FCA letter in 2021 - How can the FCA not investigate (AC)
Jul 4, 2023 18:04:48 GMT
Bagman, min, and 5 more like this
Post by bob2010 on Jul 4, 2023 18:04:48 GMT
This letter was sent to P2P firms in 25 May 2021. In it sets out the requirements that P2P firms have to comply with. I've copied the letter below and also attached it to the thread.
Direct line: 0131 301 2052
Email: andrew.kay@fca.org.uk
Date: 25 May 2021
Dear Board of Directors,
Loan-based Peer-to-Peer (P2P) crowdfunding platforms
We are writing to:
We have identified 4 areas of potential harm for investors (i.e. lenders) in the P2P sector:
This letter asks you to take the appropriate action to ensure that your firm is delivering fair outcomes for consumers. We will continue to intervene should we see failures in this regard.
The secondary markets for loans, and associated risk management obligations
As observed in PS 19/14, some P2P platforms operate secondary markets for investors to exit their loans early. This allows platforms to create liquidity in the market for loans. COVID-19 has increased the amount of investor requests 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 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. For example, an investor may not be allowed to choose which loans to sell but will indicate what monetary amount they wish to sell. The platform then decides which loans to try to sell, up to this stated amount. 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 incentivised to transfer loans from one client to another at prices that do not reflect the risk profile of the loan. We remind firms that our rules emphasise how firms need to have sound risk management frameworks and credit risk assessment capabilities, particularly the requirements in:
P2P platforms need to suspend secondary trading if they cannot comply with these requirements, and apply to the FCA to formalise this arrangement.
The Senior Manager who holds the Risk Management Function is responsible for the development and oversight of the risk management framework, and for compliance with the above requirements. We will hold them accountable where we find breaches of our rules.
WDPs, their triggers, and liquidity monitoring
In our Dear CEO letter of 7 March 2019 we highlighted how some firms’ wind-down arrangements were falling short of the standards required. These included the systems and controls for winddown, platform funding and remuneration models, and third-party permissions. Shortly after, in PS 19/14 of June 2019, we reminded P2P platforms that, even though there are no prescribed rules to conduct scenario analysis or stress-testing, we expect that firms would consider that conducting these tests would be appropriate for their business model and prudent business practice.
In WDPG/App/5/1, we say that the triggers that could prompt a wind-down may be determined by the identification of a firm’s ‘risk fault lines’, those critical areas where failure would severely affect the business. For example, the loss of a key revenue driver, the loss of critical infrastructure, or market volatility in exposed business lines could all trigger a wind-down. We also expect firms to identify an absolute minimum level 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, e.g. through cash-flow forecasts, as part of appropriate systems and controls and maintaining adequate financial resources at all times. The role of liquidity monitoring is more relevant given the strain the consequences of COVID-19 has put on firms’ financial resources, with a heightened risk of firm failures. We set out in Annex 1 an approach to liquidity monitoring that might assist firms.
Disclosure of loan performance during periods of loan forbearance, and the use of contingency funds
We have seen a number of firms offering loan forbearance to borrowers due to COVID-19. This has led to a reduction in the amount of cash being received by the platform from borrowers, and therefore less cash being distributed to investors. Some firms have used their contingency funds to make up the shortfall in cash received from borrowers, and have continued to pay investors their expected returns.
However, we are concerned that some investors may not be aware that the platform is using its contingency fund to make these payments, and that the platform is not receiving the full amount of cash from borrowers. This could give investors a false sense of security about the performance of their investments.
We remind firms that our rules require them to provide information to clients that is fair, clear and not misleading. This includes the provision of information and warnings in relation to contingency funds. Firms must ensure that they are transparent about the performance of their loan book and the impact of loan forbearance on their contingency fund.
Unclear platform fees, charges and priority over recoveries
We are concerned about the lack of clarity for investors about platform fees and charges, and the impact those fees and charges may have on the amount recovered by investors from borrowers in default. We remind firms that our rules require them to provide information to clients that is fair, clear and not misleading. This includes the provision of information about costs and associated charges.
We are also concerned that some firms may be prioritising the recovery of their own fees and charges over the recovery of amounts due to investors. We remind firms that our rules require them to manage conflicts of interest fairly, both between itself and its customers, and between different customers.
Next steps
We ask that you complete and return the wind-down plan funding assessment required above and notify us immediately if you are unable to demonstrate your firm’s compliance with any of the specific rules we have outlined in this letter.
Please address your response to P2Pportfolioresponse@fca.org.uk
If you have any questions, please contact your normal supervisory contact on 0300 500 0597. This is the primary point of contact for your firm’s day-to-day interactions with the FCA, and further details of how we can be reached are available on our website at www.fca.org.uk/contact.
We recognise that there may be times when your firm faces urgent strategic issues. In these circumstances please contact me on 0131 301 2052 or at andrew.kay@fca.org.uk. If I am not available, then please contact one of my Managers, Graham Dorward, at Graham.Dorward@fca.org.uk or on 0131 301 2038.
Yours sincerely,
Andrew Kay
Head of Department, Retail Lending Supervision
Annex 1: Liquidity Monitoring
Email: andrew.kay@fca.org.uk
Date: 25 May 2021
Dear Board of Directors,
Loan-based Peer-to-Peer (P2P) crowdfunding platforms
We are writing to:
We have identified 4 areas of potential harm for investors (i.e. lenders) in the P2P sector:
This letter asks you to take the appropriate action to ensure that your firm is delivering fair outcomes for consumers. We will continue to intervene should we see failures in this regard.
