Peer-to-peer: FCA rules explained

The Financial Conduct Authority (FCA) introduced new rules for peer-to-peer websites in April 2014, when the firms became regulated.

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Here we explain how peer-to-peer lending works and what the new rules mean for the growing industry.

What is peer-to-peer lending?

Peer-to-peer lending sites such as RateSetter, Zopa and Funding Circle, unite borrowers looking for loans with savers who are prepared to lend to them. The aim is that savers can achieve higher returns than they might find from a bank or building society account, and that borrowers will be able to take out a loan at a lower rate that they would at a bank.

This kind of scheme has proved hugely popular in recent years, due to the paltry returns on offer from savings accounts.

New regulations explained

From April 2014, anyone looking to lend through a peer-to-peer website must be given a detailed explanation of how the loans work as standard.

They should be made aware of all the risks involved, and there should be plenty of accessible and clear information so that consumers understand exactly who they are dealing with.

Platforms will have to hold any client money that hasn’t yet been lent out separately to other funds, and in the event of insolvency this cash will be returned to the lenders.

Firms must also ensure they have arrangements in place for loan agreements to continue if the platform goes bust.

The rules also give investors access to the Financial Ombudsman service if they have a complaint that a peer-to-peer lender has failed to resolve.

Peer-to-peer lenders must have a capital “buffer” of at least £20,000 in case they run into financial difficulties. From April 2017, this will increase, so that lenders must have a minimum of £50,000, or more depending on the total amount lent out.

There is greater protection for consumers investing in crowdfunding too, which involves lending to start-up businesses rather than individuals. From April 2014, people investing in crowdfunding projects must confirm that they aren’t putting more than 10% of their assets, excluding property and pensions, into this kind of scheme.

Christopher Woolard, director of policy, risk and research at the FCA, said: "We want to ensure that consumers are appropriately protected – but not prevented from investing.

"We have been careful to listen to feedback from the market and the rules provide consumer protection, whilst allowing businesses to continue to have access to this innovative method of funding."

The FCA said it plans to review the peer-to-peer market and regulatory framework in 2016 to identify whether further changes are needed.

Where the rules stop short

Anyone who lends through a peer-to-peer website is not protected by the Financial Services Compensation Scheme. This covers up to £75,000 of savers’ money in the event that a bank or building society goes bust, or £150,000 in the case of joint accounts.

However, many peer-to-peer lenders have set up their own ‘provision funds’ to ensure that lenders don’t lose out. For example, Zopa has a ‘Safeguard’ fund which is held in trust by a not-for-profit organisation. If a borrower is unable to repay what they owe the Safeguard fund will cover savers for any loss of capital or interest. The fund contains a buffer on top of what it expects to pay out to provide even greater protection for savers.

Industry response

Regulation by the FCA has been welcomed by peer-to-peer lenders. Christine Farnish, Chair of the Peer-to-Peer Finance Association, said:  “We are pleased that the FCA is taking a proportionate approach to the regulation of peer to peer lending, in line with its competition and consumer protection objectives.

“Peer to peer lending is a good news story for UK consumers and its growth should be encouraged. It is however important that all players in this new market operate responsibly. Formal regulation of the sector by the FCA should help ensure that this happens."

Giles Andrews, CEO and co-founder of Zopa, which has arranged nearly £500 million in peer-to-peer loans since it launched in 2005, said; “The regulation of peer-to-peer lending (P2P) is a defining moment. When we created the UK’s first peer-to-peer lending business in 2005 it sparked intrigue and conjecture amongst the traditional banking sector. But with the peer-to-peer market now worth £1bn a year and growing fast, it's a mainstream alternative to traditional financial institutions that is offering savers and borrowers a better deal.

“Regulation is a stamp of approval for the industry that will encourage bank customers to take another look at their financial options.”
 
Visit our dedicated peer-to-peer hub to learn more.

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