FCA letter on expectations for P2P platforms

An interesting read, Ace - thank you.

Couple of initial thoughts.

First is my disdain for the continued arms-length approach the FCA takes on their regulation of what is, in their words, a 'high-risk investment'.  (I'm still wanting to put an 'extremely' in there! )  To wit:

Why are they settling for a 'Yeah, we did that. Definitely. Honest guv', when they could insist that funds are deposited in an escrow account, or similarly controlled?  To coin my favourite line from House MD: "Everybody lies." 

The second relates to your Kuflink observation (£900k set aside), and Ablrate's apparent shortfall in that area or, indeed, the provision held (or not) by any platform. 

When it gets to the point that a platform's owner/s realise/s the writing is on the wall, just how tempting is it to syphon funds away from the business for use 'elsewhere'.  I think I'm correct in saying (and apologise unreservedly if I am wrong) that directors of both CollateralUK and Lendy were caught illicitly removing funds from the business.

Hypothetically, Kuflink - and all due apologies to the folk at Kuflink for using them as an example - but Kuflink could have £9M instead £900K in a 'segregated account' and that would be seemingly wonderful - unless times got too hard, temptation proved too great and the funds were reallocated elsewhere. Either used operationally to KTLO, or simply spirited away into the night. At which point, whether £900K or £9M - it matters not.

Specifically on Kuflink, a review of their Wind Down Plan suggests they have a time horizon of two years.  I'm not familiar with Kuflink's loan book, but being witness to other 'winding down' events (aka 'administrations') suggest that two years may be optimistic, particularly for the rump of the loan book, presuming there would be some defaulted loan to manage.  For example, FundingSecure's administration has entered its' fifth year. CollateralUK is almost in its sixth year and Lendy is approaching its' fifth.  That said, I don't want to in any way suggest Kuflink is - or ever will be - another FS / COL / Ly!!

Thirdly, and to their slight credit, the FCA highlighted 'concentration risk'; ie: where a platform has made - or is proposing to make - multiple loans to the same party (even if held in separate legal entities).  Disappointingly, it doesn't appear to go so far as to mandate the disclosure of linked entities.  Although, I might have missed that, or that detail may be written out in COBS or similar.

Lastly, the letter mentions 'Consumer Duty' and how platforms need to spell out to Joe/Josephine Public the nature and extent of all risks.  I think there's two sides to that particular coin.  I think the FCA needs to do a better job on spelling out its' own role with regard to 'Consumer Duty'.

It's been cited that some investors in failed P2P platforms only invested because there was an FCA approval given to the platform. (Personally, I doubt the that is strictly true for all those that claim it, but... )  That investors felt FCA approval provided any form of guarantee suggests to me that there is a general misunderstanding of what the FCA can feasibly do in its' day-to-day regulation of the P2P industry.  Undoubtedly the FCA could do more.  Arguably, it should do more; although it would need to be funded and I suspect the cost - if paid for directly by P2P platforms - would likely kill off the P2P industry. 

That anyone might regard the FCA as a proactive, boots-on-the-ground, protective force, shielding the unwary from the unscrupulous and the incompetent, is laughable when it is realised, in real terms, just how ineffectual the FCA are.  The FCA are not fit for purpose and their ongoing immunity from legal censure serves to perpetuate their ineptitude.  Make it possible to sue the FCA for damages when it proven they have failed their legal and mandated obligations and the public might start seeing some proper regulatory protection.

Until then, the FCA need to do a better job of educating the public as to exactly what can be expected from them.

Shouldn't take long.

Hi Ace,


Since we received a few nervous emails yesterday in relation to your post, I thought I provide some thoughts here directly.


The security position (senior or junior) is largely irrelevant, but what matters is the size and complexity of the loan book. Generally, it takes more time and is more expensive to resolve say a half-completed multimillion development versus a small second charge bridging loan.


Another important consideration is treatment of interest i.e. if interest is retained or rolled.


With retained interest, the platform has a steady income to cover its expenses, whilst with rolled interest, the platform only receives revenues when a loan is redeemed, and therefore the platform has to rely on income from other sources to cover its expenses. This can be significant if a platform has a large proportion of non-performing loans that are not paying any interest and therefore no revenues earned by the platform (and as the platform cannot originate new loans and earn any revenues from new originations). 


The issue is much more complex and detailed than this, but the above is some main considerations.



Filip