The outlook for peer-to-peer lending firms in 2019/2020
30 April 2019
The FCA have published the 2019/20 Business Plan outlining their sector and cross sector priorities for the next year. While the plan is for the industry as a whole, it is clearly relevant to P2P firms, particularly given the Regulator’s increased focus on the sector. The FCA began regulating P2P in back in 2014. Since then it has:
- conducted a Post Implementation Review (PIR)
- consulted on proposed new rules and guidance as a result of the PIR
- issued a Dear CEO letter to all firms in the sector requesting a review of the wind down arrangements in place.
Given this high profile, it is important for firms to ‘keep their house in order’ and ensure they are aware of the Regulator’s priorities.
Culture and Governance
Good governance has been a longstanding focus of the FCA. Firms are required to ensure that they have robust governance arrangements in place to promote a healthy culture and drive appropriate behaviours. This focus continues with the implementation of the Senior Managers and Certification Regime (SMCR), which will be extended to firms in the peer-to-peer lending sector in December 2019. As a result, senior managers will be responsible for driving positive customer outcomes and held responsible where things go wrong.
The FCA has a particular focus on P2P, highlighting the importance of ‘good governance and orderly business practices’ in the recent paper CP18/20. The key proposals for governance related changes require firms to:
- have appropriate wind down plans in place
- establish independent Compliance, Risk and where appropriate Audit control functions
- implement a risk management framework
- encourage director level responsibility for risk.
The FCA is committed to protecting consumers from the harm caused by “platforms’ complicated business models and poor business practices. So further review work in this area should be expected.
The FCA (alongside the PRA and Bank of England) highlighted operational resilience as a key issue in their July 2018 discussion paper, and it continues to be a focus in the 2019/20 plans. Ensuring continuity of service, and safeguarding data is a core requirement for all firms. While these failures had many different triggers, there are often common causes:
- Lack of engagement from senior management. Operational resilience is too important to be left to operations and IT. Boards and Excos should review relevant MI (uptime, capacity, near misses etc), and demonstrate they understand the issues, and have taken appropriate action.
- Risk landscapes which are too narrowly drawn or fail to fully quantify the impacts.
- Lean programmes which have become dangerously underweight – with cost cutting exercises resulting in insufficient resources to maintain adequate services (under BAU conditions and in times of stress).
- Inadequate oversight and control of change management programmes.
- Insufficient due diligence, and ongoing monitoring of third party suppliers.
Bovill’s prudential expert, Harpartap Singh highlights some of the key issues: ‘In a recent Dear CEO letter, the FCA has raised concerns about the level of wind down planning carried out by loan-based peer-to-peer crowdfunding platforms. Although the wind down planning guidance was introduced in Q4 2016, many firms have not gone any further than putting in place business continuity plans and vague, non-specific “plans”. The FCA also highlighted the obligation to notify lenders of the wind down arrangements in place, especially if they involve another firm taking over the management and administration of the P2P agreements.’
The letter outlined the following expectations:
- Firms will need to take reasonable steps to ensure continuity in the administration of P2P agreements should they need to wind down
- Firms will need adequate cash reserves to cover the costs associated with wind down
- Where firms commission third parties to assist with the wind down, they will need to ensure they have the appropriate regulatory permissions.
A recent review of P2P firms’ arrangements “strongly suggest” that some firms may struggle to meet the Regulator’s expectations. Three areas require urgent attention:
- Systems and controls relating to wind down – these need to be very firm specific, including clarity on governance, when a wind down would be initiated, due diligence on back-up service providers and details of IT system continuity and availability of technical staff
- Platform funding and remuneration models – firms need to consider whether their income streams would be sufficient to carry out a wind down or whether other arrangements need to be put in place
- Third party permissions required for wind down – the firm(s) which would take over the administration of P2P agreements must have the relevant regulatory permissions
Harpartap adds ‘the FCA will be asking a sample of firms to submit their revised wind down plans for review. In the circumstances, firms should carry out an immediate review of wind down plans. This may be the time to get external help to ensure that the plans are compliant with the current guidance and leave you in a good place for when the new rules come out.’
Fair treatment of customers
In the 2019/20 plans, the FCA focuses on fair treatment of ‘existing’ customers – which is a particular focus for the insurance sector. But all firms should be looking at customer outcomes, throughout the lifecycle, from new business to end of life. In particular in the P2P where there remain challenges:
- Ensuring customers fully understand the products they are purchasing
- Keeping customers informed on changing risk profiles
- Being able to demonstrate fair value
- Adhering to CONC requirements (for sales and collections), when consumer lending is offered
- Managing potential conflicts of interest between different classes of investors.
Next steps for P2P lending firms
The Business Plan is there to give insights into the FCA’s mindset and direction of travel. Firms should review the document and consider the elements relevant to their businesses.
Whatever your sector, it is clear that culture – and the associated requirements under SMCR – is a cross-sector focus that will underpin much of the Regulator’s approach in the future.