The regulator, the FCA, says it’s concerned that some people may be taking on too much risk when they use peer-to-peer lenders and crowdfunders. Find out why.
What is the problem with crowdfunding and peer-to-peer lending?
Peer-to-peer lenders let people lend money to businesses or individuals and get paid interest. Crowdfunders let people invest in young businesses. This can be done by taking a stake in them (through equity crowdfunding) or lending them money through mini bonds. The regulator, the Financial Conduct Authority, says it’s more concerned about peer-to-peer lending than the crowdfunding market. However, the FCA is worried about several aspects of both types of platform:
- It’s hard for investors to compare one crowdfunding platform or peer-to-peer lender with another – or with other investments because products are complex or not described clearly.
- It’s hard for investors to assess the risks and returns of investing through a peer-to-peer lender or crowdfunding platform.
- Financial promotions may be misleading, unclear or unfair,
- Peer-to-peer lenders and crowdfunders may themselves be complicated in structure, which introduces its own risks and/or conflicts of interest.
Peer-to-peer lenders and debt crowdfunders
The FCA said it was also concerned about some platforms that are not fully authorised. This is a bit tecchie so bear with me… A financial firm must be authorised in order to do certain things that are regulated by the FCA. Crowdfunders and peer-to-peer lenders have to be authorised by the FCA.
However, they can operate under ‘interim authorisation’, while they wait to be fully regulated. The FCA says it has a number of concerns about platforms that are not yet fully authorised. These are:
- Some features may obscure underlying risks or may not be properly understood by investors. For example, provision funds (which are designed to pay out if a borrower goes bust or can’t repay) may leave investors believing that loans are guaranteed.
- Some platforms don’t have proper plans for what happens if they fail, which means the loans wouldn’t be properly managed until they’re paid off.
- Some platforms don’t handle client money as well as they should.
The FCA may introduce tougher rules for peer-to-peer lending and crowdfunding
The FCA is looking to introduce stricter rules in 2017 to address some of these concerns. These could include:
- Imposing a cap on the amount you can invest so people could only lose a certain amount.
- Putting in place extra controls on more complicated business models.
Platforms should be clearer to investors
Another area of concern for the FCA is that some lending platforms are letting institutional investors (such as funds) get preferential treatment when it comes to loans – and the platforms don’t necessarily make this clear to ordinary borrowers.
The FCA says that this is ‘unlikely’ to be compatible with one of its rules which says firms have to treat customers fairly.
Innovative finance ISAs
There was some concern that innovative finance ISAs, which have been launched fairly recently, may appeal to people who trust the ISA ‘brand’ but who don’t fully understand the risks of peer-to-peer lending or crowdfunding. The FCA says it’s not yet seen evidence that people who haven’t invested in crowdfunding before are taking out innovative finance ISAs, but I’m assuming this is something it will keep an eye on. You can read more about innovative finance ISAs in my article called What is an innovative finance ISA? Innovative finance ISAs explained
The FCA says it’s planning to regulate peer-to-peer lenders that offer residential mortgages in the same way as a mortgage lender would be regulated.
What are mini bonds and should you invest in one?
What is crowdfunding and how does it work?
Peer-to-peer savings explained; are peer-to-peer savings safe?
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