The UK’s Treasury Select Committee (TSC) has published an exchange of letters with each of the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA). In the covering press release, TSC Chair, Andrew Tyrie MP, argues that “Government policies to promote … crowdfunding … may have the right intention – to increase competition in the SME lending market – but government tax incentives, in effect government subsidies, may be encouraging some consumers into the use of inappropriate products. The FCA needs to be alert to these risks. The Government may need to reconsider these tax incentives“.
In his letter to the FCA of 1 June 2016, Andrew Tyrie said: “I would be grateful if you could examine … crowdfunding [and peer-to-peer lending (crowdfunding)] …
- Where does the responsibility lie for ensuring that accurate information is conveyed to potential investors …?
- Are sufficient incentives placed on crowdfunding platforms accurately to assess the creditworthiness of borrowers and firms seeking investment through crowdfunding platforms?
- What is the FCA’s assessment of consumers’ understanding of the level of risk associated with the investment opportunities offered through crowdfunding platforms?…“
The FCA’s response (dated 16 June, and published 4 August, 2016) is strangely relaxed, when compared to the more worried approach taken in and by its (8 July 2016) “Call for input to the post-implementation review of [its] crowdfunding rules” (our blog about that is here). It describes itself as merely “cautious” about the consumer risks associated with peer-to-peer (P2P) lending, noting that they’re “higher” than putting money on deposit – although P2P-lending “consumers … may lose some or all of their investment” and “will not have access to the Financial Services Compensation Scheme“. It also describes investment-based crowdfunding as “high-risk“, before implying that it’s happy to control these risks using little more than its “financial promotions” rules, which “restrict promotion of [P2P] investments to those who have received advice[;] particular types of experienced or sophisticated investors[;] or ordinary investors who confirm they will not invest more than 10[%] of their net investable assets” – perhaps suggesting a difference between the way in which the financial promotion rules are seen by the FCA and in some parts of the market.
The FCA’s express and implied reliance on the financial promotion rules also tracks into its answers to the TSC’s particular questions:
- “The obligation to provide accurate information rests with [authorised] firms. [We] assess whether they convey information that is clear, fair and not misleading in accordance with our rules on financial promotions … [Authorised] firms must provide information to retail clients on the nature and risks of their investment in sufficient detail to enable the client to take investment decisions on an informed basis … we have considered 27 … P2P financial promotions [and] 12 [were] amended or withdrawn, and 10 … investment-based promotions, 9 of which [were] amended or withdrawn. We continue to monitor this area … “;
- “There are commercial incentives on P2P firms to lend to creditworthy borrowers to ensure that their proposition continues to be attractive to investors. Where the borrower is an individual, or certain forms of small businesses, the P2P platform also has to comply with our creditworthiness rules, … Different borrowers will, however, have different risk profiles and that is reflected in returns … available to investors … We have not stipulated levels of due diligence which investment-based crowdfunding platforms must undertake. Instead we have provided flexibility to firms to develop their own approach. In some cases, for instance, it may be appropriate for investors to undertake their own analysis of possible investments. In other cases the firm running the platform will undertake more of the analysis on behalf of investors. Our current rules allow either approach but we require firms to make it clear to potential investors what analysis has been undertaken so investors can determine how much extra work they need to do“; and
- “For investment-based crowdfunding, [we] require firms to assess the level of knowledge, experience and understanding of the investor where they have not received financial advice. They do this by asking the client to provide information regarding their knowledge and experience in the investment. For P2P lending, during our initial consultation in 2014 the evidence showed a high level of investor understanding of the risks involved. As such, we did not require the same level of assessment of knowledge and experience…“
In his letter to the PRA of 1 June 2016, Andrew Tyrie said: “I would be grateful if you could examine … crowdfunding [and peer-to-peer lending (crowdfunding)] …
- What is the PRA’s assessment of the crowdfunding sector’s resilience to potential economic shocks?
- What have been the prudential impact of the financial sector’s increased exposure to unsecured loans through crowdfunding platforms and what may these be in the future if the current growth rate persists?“
As we anticipated, the PRA doesn’t have very much to say about any of these things, and what it does say seems to depend largely on surveys and analysis carried out by others. This is fair and reasonable: “The PRA is not the prudential regulator for crowdfunding platforms, and … does not routinely assess risks to the crowdfunding sector or its resilience to shocks“. The sector is also “too small to be systemically important to the UK financial system, though [sic] this judgment may change if the sector continues its recent high rates of growth“. So, although the Bank of England “will continue to monitor growth in the sector and any prudential risk it may pose to the firms it supervises and to the financial system more broadly”, it gives the impression that it’s pretty relaxed about things for now.
These letters will disappoint some because they seem to suggest that P2P lending and crowdfunding are still poorly understood, and that could easily lead to an inappropriate policy response from a platform-operator, investor and consumer protection perspective. Tyrie’s comments about the possible need for a “tax incentive” review are also curious because, whilst some might regard them as fair, they also seem to be entirely free-standing: there’s nothing in the FCA or PRA correspondence which suggests or implies that the regulator have any concerns about “government tax incentives [or] subsidies … encouraging some consumers [to] use … inappropriate products“.