FCA appropriateness test changes cost impact on P2P lenders

What is happening?

In January 2022, the FCA issued its CP 22/2 consultation on financial promotions for high-risk investments, which includes requirements for peer 2 peer lenders to introduce tougher appropriateness tests and investor self-certification. This is expected to come at a considerable cost to lenders, chiefly in relation to IT upgrades.

The FCA will consider all feedback and, depending on the responses received, will publish a Policy Statement and final Handbook rules on the subject in summer 2022.

How is this happening?

The changes to be introduced include preventing users from retaking an appropriateness test for 24 hours if they fail it and ensuing questions asked in subsequent tests are different. Firms will not be allowed to encourage investors to retake the test if they fail and must instead inform them of the results and give them the option to retake the test or find content about the investment.

The FCA has also proposed introducing an evidence declaration in which investors will be required to state why they meet the relevant criteria, for example by stating their income to demonstrate that they are high net worth. P2P lenders will also have to keep records on details such as how many users have seen risk warnings and sought more information, the outcome of appropriateness tests and investor categorisations.

The FCA estimates in its cost-benefit analysis supporting the consultation that these changes will cost the 41 authorised P2P platforms and 19 investment-based crowdfunding platforms £1.94 million in one-off costs across the sector. This cost is broken down as £19,000 for familiarisation and legal costs, £226,000 for governance and change projects, including Board review, and £1.7 million for the costs of making changes to IT systems, including steps such as;

• Updating the risk warning shown on the website and/or mobile application,
• Building in the pop‑up for the product‑specific risk information linked to in the risk warning,
• Building in the 24‑hour cooling-off period for first-time investors,
  • Adding in the evidence declaration field into the client categorisation process and updating the investor statements,
  • Building in the personalised risk warning pop‑up and the associated risk information pop‑up linked within this,
  • Amending the appropriateness test question and answer fields and introducing alternative question sets for reassessments,
  • Amending the appropriateness test journey (i.e. adding in the 24‑hour lock‑out period if an investment is determined to be inappropriate for the consumer, ensuring all consumers are subject to an appropriateness assessment and must be considered appropriate to be able to invest, removing features designed to influence the consumer during the assessment, and removing any encouragement to be re‑assessed from communications if considered inappropriate),
  • Removing references to inducements to invest, and
  • Incorporating record-keeping requirements into data collection

  The FCA predicts that it will take a small firm an average of 93 person-days to update its IT systems in this way and a medium-firm an average of 312 person-days across several roles. In total, it expects one‑off IT costs to amount to £26,800 per firm in scope.

  There will also be ongoing costs, currently said by the FCA to be “unquantified”.

  How can we help you with peer 2 peer compliance?

  If you’d like to know more about how we can help you with your peer 2 peer compliance or onboarding arrangements, or with any other regulatory compliance issues, our specialist team is here to help.

  Contact us today on 0207 436 0630 – or email info@thistleinitiatives.co.uk.