I have just come across
this and it gives me a glimmer of hope that the FCA may actually be able to help the peer2peer sector evolve into something viable.
The concerns raised and observations made are identical almost point for point to what I struggled putting across on certain boards.
I personally would like to see peer2peer models simplified. I don't think provision funds are especially useful as they are based on questionable past data and just add costs to investors (investors should just take a cut and rely on security on a defaulted loan). I also am not sure the secondary market is that useful. In the event of slight economic strain, it will become dysfunctional anyway. I would just expect to hold investments full term.
Platforms that both originate and trade in loans on behalf of investors should either have special regulation to manage conflicts of interest or change their business models. There should also be some sort of standardised method on the spread between cost to borrowers and cost to lenders.
And there is most definitely not enough transparency with some platforms and a lot of misleading promotional information.
I wonder what happens to platforms who do not wish to change their business models in view of FCA's findings? Can they continue operating without full authorisation?*
"For both loan-based and investment-based crowdfunding platforms, for example, we see the
following issues:
• it is difficult for investors to compare platforms with each other or to compare crowdfunding
with other asset classes due to complex and often unclear product offerings
• it is difficult for investors to assess the risks and returns of investing via a platform
• financial promotions do not always meet our requirement to be ‘clear, fair and not
misleading’, and
• the complex structures of some firms introduce operational risks and/or conflicts of interest
that are not being sufficiently managed
Loan-based crowdfunding
2.7 Based on our experience of supervising firms in the loan-based crowdfunding market operating
under interim permissions, we have a number of concerns. For example:
• Certain features introduce risks to investors that are not adequately disclosed and may not
be sufficiently understood by investors. For example, the use of provision funds may obscure
the underlying risk to investors, which may result in investors believing that platforms are
providing an implicit guarantee of the loans they facilitate.
• The plans some firms have for wind-down in the event of their failure are inadequate to
successfully run-off loan books to maturity.
• We have challenged some firms to improve their client money handling standards."
*this is the bit from the document:
"• There appears to be increased pooling of credit risk for investors, which has the potential to
create a blurred line between loan-based crowdfunding and asset management. This creates
a risk of regulatory arbitrage where firms conduct what is essentially asset management
business, but under a regulatory regime not designed for this."
Such platform would struggle to fill loans and would have to hike rates of return, the SM would also be very illiquid. Unless in the unlikely event investors were naive/insane; FCA move along, nothing to see here.