Industry blasts proposal for P2P development loan marketing ban

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Peer-to-peer lending platforms, trade associations and other stakeholders have hit back at the Financial Conduct Authority’s (FCA) proposals regarding the marketing of P2P property development loans to retail investors.

The City regulator is considering tougher financial promotion rules for “high-risk” investments, including P2P lending.

It noted similarities between P2P agreements – using the example of a property development loan – and speculative illiquid securities (SISs) and asked whether this should impact the marketing of such products to retail investors.

“Where a P2P agreement has similar features to a SIS (for example where it is a loan to a property developer) there is the possibility for arbitrage,” the FCA said in the discussion paper.

Industry stakeholders submitted their feedback to the FCA ahead of the 1 July deadline. Peer2Peer Finance News understands that the FCA is likely to publish a consultation paper next, although a date has not yet been confirmed.

The 36H Group submitted feedback on behalf of its six member platforms.

Mike Carter, head of platform lending at the 36H Group, said the trade body’s members support the FCA’s work to protect investors from potential harm but were concerned about the impact the proposals would have on the industry.

“Our members are concerned that recategorising P2P property loans as SIS investments will unnecessarily significantly reduce investor liquidity for this product, penalising the platforms which have demonstrated positive investor returns, and could make the retail operations of some platforms unviable,” he said.

“Instead, they believe the focus should be on making sure the risk management framework is adequately implemented at platforms rather than preventing those platforms who have good risk management from being able to offer the product to existing investors as they do currently.”

Read more: FCA urged against P2P development loan marketing ban

36H Group members believe that P2P property platforms are materially different from other lenders that may fall within the SIS category because of the introduction of the risk management framework for all P2P platforms in 2019.

Carter said this framework, if implemented properly, ensures that a platform has skilled staff who know how to originate good quality loans; can assess the risks of the loan and the underlying property development projects; execute lending agreements appropriate for a property loan and take security; and after the drawdown they monitor the loan and if necessary exercise security on behalf of investors.

“Taken together, all of these elements of a risk management framework should minimise potential harm to investors by delivering good loans for investment,” said Carter.

Read more: P2PFN and UKCFA roundtable on regulation

Stuart Law, chief executive of one of the UK’s biggest P2P lenders Assetz Capital, said there are strong controls already in place. He argued that the FCA should focus on supervision, rather than going ahead with these proposals that would lead to the collapse of many platforms that do not have institutional funding to lend if there were a ban on retail.

“I think it’s ridiculous, it’s implying that there’s no due diligence already in place,” he said.

“The FCA should enforce the rules it already has in place to ensure there’s no arbitrage.”

Other P2P platform bosses, including Loanpad chief executive Louis Schwartz and LandlordInvest managing director Filip Karadaghi, similarly expressed concerns about a blanket ban and suggested the FCA should instead focus on the individual platform’s management and processes.

Dena Chadderton, partner at compliance consultancy Adempi Associates, said she was concerned about the FCA’s direction of travel in relation to consumer investing for P2P and the wider alternative investment market.

“The recent consultation paper and interactions by the FCA with our clients, very much point to the FCA increasing the restrictions and/or frictions for consumers to invest in alternative products and that includes P2P development loans,” she said.

The UK Crowdfunding Association (UKCFA) surveyed 2,512 investors on their view of the asset class as part of its response to the FCA and found that the majority have a good understanding of the risks when investing in regulated platforms.

“We took the view that the FCA’s data showed arbitrage was not towards P2P but towards unregulated investments and our own survey of P2P and crowdfunding investors showed that the involvement of a regulated platform appeared to show a good understanding of risk with regulated platforms, so we don’t see the need to apply a marketing ban to P2P platforms,” said a UKCFA spokesperson.


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