Change is coming - FCA P2P rules review

Yes, one of the things I was totally unaware of.

The money will never be repaid in full - the asset does not support the level of debt.

Some sensible stuff here from the FCA on a quick skim through. To be frank, however, they said some sensible stuff in prior reports about P2P lending in 2013-15. They then proceeded to completely forget these points and continued with the "light touch" regulation including daft ideas such as interim permission.

One of the key ideas seems that investors "be remunerated fairly for the risks they are taking" and "may pay excessive costs for a platform’s services". From my perspective, this all comes down to the high fees and spread margins some platforms charge. Asking investors to engage in highly speculative property developments (so speculative that 73+/80 major institutional lenders won't touch them) is bad enough. To then only pay them 12% out of the 20-30% the borrowers are paying really can only result in some fairly unpleasant outcomes. Borrower's can pay these rates because they have very little equity down i.e. constrained downside, but with huge upside (take Lendy's DFL004: the borrower initially risked £0.5mm but had £8mm upside, a 16:1 bet). These spec development loans are, in reality, hugely leveraged option structures for the developers. By comparison, investors are doing a classic carry trade, picking up pennies in front of an inevitable steamroller. It's crucial they are given a high degree of participation in the borrower's rate; they need every penny to make these trades work on a portfolio basis.

Section 4.42 is interesting 

Ongoing valuations
- We have observed a number of instances among P2P platforms where loans are being transferred to investors in a way that transfers value inappropriately.

... and goes on to talk about the reassignment of loans between investors... ie the secondary market from what I can tell. But also automatic portfolio assignments between new/exiting investors as well I assume.

It seems to be very disapproving of any kind of transfer that does not fully price in the risk profile at the time of transfer... which sounds great, but seems very negative for par-only secondary markets and portfolio transfers if taken on a strict interpretation

And yet, a variable pricing secondary market opens up far more avenues of harm via internal conflicts of interest etc... such as the section on company staff transacting on secondary markets with privileged information, and all the possible market abuses that are possible via price. Plus the onus on platforms to ensure the price is 'correct', or all information required to establish a 'correct' price is available.

And thats just one tiny section, the possible consequences for platforms have my head spinning.

There is a heck of a lot to think about in this document, thats for sure!

thanks. I wouldn't have known about this if it weren't put here...

Only had time to skim but its nice to see provision funds being looked at and hopefully a standard being applied across all platforms who offer it would be good.                                                                                                                      Have wondered before now and i know its unlikely but looking far into the future i.e 25/50 years what happens to the money if platform builds up a provision fund and is not using it? (Know it would be a miracle but don't laugh it could happen you have the likes of Landbay with no defaults yet and assets to reclaim and still a provision fund)