risks and benefits that I think advisers and investors need to be aware of.”
At LendingCrowd, we enable investors to instantly create a diversified portfolio of business loans with our Growth Account and Income Account. For more sophisticated investors who have the time to hand-pick which businesses they want to lend to, we offer our Self Select Account.
If you invest through LendingCrowd you should understand that, as a lender, your capital is at risk. LendingCrowd and its products are not covered by the Financial Services Compensation Scheme.
The fintech lending market has evolved rapidly since the first platform launched in 2005. In the UK, the sector has been overseen by the FCA since April 2014, when it took over the regulation of consumer credit from the former Office of Fair Trading.
The FCA has already introduced clear rules aimed at safeguarding investors. For example, client money must be protected and platforms have to meet minimum capital standards. Resolution plans must also be in place to ensure that, if a platform collapsed, loan repayments would continue to be collected for investors.
In its consultation paper, the FCA set out a number of new proposals aimed at:
- ensuring investors receive clear and accurate information about a potential investment and understand the risks involved
- ensuring investors are adequately remunerated for the risk they are taking
- assessing the risk, value and price of loans, and fair/transparent charges to investors, through transparent and robust systems
- promoting good governance and orderly business practices
- extending existing marketing restrictions for investment-based crowdfunding platforms to loan-based platforms
That last proposal in particular provoked strong debate. It would limit fintech lending platforms’ ability to market to certain investors who:
- are certified or self-certify as sophisticated investors;
- are certified as high net worth investors;
- confirm they will receive regulated investment advice or investment management services from an authorised person; or
- certify that they will not invest more than 10% of their net investible portfolio in peer-to-peer agreements
LendingCrowd founder and CEO Stuart Lunn said: “LendingCrowd has been built on a culture of protecting clients, both borrowers and investors, and as such we have been at the forefront of our industry when it comes to regulation.
“Platforms that have this underpinning should not be afraid of an appropriate level of oversight under an evolving regulatory landscape. Therefore, we are fully supportive of any FCA proposals that seek to enhance investor protection.”