Loan-based Peer-to-Peer platforms FCA Dear Board of Directors letter

Sep 1, 2021 12:00:00 AM

What has happened?

In August 2021, the FCA published a Dear Board of Directors letter that had originally been issued in May 2021 to the Boards of loan-based peer-to-peer (P2P) crowdfunding platforms. This letter was intended to;

- set out the FCA’s view of the key risks P2P platforms pose to their customers and the markets in which they operate,
- outline its expectations of P2P firms, including how firms should be mitigating these key risks, and
- describe its supervisory strategy to ensure that firms are meeting their expectations and harms are being remedied

What do you need to do?

The FCA has identified four areas of potential harm for investors (lenders) in the P2P sector, namely;

- the secondary markets for loans, and associated risk management obligations,
- wind-down plans (WDPs), their triggers, and liquidity monitoring.
- disclosure of loan performance during periods of loan forbearance and the use of contingency funds, and
- unclear platform fees, charges and priority over recoveries

This letter asks P2P firms to take the appropriate action in each area, as noted below, to ensure that they are delivering fair outcomes for consumers. The FCA will continue to intervene should it see failures in this regard.

The secondary markets for loans and associated risk management obligations

Given the impact of Covid-19 on borrowers’ creditworthiness, there is a risk that firms might be either unable to accurately price loans or incentivised to transfer loans from one client to another at prices that do not reflect the risk profile of the loan.

P2P platforms need to suspend secondary trading if they cannot comply with the related COBS requirements, and to apply to the FCA to formalise this arrangement.

WDPs, their triggers, and liquidity monitoring

The FCA’s recent supervisory work has left it generally dissatisfied with the firms’ WDPs reviewed. All had assumed a voluntary wind-down, and none had adequately identified the triggers that might realistically allow for a solvent wind-down to be invoked. Coupled with a lack of liquidity monitoring and capital adequacy planning, the FCA found little evidence of firms’ ability to identify when an invocation of their wind-down plan would realistically ensure an orderly wind-down.

The FCA will continue to ask firms for their WDPs through its supervisory work. Where a firm has not adequately prepared for a solvent wind-down, the FCA will assess the potential for harm to existing and future investors, and whether it remains appropriate to allow new loans to be originated.

As part of a firm’s wind-down planning, and to facilitate an orderly wind-down, the FCA considers that funds directly relating to the wind-down should ordinarily be held in cash or in another readily realisable form. They should be in a UK bank account under the control of the firm, with immediate accessibility. There should be no right of set-off over the account and, where possible, it should be excluded from charges and debentures. The funds should be available for use only once the decision to wind down the business has been taken by the Board. More specifically, they should not be used to meet business as usual liquidity needs, and they should be regularly reviewed for sufficiency or when there are changes to the business model or loan books.

Firms were asked in the letter to confirm to the FCA within three weeks the amount they have or intend to ringfence in the way set out above and an explanation of why this is appropriate, given their business model. The FCA will be reviewing these submissions.

Disclosure of loan performance during periods of loan forbearance and the use of contingency funds

The FCA’s supervisory dialogue with trade associations has highlighted uncertainty and an uneven interpretation of, and compliance with, the disclosure requirements for P2P platforms. Firms have been reporting loan status and performance in different ways to lenders, markets and the FCA. The FCA considers that disclosures that are fair, clear and not misleading remain a high priority.

The FCA has undertaken to take action where it does not see an adequate disclosure of loan performance or the correct provision of information and warnings in relation to firms’ contingency funds.

Unclear platform fees, charges and priority over recoveries

The FCA is concerned that there is a lack of clarity for investors about platform fees and charges (whether payable by investors or borrowers), and about the impact that those fees and charges may have on the amount recovered by investors from borrowers in default. This is often the case if the platform can deduct its fees and charges before passing the amount recovered on to investors.

Firms were asked in the FCA’s letter to complete and return the wind-down plan funding assessment required and to notify the FCA immediately if they are unable to demonstrate compliance with any of the specific COBS rules outlined in the letter.

How can we help you?

If you’d like to know more about how we can help you with your peer-to-peer lending or wind-down arrangements, or with any other regulatory compliance issues, our expert team is here to help.

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