The secondary markets for loans, and associated risk management obligations
As observed in PS 19/14, some P2P platforms operate secondary markets for investors to exit their loans early. This allows platforms to create liquidity in the market for loans. COVID-19 has increased the amount of investor requests 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 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. For example, an investor may not be allowed to choose which loans to sell but will indicate what monetary amount they wish to sell. The platform then decides which loans to try to sell, up to this stated amount. 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 incentivised to transfer loans from one client to another at prices that do not reflect the risk profile of the loan. We remind firms that our rules emphasise how firms need to have sound risk management frameworks and credit risk assessment capabilities, particularly the requirements in:
P2P platforms need to suspend secondary trading if they cannot comply with these requirements, and apply to the FCA to formalise this arrangement.
The Senior Manager who holds the Risk Management Function is responsible for the development and oversight of the risk management framework, and for compliance with the above requirements. We will hold them accountable where we find breaches of our rules.
WDPs, their triggers, and liquidity monitoring
In our Dear CEO letter of 7 March 2019 we highlighted how some firms’ wind-down arrangements were falling short of the standards required. These included the systems and controls for winddown, platform funding and remuneration models, and third-party permissions. Shortly after, in PS 19/14 of June 2019, we reminded P2P platforms that, even though there are no prescribed rules to conduct scenario analysis or stress-testing, we expect that firms would consider that conducting these tests would be appropriate for their business model and prudent business practice.
In WDPG/App/5/1, we say that the triggers that could prompt a wind-down may be determined by the identification of a firm’s ‘risk fault lines’, those critical areas where failure would severely affect the business. For example, the loss of a key revenue driver, the loss of critical infrastructure, or market volatility in exposed business lines could all trigger a wind-down. We also expect firms to identify an absolute minimum level 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, e.g. through cash-flow forecasts, as part of appropriate systems and controls and maintaining adequate financial resources at all times. The role of liquidity monitoring is more relevant given the strain the consequences of COVID-19 has put on firms’ financial resources, with a heightened risk of firm failures. We set out in Annex 1 an approach to liquidity monitoring that might assist firms.
Disclosure of loan performance during periods of loan forbearance, and the use of contingency funds
We have seen a number of firms offering loan forbearance to borrowers due to COVID-19. This has led to a reduction in the amount of cash being received by the platform from borrowers, and therefore less cash being distributed to investors. Some firms have used their contingency funds to make up the shortfall in cash received from borrowers, and have continued to pay investors their expected returns.
However, we are concerned that some investors may not be aware that the platform is using its contingency fund to make these payments, and that the platform is not receiving the full amount of cash from borrowers. This could give investors a false sense of security about the performance of their investments.
We remind firms that our rules require them to provide information to clients that is fair, clear and not misleading. This includes the provision of information and warnings in relation to contingency funds. Firms must ensure that they are transparent about the performance of their loan book and the impact of loan forbearance on their contingency fund.
Unclear platform fees, charges and priority over recoveries
We are concerned about the lack of clarity for investors about platform fees and charges, and the impact those fees and charges may have on the amount recovered by investors from borrowers in default. We remind firms that our rules require them to provide information to clients that is fair, clear and not misleading. This includes the provision of information about costs and associated charges.
We are also concerned that some firms may be prioritising the recovery of their own fees and charges over the recovery of amounts due to investors. We remind firms that our rules require them to manage conflicts of interest fairly, both between itself and its customers, and between different customers.
Next steps
We ask that you complete and return the wind-down plan funding assessment required above and notify us immediately if you are unable to demonstrate your firm’s compliance with any of the specific rules we have outlined in this letter.
Please address your response to P2Pportfolioresponse@fca.org.uk
If you have any questions, please contact your normal supervisory contact on 0300 500 0597. This is the primary point of contact for your firm’s day-to-day interactions with the FCA, and further details of how we can be reached are available on our website at www.fca.org.uk/contact.
We recognise that there may be times when your firm faces urgent strategic issues. In these circumstances please contact me on 0131 301 2052 or at andrew.kay@fca.org.uk. If I am not available, then please contact one of my Managers, Graham Dorward, at Graham.Dorward@fca.org.uk or on 0131 301 2038.
Yours sincerely,
Andrew Kay
Head of Department, Retail Lending Supervision
Annex 1: Liquidity Monitoring
| Approach | Description |
|---|---|
| 3-month rolling forward cash flow forecast | A 3-month rolling forward cash-flow forecast tracks contractual and reputationally important cash flows (and others as relevant) to lay out the future liquidity position over the forecast period. A prudent cash-flow forecast would assume a form of stressed operating environment that entails, for example, marked reductions in cash flowing through the corporate balance sheet and the platform due to, for example, increasing borrower late payments/defaults and increased demands from investors for return of capital when economic conditions are adverse. In lieu of a cash-flow forecast, the firm could implement a suitable alternative that delivers effectively the same result. |
| Wind-down costs | It is important that sufficient liquidity is available to meet the total net costs of the wind down of the firm. It is likely that the firm will already have calculated the costs of a solvent wind-down as part of its wind-down arrangements per the rules in SYSC 4.1.8A R and guidance in SYSC 4.1.8C G. |
| Liquidity Buffer | As the activation of a wind-down may not instantly follow on from a decision to wind down for logistical reasons, adding a liquidity buffer may be considered prudent. For example, a buffer corresponding to one month's worth of the firm’s Fixed Overhead Requirement (FOR) might be considered sufficient, although firms should consider the liquidity buffer required to achieve a wind-down in the context of their own business model. The total wind-down costs that firms should be able to cover are the sum of the net wind-down costs and the liquidity buffer. |
| Monitoring and Reporting | Firms can agree with their supervisor how often (and how) they report their current and forecast liquidity position, and that position relative to the total wind-down costs. |
| Maintaining the currency of the WDP | Firms are reminded that they are required to regularly review their WDPs (SYSC 8.4.1) and may need to re-assess the amounts of liquid resources they require to ensure a solvent wind-down. |