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Peer to peer

A guide to the new peer-to-peer lending FCA regulations (PS19/14)

On 4 June 2019, the Financial Conduct Authority (FCA) released its new regulatory framework for peer-to-peer lending (P2P); a Policy Statement known as PS19/14. As you might imagine, it's a document which, following a ten-month consultation, is a hefty read of no fewer than 102 pages. We wanted to provide our valued investors with a comprehensive guide to the new framework, and explain what it means for you.

First and foremost, we welcome these new regulations - which come into effect in December 2019 - and believe they are a positive step for customers and firms alike. The P2P lending industry is now worth £10bn so, naturally, it should be regulated appropriately. Lending Works already complies with many of the new rules being proposed, but mandating them across the industry is good for customers, good for us and good for the credibility of the sector as a whole.

The below guide we've put together is for the benefit of our existing customers, and the new rules that affect them are centred on three key areas:

- Mandating effective risk management and robust corporate governance;

- Mandating appropriate disclosure to customers; and

- Ensuring appropriate arrangements are in place should the platform cease to operate for any reason (also known as a 'wind-down' plan)

For those not yet signed up with a P2P firm, there are additional regulations such as appropriateness tests and investor categorisation which are of significance. However, as this guide is intended for our existing customers, we have not covered those points here.

There is no doubt that the new rules will collectively result in a more-robust industry, and thus ensure fair outcomes for customers across the board. Furthermore, they will protect the reputation of the peer-to-peer sector by ensuring all market participants meet a stringent set of standards. Indeed, as an enthusiastic member of the P2PFA - the industry’s self-regulating trade body - Lending Works has championed effective regulation since its launch in 2014 and has worked closely with the FCA in formulating these new regulations.

Some context on the Policy Statement

The PS19/14 is a new iteration of the first set of FCA regulations that applied to the P2P sector, which came into force back in 2014. This in itself is nothing unusual, as it is standard practice for the regulator to review its guidelines a few years after an industry becomes regulated. Essentially, it's a sensible way of building on the initial regulatory applications with learnings gleaned over the intervening years once the market has had time to develop. 

As such, the regulator launched its consultation (known as CP18/20) last July, and PS19/14 is the final product of the new rules that were consulted on since last July.

Risk management and corporate governance

As we've mentioned above, Lending Works already falls into line with most of the new requirements, and this category is no exception. To underline our existing risk management activities, we recently employed a new Head of Risk who is responsible for both credit risk and business risk. Prior to joining our platform, this team member was the most senior person managing credit risk for personal loans at a high-street bank which had a lending portfolio of many £bns, and has a distinguished background in professional services.

The new rules to ensure effective risk management and robust corporate governance focus on the implementation of a comprehensive risk management framework, within which the following processes must be clearly set out:

- Credit risk management processes and procedures

- Pricing of loans

- Pricing and credit model risk management

- The implementation of independent compliance, risk management and internal audit functions

The principle behind these regulations is to ensure that credit risk is managed effectively, and loans are priced appropriately, so that there is a high probability that retail investors get the returns that are advertised by the platform and are not exposed to excessive risk. Furthermore, the entire risk function must be independent and well governed to ensure it does it is able to manage risk effectively. These new regulations mandate what is standard practice across other mainstream financial services industries, and we welcome this robust and mature approach.

Appropriate customer disclosure

As the name suggests, this particular set of regulations mandates greater disclosure from platforms to investors. Aside from being a positive step for the P2P sector, this also resonates with one of our core values as a business: transparency. We believe that since the advent of the internet and the digital world, there is no other option but to be fully transparent, and we pride ourselves on this attribute. Being transparent not only allows us to be proud of Lending Works, but we also believe it makes good business sense too.

Moreover, as a P2PFA member, we already adhere to levels of disclosure which far exceed the existing FCA regulations - including the display of key performance statistics and making our loan book available for download on our website.

That said, in order to fully comply with the new regulations, we'll be making a few tweaks to our investor disclosures, including:

- Providing more information on each of the loans our investors have actually funded

- Providing periodic written reports on the performance of the portfolio, the Lending Works Shield and the company’s development

While making these tweaks to our investor disclosures, we will also overhaul our statistics pages to ensure that we articulate consistent terminology and metrics in all our communications.

Wind-down plan arrangements

Regulated platforms should already have wind-down plans in place in the event that they cease trading, and/or are no longer able to fulfil their obligations in managing active peer-to-peer investments. However, the FCA has requested that platforms review their existing arrangements to ensure they are still fit for purpose. Additionally, there are further measures which have been mandated, such as creating a comprehensive ‘resolution manual’ detailing how a backup service provider would step in to administer outstanding investments, so that if this scenario occurs, the handover is as smooth as possible.

Ensuring suitable levels of funding required for this wind-down process will also be compulsory, as well as ensuring customers understand how moving into wind down might affect their investments.

In line with these regulations, we will be reviewing our wind-down plan and backup arrangements, with a view to making further enhancements where appropriate. We will also outline our wind-down process in greater detail to customers before December.

A significant step in the right direction

In summary, we profoundly endorse these new P2P regulations, and applaud the FCA for compiling a framework which is both sensible and proportionate. Needless to say, we are happy to comply accordingly, and look forward to seeing how it augments the progress of an industry which has now firmly established itself within the mainstream of financial services.

Our sector is somewhat unique in that there really is a direct correlation between the benefits derived by customers, and the prosperity of the platform itself. Ultimately PS19/14 reaffirms that intrinsic connection between platform and investor, whilst also inspiring confidence that peer-to-peer lending is here to stay.

Over the coming months, you will see a few changes filter through in terms of our website, processes and communications. But with solid foundations in place, we find ourselves in a position of strength to reach full compliance with these regulations well ahead of the December deadline, and there is thus no need for any significant overhaul on our part.

If you have any questions on PS19/14, or anything else, please do not hesitate to contact us. But in the meantime, happy investing, and here's to the next chapter in the history of our sector being a hugely successful one.

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Our website offers information about saving, investing, tax and other financial matters, but not personal advice. If you're not sure whether peer-to-peer lending is right for you, please seek independent financial advice, and if you decide to invest with Lending Works, please read our Key Lender Information PDF first.

As with all investments, your capital is at risk.