In May 2021, the FCA issued a Dear Board of Directors letter addressed to the boards of P2P lending firms in order to set out its view of the key risks P2P platforms pose to their customers or the markets in which they operate, to outline its expectations of P2P firms, including how they should be mitigating key risks, and to describe its supervisory strategy to ensure that firms are meeting regulatory expectations and that harms are being remedied.
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
Each of these is considered below.
The letter asks firms to take the appropriate action to ensure that they are delivering fair outcomes for consumers, and the FCA states that it will continue to intervene if it sees failures in this regard.
COVID-19 has increased the number of requests by investors to sell their P2P loans, creating liquidity issues across the industry. A number of firms have closed their secondary markets while others have opted to keep them open. Some platforms with discretionary models provide existing clients with a way to exit their loans by using the platform’s discretionary powers to transfer the loans of existing clients to new clients wishing to invest. In practice, this has often resulted in a slower release of early exit requests.
A discretionary P2P platform usually takes an active role in the operation of its secondary market. The platform also has a significant role in pricing the loans when these change hands. However, given the impact of COVID-19 on borrowers’ creditworthiness, there is a real risk that firms might be either unable to accurately price loans, or be incentivised to transfer loans from one client to another at prices that do not reflect the risk profile of the loan.
The FCA is reminding firms that its rules emphasise how firms need to have sound risk management frameworks and credit risk assessment capabilities. P2P platforms need to suspend secondary trading if they cannot comply with these requirements, and must apply to the FCA to formalise this arrangement.
In its Dear CEO letter of 7 March 2019, the FCA highlighted how some firms’ wind-down arrangements were falling short of the standards required. These included the systems and controls for wind-down, platform funding and remuneration models, and third-party permissions.
The FCA expects firms to identify an absolute minimum level of liquid and capital resources which, if breached, will trigger a wind-down.
Recent supervisory work has left the FCA generally dissatisfied with the 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.
Where a firm’s surplus liquid resources are forecast to be lower than the total net costs of wind-down (including any ‘buffer’), it should rectify this immediately and provide evidence of how it has done so to the FCA.
The FCA considers that funds directly relating to the wind-down should ordinarily be held in cash or another readily realisable form. They should be in a UK bank account under the control of the firm with immediate accessibility. It also considers it is important that there is no right of set-off over the account and, where possible, that 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.
The FCA will review firms’ submissions and it may wish to follow up where it has additional questions or to take further regulatory action as required.
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 transparent 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 contingency funds.
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 of 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.
The FCA is asking firms to complete and return the wind-down plan funding assessment and to report immediately any inability to demonstrate their compliance with any of the rules outlined in the letter.
If you’d like to know more about how we can help you with your firm’s P2P lending, wind-down planning or promotional arrangements, or any other regulatory compliance issues, our expert team is here to help.
Contact us today on 0207 436 0630 or email info@thistleinitiatives.co.uk.