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What has happened? 

In January 2024, the FCA issued a Portfolio Letter to peer-to-peer lending firms that outlines the harms to consumers and markets that it considers are most likely to arise from P2P lenders’ business models, together with its strategy to address those harms. 

Firms are requested to consider whether the risks of harm identified by the FCA in the Portfolio Letter are present in their firms and to adopt strategies for mitigating them. 

What are the key points of the Portfolio Letter?

In any future supervisory engagement with firms, the FCA will consider whether those firms have taken appropriate action to ensure that consumers and markets are adequately protected from these harms. It intends to use data provided through regulatory returns and supplemented by direct information requests and intelligence, to assist in identifying outlier firms that pose a heightened risk of harm, whether deliberately or not, and engage with them to mitigate any harm or potential harm.

The FCA suggests the following three key areas of focus for P2P firms;

• FCA PS22/10: Strengthening our financial rules for high-risk investments and firms approving financial promotions

A key feature of PS22/10 was to improve the customer journey into restricted mass market investments, which include P2P agreements, through:

• strengthening risk warnings,
• banning inducements to invest,
• introducing positive frictions including a cooling-off period, and
• improving client categorisation and appropriateness testing

These rules are designed to ensure that firms communicating and approving financial promotions do so to a high standard, ensuring consumers receive high-quality financial promotions that enable them to make effective, well-informed investment decisions. Following a review of the risk warnings provided by firms within the Peer-to-Peer and Investment-based Crowdfunding (IBCF) portfolios in December 2022, the FCA found that the level of compliance identified was far below the standard expected. As a result, the FCA looked more deeply at how firms had implemented the remaining rules from 1 February 2023.

The FCA expects all firms to review its findings, including the good and poor practice examples, and make any changes needed to meet expectations and improve consumer understanding and ensure good outcomes. The FCA will proactively engage with firms in the P2P portfolio to ensure that the new rules in PS22/10 have been fully embedded.

• Wind-down plans, their triggers, and liquidity monitoring

In the FCA May 2021 letter, the risk of disorderly wind-down and the potential risks of increased financial losses to investors on platforms was expressed to be of significant concern to the FCA, which engaged with all firms in the portfolio to strengthen their wind-down plans, include triggers that were appropriate and effective and introduce liquidity monitoring along with an agreed ‘liquidity buffer’ that would help facilitate a solvent wind-down.

All firms need to identify absolute minimum levels of liquid and capital resources which, if breached, will trigger a wind-down. Liquid resources are critical for firms’ survival and to help ensure that they can wind down in an orderly manner. Firms should monitor their financial health as part of appropriate systems and controls and maintain adequate financial resources at all times.

The FCA expects firms to, at least annually: 1. Complete an assessment of adequate liquid resources that would facilitate an orderly wind-down, 2. Confirm that sufficient levels of liquid resources are held to implement a wind-down, if necessary, and that these are held appropriately, ring-fenced for the sole purposes of wind-down, and 3. Conduct a review of their wind-down plan for suitability, including an assessment of the triggers that could prompt a wind-down and that these are still relevant.

The FCA will continue to ask firms for their wind-down plans through its supervisory work. Where it determines that a firm has not adequately prepared for an orderly wind-down, or where it thinks there are insufficient levels of capital or liquid resources, it will not hesitate to require an injection of capital and consider whether it is still appropriate to continue offering new loans to retail investors.

To underpin this work, the FCA is asking firms to complete a Self-Certification Attestation, which is a firm's formal statement that it will take, or has taken, any action required. It is asking firms to identify the most appropriate senior individual(s) to be accountable for the actions described above, and to advise the FCA of who they are at Portfolioletters@fca.org.uk. The FCA will then provide, separately, a template for them to complete and return as confirmation that the review has been carried out.

• The Consumer Duty

The Consumer Duty came into effect in July 2023 and is a key focus for how the FCA supervises firms in the P2P portfolio.

The FCA expects firms to have implemented the Consumer Duty in full, which requires them to put the needs of consumers first and deliver good customer outcomes. The supervisory focus aligns with the four Consumer Duty outcomes, for example:

Consumer understanding: Firms need to ensure that investors fully understand all aspects of the investment they are making (e.g. its inherent illiquidity, risk of capital loss, and lack of FSCS protection) and are aware of the extent of due diligence undertaken by the platform.

Products and services: Firms need to apply an appropriate level of due diligence in relation to the loans they offer before marketing such loans to investors, to ensure an investor can select an investment or portfolio with a risk profile aligned to their needs and avoiding foreseeable harm.

Price and value: Platforms that are required to produce Outcomes Statements need them to be accessible, capable of being understood by their investors, and clear about performance. Platforms that are exempt from this requirement still need to be very transparent about performance.

Consumer Support: Firms need to provide support that meets their consumer’s needs, including those with characteristics of vulnerability, throughout the life of the product or service. Firms must review their communication systems, including complaints procedures, and remove any unreasonable barriers, to make sure they align with expectations under the Consumer Duty.

The FCA has undertaken to use the Consumer Duty where it sees the need to intervene assertively to prevent harm arising or where harm has occurred. In line with other portfolios, it plans to issue data requests to firms that will supplement regulatory returns, allowing better monitoring of firms’ behaviours and business models, identifying outliers, and allowing judgements to be made on those that pose the greatest risk of harm.

How can we help you? 

Thistle Initiatives has supported lending firms for over 10 years as a trusted compliance and regulatory advisor. In addition to assisting firms as-and-when, our team of specialists can serve as your right hand in meeting and complying with FCA regulations. We understand the importance of staying up-to-date and compliant and are dedicated to providing the guidance and support needed to do so.

Are you looking for help with your P2P lending arrangements, or more general regulatory questions? Contact our specialist team now to schedule a free consultation. Get in touch with us by calling 020 7436 0630 or sending an email to info@thistleinitiatives.co.uk.