The Financial Conduct Authority (FCA) has published interim findings on its consultation into the crowdfunding industry, revealing a number of areas where it wants to enhance investor protection within the loan-based crowdfunding industry. It is important that the regulator is continuing to evolve the regulatory framework for the alternative finance sector, and as an industry leader we have to listen to the FCA’s concerns and think about how we can help protect both investors and borrowers.
In summary, the FCA has found that some investors find it difficult to compare crowdfunding with other asset classes and to assess the risks and returns of individual crowdfunding platforms. Promotions in this space can also fail to be ‘clear, fair and not misleading’ in the regulator’s eyes and for some platforms, operational risks and/or conflicts of interest are not being managed sufficiently.
With the regulator aiming to consult on new rules for the sector in 2017, at LendingCrowd we welcome the FCA’s commitment to bring about best practices in the industry and overall enhance the quality of investor protection. As one of the first platforms to receive full FCA authorisation we know all about the rigours and requirements of regulation, so we are looking forward to contributing more to this process.
The FCA is also concerned about investors being misled and so we work hard to ensure that LendingCrowd investors have access to a wide range of information, including providing guides for lenders on the importance of diversification and understanding risk. Education is critical in P2P lending so we have written on how the concept itself works and the issues and risks investors need to be aware of. Whenever we host a company (i.e. Clear Finance or FastNet Developments) on our platform, we publish information about the borrower and include a guide to our credit bands and what they mean for default rates.
Elsewhere the regulator remarked that it has challenged some platforms to improve their processes for handling client funds. This is one of several areas where we have made significant investment in our infrastructure to ensure we are aiming for best practice. Other areas of focus for the regulator include the role of provision funds, winding down processes and extending mortgage lending standards to P2P in general. At LendingCrowd we don’t have a provision fund and our winding down process includes an agreement with a standby servicing partner to take over management of the loan book if LendingCrowd went out of business. The extension of mortgage lending standards could include the use of stress testing and this is something we already carry out on our loans to understand how they would cope. The fact our loans have fixed rates (they are not linked to the base rate) should offer some protection in these scenarios.
The FCA will continue to consult on potential new rules for the industry and time will tell what they come back with in 2017. While there is room for improvement, it is very positive to see the regulator engaging so closely with the industry in a bid to enhance investor protection. As a fully FCA authorised firm, we have been able to show we can meet high regulatory standards and evolve our business accordingly. We look forward to continuing to work with the FCA and the industry in general to ensure investors receive the protection they need.