Post by pikestaff on Nov 14, 2013 12:29:02 GMT
The FCA is currently consulting on its proposals for regulation, with a comment deadline of 19 December 2013. The final rules are expected to be published in March.
Its press release is here www.fca.org.uk/news/the-financial-conduct-authority-outlines-how-it-will-regulate-crowdfunding and the full consultation paper is here www.fca.org.uk/static/documents/consultation-papers/cp13-13.pdf. Anyone can comment on the proposals, either in writing or via the FCA's website. Instructions are on page 2 of the consultation paper.
The FCA's main proposals can be summarised as follows. This is based on the press release, but re-ordered slightly and adding a couple of things that the press release leaves out:
Communication and promotions:
- Information about the platform must be clearly presented and easy to find so customers know with whom they are dealing.
- All communications must be presented in a way that the intended customer will understand. Platforms must not downplay risks or warnings.
- Any comparison of a peer-to-peer loan interest rate with a regular savings account interest rate must be fair, clear and not misleading.
- Any promotions (such as print, broadcast or online advertising) must be fair, clear and not misleading. Promotions that are not can be banned by the FCA.
Protection:
- Client money (ie, money that is not currently lent out) must be properly segregated and platforms must disclose where it is held.
- Where firms do not provide access to a secondary market, investors can cancel without penalty and without reason within 14 calendar days. [Comment: to avoid this, I would expect all platforms to provide a secondary market.]
- Platforms must have resolution plans in place that mean, in the event of the platform collapsing, loan repayments will continue to be collected so lenders will not lose out.
- Platforms must have a minimum amount of capital: either a percentage of loaned funds (see below) or a fixed minimum of £50,000 – whichever is higher. The fixed minimum will be lower (£20,000) until April 2017, to allow platforms to acclimatise to the new regime. [Comment: the percentage of loaned funds will still apply, so this will be of help to only the smaller platforms.]
- For the avoidance of doubt, p2b/p2b lending will continue to be unprotected by the FSCS, ie there will be no government guarantee!
Admin/reporting:
- Platforms must supply lenders with information about their transactions, including at least annual statements.
- Platforms must comply with the FCA's disputes resolution procedures, including the formal recording and reporting of compliants and how they are dealt with, with access to the Financial Ombudsman Service (FOS).
- There will be various ongoing reporting obligations to the FCA.
The better platforms will be doing much of this already, but it is clear from the full paper that the FCA considers websites generally to be not up to standard. We can expect to see ongoing work on all platforms, tightening up their content and other documentation between now and April 2014.
My personal view is that much of this is good and necessary (or at least not harmful), but a couple of areas have the potential to cost platforms a lot of money, which we will all have to pay for somehow: either explicitly in fees, or implicitly in the spread between what platforms charge borrowers and what they pay to us. These are:
Capital
When the new regime is fully up and running the minimum capital requirement (broadly share capital + reserves + eligible subordinated debt) is proposed to be the greater of £50,000 and a percentage of loaned funds, calculated as follows:
- 0.3% of the first £50m
- 0.2% of the next £450m, up to a cumulative £500m
- 0.1% thereafter.
To put these numbers in context, FC's outstanding loans (net of repayments) are currently about £125m, which would require capital of £300,000, while Thin Cats' outstanding loans are about £40m, which would require capital of £120,000. Actually it's worse than this, because platforms will also have to hold capital to cover growth. With the platforms all growing rapidly, they might need another 50% on top. However, they will all have some capital already so the figures that I have given may not be far off the amount of additional capital required.
This will not come cheap. Equity providers in early-stage businesses will be looking for a return of around 20% per annum, so if this capital was raised in the form of equity the extra cost for a small to mid-size player (up to and including TC and RS) would be of the order of 0.3% x 20% = 0.06% of loaned funds, which is not to be sneezed at. This should come down a bit if platforms are able to raise the extra capital in the form of subordinated debt.
I am not convinced that all this extra capital is necessary. In my response to the FCA I will be suggesting that the numbers are halved.
Complaints
This one is more nebulous, partly there is little clarity about what exactly constitutes a complaint. If every negative comment on an official forum was counted as a complaint that had to be recorded together with the platform's response, then this would either (i) create an enormous bureaucracy, or (ii) result in the immediate closure of the forum! Hopefully sanity will prevail, and only "official" complaints (either by letter or via a complaints form on the website) will count.
But the bigger worry for platforms is likely to be the prospect of a group of disappointed lenders trying to whip up a "mis-selling" scandal and resulting FCA action, out of something that was properly disclosed to them and that they should have understood at the time. This must be really scary for platforms, given the history of the FCA and its predecessor in bending over backwards to see the customer's point of view. I imagine they will look to insure against this risk, but it will come at a price.