RegTech Bottleneck?

The UK's Financial Conduct Authority is rightly proud of its Innovation Hub, Regulatory Sandbox and new "RegTech" approach, which includes "managing regulatory requirements more efficiently, and... how we can best support developments and potentially adopt some RegTech solutions ourselves."

But the figures suggest that either more resources are required or there has to be a quicker route to market for new firms.

Of 413 requests received as at February, about 215 firms (52%) obtained support from the FCA's Innovation Hub. But only 39 firms (18%) have either been authorised (18) or are going through the approval process (21).  And in a recent statement defending its record on processing applications for authorisation by P2P lending platforms, the FCA said that it has only processed 8 of 94 applications received (about 9%).

Something is gumming up the works!

In its statement on the P2P lending process, the FCA bravely claims that it is "taking a proportionate approach to regulation, recognising the need for consumers to be adequately protected and have the information they need". It has a deadline of 12 months to decide on applications (actually 6 months for complete applications). But it's not like these firms are trying to flout the law - they have willingly approached the FCA for approval. Indeed, the P2P lending industry spent years lobbying for regulation of the sector, which was introduced by the Treasury in early 2013 and took effect on 1 April 2014. Yet since then the FCA's figures suggest that over 40 new firms have applied to enter the market and 42 of them are unable to trade because their application to do so is yet to be approved. Another 44 firms are still relying on their interim permission by virtue of being licensed under the previous regulatory regime, and therefore (ironically) cannot offer the new Innovative Finance ISA because they are not yet fully authorised.

How many firms are able to persist against these regulatory headwinds remains to be seen, but the approach seems neither proportionate nor worthy of the FCA's ambition to foster innovation and competition for the benefit of consumers. So far, the traditional players remain pretty safely sheltered behind the FCA's regulatory wall.

Something must be done.

Either the FCA needs more resources or it must adopt a more expeditious approach to granting regulatory approval - a mechanism that allows firms to begin trading more quickly under certain thresholds, for example, as is the case with small payment institutions and small e-money institutions. Indeed, payment services firms enjoy their own regulatory regime (with a 3 month turnaround time for complete applications); and the P2P industry lobbied for that regime to be used as the basis for regulating their platforms - an approach which the French and Spanish have since adopted and the European Banking Authority supports.

Recent Changes to FCA Rules for P2P Lending Platforms

The FCA has announced some changes to rules on P2P lending (explained amongst other non-P2P changes here). Feedback on the prior consultation papers and final rules are here.

You should consult the listed FCA Handbook sections for the detailed changes, but in summary they are designed to: 

• simplify client money requirements for P2P platform operators that hold money in relation to both regulated and unregulated peer-to-peer business which come into force immediately on 21 March, as they are helpful. The rule changes and related guidance are in: 

Glossary; SYSC 4; CASS 7; TP 1, Schs 1 and 2; SUP TP 1 

• support the introduction of the Innovative Finance ISA (IFISA) and new regulated activity of advising on P2P agreements, by clarifying the FCA’s expectations about standards for IFISA disclosures and establishing a regulatory regime for the provision of regulated advice on P2P agreements that reflects the recent changes to the Regulated Activities Order. The rule change come into force on 6 April 2016. The rule changes and related guidance are in: 

Glossary; SYSC 1 and 4; TC 2, App 1.1 and 4.1, TP 8; FEES 4; COBS 2, 4, 6, 9 and 14; CASS 7; SUP 10A, 12, 16, App 3; DISP 2; COLL 6; and PERG 1, 2, 5, 7, 8, 10 and 13

P2P #ISAs: FCA's Approach

Although we are yet to see the legislative changes required to include peer-to-peer loans in the new Innovative Finance ISA from April 2016 and regulate advice on P2P loans, the Financial Conduct Authority has helpfully set out its proposed approach for when the law does change. We have until 31 December to respond. Broadly, the FCA proposes to:

• give guidance on how disclosure rules will apply to including P2P loans in an IFISA - particularly where the P2P platform only has interim permission (pre-April 2016) and risks arising if the firm does not get full authorisation;

• consult on applying suitability rules to advice on P2P loans, including changing the application of the rules and banning the payment or receipt of commission in relation to making P2P loans (note that the regulation of advice generally is being reviewed, so those rules could also change in due course anyway); however, because direct holdings of shares and other investment instruments are not included in the list of products that independent financial advisers must consider when making recommendations, P2P loans will also be excluded from that list; and

• ensure any risks related to IFISA inclusion are disclosed, like whether they can be transferred or sold (the FCA considers P2P loans to be "a much higher-risk alternative to buying an annuity" but doesn't mention the risk compared to buying a Lamborghini other types of investment that also compete with annuities).