The FCA would like our help

I think this would get more visibility in General rather than in here...

It might be a good idea for forum members to post here the gist of their response, as other members might be prompted to submit similar proposals when they think it is a good idea.

i have proposed that provision funds should be treated in a similar way to client account funds, so long as a platform continues to operate advertising a PF, even if it is discretionary.

1. Overall platform risk - lack of visibility and transparency.
2. Operational risk - lack of visibility and transparency (and capital requirements when compared with banks).
3. Pooled risk accounts - are they true p2p? Are "black box" accounts appropriate for retail investors? Are they actually "collective investments"? If so would it be more appropriate to sell them as investment products eg an investment trust rather than as a "savings account"?
4. Maturity transformation and lack of transparency.
5. Related to 4. above, liquidity risk.
6. Provision funds - they have to be discretionary, but that introduces uncertainty into their value to the lender. People may draw undue comfort from their presence.  Were a provision fund materially at risk it would threaten the future of the platform. Related to point 10. below.

(3, 4, 5 and 6 are of relevance to anybody concerned about regulatory arbitrage)

7. Lack of standardisation and consistency of usage of terms eg LTV, OMV, GDV or default makes it more challenging to asses the risk of loans across platforms. Some platforms' approaches to this area could be considered optimistic and could result in miss-selling litigation in the future.
8. Modelling risk and the use of risk ratings - Some platforms seem to have taken an approach akin to "we're not experiencing enough defaults to support the risk ratings we've applied historically, so we are going to re-rate at more optimistic levels". It's been a very benign credit environment recently and I fear that when this turns lenders may get caught out.
9. Asymmetry of information available to lenders eg loan commentary available to holders of a loan, but not available to purchasers of loans on a secondary market.
10. Living wills / platform wind up. Who will protect lender interests?

While I agree with many of the comments, my experience with consultations in the past is that the authorities often take a crude response based mainly on the absolute number of respondents raising a point. If these comments are the gist of actual responses and are echoed by many others (given only 37 responses to a recent FSA consultation), they might conclude that knowledgable lenders are unhappy with the platforms and so implement an unreasonable amount of regulation that increases platforms costs and reduces lenders rates through increased fees and reduced competition.

Personally I will be praising the level of disclosure relative to other investment types. I will be raising suggestions for improvements, but concentrating on readily achieved and incremental changes. Those that come to mind include:

1) Disclosures: Requiring full financial accounts to be prepared and filed within 6 months for platform companies and those holding any security. Clear requirement for separation of all rights to receivables from platforms or disclosure of rights of lenders and where they rank against other creditors. descriptions of valuation basis for security if it is not the open market value of existing asset that should be realisable within 6 month period. requirement to report form of any assets held in provision funds at least annually and disclose any material changes. Description of nature of asset classes that may be allocated to lenders when lenders are not bidding on specific loans including key constraints (eg maximum unsecured, maximum term, potential for extension without borrower being in financial distress, nature of potential counterparties and range of APRs offered. Also average share of the cost of finance for borrowers taken by the platforms for each category of loan made. Details of "Living Will arrangements.

2) Platform security: increase in the minimum capital held by platforms.

3) Disclosure required of all material risks faced by lenders listed in order of seriousness as adjudged by platform (assessed as probability of default multiplied by amount of default).

4) Personally I will call for platforms not to be allowed to invest in any loans on the platform, but allowing investors and/or management of them to do so where disclosed.

 

- PM

Because they have prior access to information.

e.g. I am always annoyed when a loan that I have on the 2nd market at a discount because it is overdue - the minute the borrower unexpectedly pays up this loan is scooped up by someone. (Yes, it happened again today).

Staff members are in a good position to do this

That isn't what skin in the game means. It means that when a platform lists an asset backed loan, they are required to retain 5% of the loan so that their interests align with those of the lenders. Otherwise, the platform has no incentive to do due diligence and ensure that the loan is a viable proposition if they have no financial risk (it is not their money being lent). You're talking about insider trading which should not be allowed whatsoever.  

One thing that I would like improved relates to the security valuation documents.

I have seen various variations of text which all imply that, not only we are not allowed to use them, but in some cases, these documents are not to be made available to us, the lenders, i.e. we are not allowed to even look at them.

I would like us, the lenders, included with the platform as people who have interest in the loan and thus the valuation of the security.