The UK market regulator has introduced new rules to protect investors using peer-to-peer platforms (P2P) amid concerns of overexposure to the small but growing sector that just a week ago saw P2P lender Lendy collapse.
Individuals will not be permitted to have more than 10% of their assets in peer to peer investments unless they have taken financial advice, under new rules proposed by the Financial Conduct Authority (FCA).
This will stop investors "over-exposing" themselves to risk, the FCA says. This restriction will not apply to retail customers who have received regulated financial advice, however. Where investors have not received advice, P2P platforms will have to assess customers' "knowledge and experience" of peer-to-peer investments.
For P2P to continue to evolve sustainably, it is vital that investors receive the right level of protection"
Last week regulated peer-to-peer firm, Lendy, entered administration following action taken by the FCA. The firm had £160m in outstanding loans with more than £90m in default.
The FCA says its new rules will "allow firms and fundraisers to operate in a long-term, sustainable manner".
The rules cover more explicit requirements to clarify what governance arrangements, systems and controls platforms need to have in place to support the outcomes they advertise, with a particular focus on credit risk assessment, risk management and fair valuation practices.
The regulator is also strengthening rules on plans for the wind-down of P2P platforms if they fail.
Platforms will now need to assess investors' knowledge and experience of P2P investments where no advice has been given to them.
The Mortgage and Home Finance Conduct of Business (MCOB) sourcebook and other Handbook requirements will be applied to P2P platforms that offer home finance products, where at least one of the investors is not an authorised home finance provider.
Platforms need to implement these changes by 9 December 2019, except for the application of MCOB, which applies with immediate effect.
Christopher Woolard, executive director for strategy and competition at the FCA, said: "These changes are about enhancing protection for investors while allowing them to take up innovative investment opportunities.
"For P2P to continue to evolve sustainably, it is vital that investors receive the right level of protection.
"The FCA has refined its proposals to ensure the new rules protect consumers and support the P2P market. In particular, additional guidance has been provided to make it clear that platforms will not be prevented from including information about specific investments in their marketing materials."
Yann Murciano, chief executive at BLEND Network, said: "We welcome the investment limit for retail customers new to the sector to 10% of investible assets ensuring that they are not over exposed to risk. Despite not being currently legally required to do so, many platforms including our own, use appropriateness testing to ascertain whether individuals are able to invest. This test ensures there is an appropriate level of education regarding the risks and nature of P2P on the part of the investor. Consequently, this new regulation should not drastically alter how lenders operate, but entrench a policy that many P2P lenders already have in place."
Laura Suter, analyst at AJ Bell, said: "Peer-to-peer platforms have been dealt a blow by the regulator today, as the FCA introduces new rules to tighten up the sector.
"From December, anyone wanting to invest in peer-to-peer will now have to pass a test to show they understand the risks they involved, and new investors will be limited to having 10 per cent of their assets in the sector.
"Providers will also be restricted in how they market products in the future, stopping mass advertising campaigns.
"The latest Isa season highlighted the flood of marketing from peer-to-peer lenders, some of which made comparisons with cash Isa rates or didn't fully highlight the risks involved in the sector."
Jaidev Janardana, chief executive of Zopa, said: "We share the FCA's view that investors need to understand the risks of P2P lending and fully support the proposed appropriateness test as a way of checking an investor's knowledge and experience of the sector."
Janardana added, however, that the new restrictions "don't take into account the diversity of risk levels of the underlying assets to which P2P investors are exposed".