Latest changes to P2P regulation – ISAs, Advice and Client Monies

 

The FCA has been busy these past few weeks, issuing proposals for Innovative Finance ISAs, advising on P2P agreements and client monies.

 

Innovate Finance ISAs

 

The first key bit of news is the confirmation that only P2P firms holding full authorisation will be able to offer Innovative Finance ISAs (“IFISAs”). This means that firms holding interim permission will not be able to offer the IFISA until their full FCA authorisation comes through. This will clearly give an advantage to the first firms to be authorised.

 

The second ISA-related news was announced on 2 February 2016 when the FCA published a together with a draft version of the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2016 (the “Draft Order”). This, among other things, amends legislation concerning the regulation of activities relating to peer-to-peer lending and providing advice on lending through such platforms. This follows a on the subject which was published by the FCA in November 2015.

 

The amendments arise out of the Government’s plan to align the treatment of P2P loans with other ISA qualifying investments. The Draft Order introduces a new regulated activity of advising a person in their capacity as lender (or potential lender, or an agent of such a person) under a relevant loan based P2P lending agreement. Firms without an existing permission to advise on investments that want to provide regulated advice on P2P agreements from 6 April 2016 will need to apply for permission to carry on the new activity.

 

The Draft Order also extends the scope of the regulated activity of operating an electronic system in relation to lending, to ensure that all the relevant activities are included within this. This includes the activity of facilitating the transfer of rights under a P2P loan between lenders.

 

It is therefore important that firms who operate in this segment of the market take this opportunity to review their activities to assess whether they are affected by this legislative change.

 

The FCA aims to publish a policy statement making final rules in March 2016, in time for the introduction of the IFISA.

 

FCA consults on segregation of client money for loan-based crowdfunding platforms

 

On 21 January 2016, the FCA issued a on loan-based crowdfunding platforms and the segregation of client money (the “Consultation”). 

 

For the purposes of the Consultation it is necessary to distinguish between:

 

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• P2P loans: regulated loans made over peer to peer platforms from individuals to individuals, individuals to businesses, or businesses to individuals; and
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• B2B loans: unregulated business to business loans that fall outside the scope of a P2P loan.
• 
  

 

Currently, an investor’s money held by a firm in relation to P2P loans (e.g. money to be lent or money received in payments) falls within the definition of client money for the purposes of the client money rules in CASS 7. Under CASS 7, client money must be segregated from both the firm’s own money and money held in relation to B2B loans.

 

Firms in the P2P industry have generally not developed systems that distinguish between money held for the purposes of P2P loans and that held for B2B loans. The requirement to segregate P2P and B2B monies can therefore be burdensome when, for example, firms offer bundles of loans to borrowers that can comprise a mixture of B2B loans and P2P (or more likely P2B!) loans from a number of lenders to one borrower.

 

The FCA has proposed that firms that hold money in relation to both P2P and B2B loans can elect to hold all lenders’ monies under CASS 7 if they wish to do so. This would allow firms to segregate both P2P and B2B monies from the firms’ money.

 

This move is welcomed and the FCA has said it aims to publish a policy statement making final rules in March 2016.

 

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Jonathan Segal, Partner at Fox Williams LLP

 

Jonathan is a partner in the FinTech and Alternative Finance team at Fox Williams, a City-based Law Firm. He advises clients across the FinTech and Alternative Finance spectrum, from start-ups disrupting existing markets with innovative technology to financial institutions looking to invest in new technology.

 

He has particular expertise in peer-to-peer and crowdfunding platforms, drawing on his extensive experience in the banking and finance sector gained both in-house at major financial institutions and in private practice. His experience spans a variety of financial products, including loans (both corporate and consumer), real estate and development finance, asset-based lending, receivables financing, asset finance, trade finance, capital markets, derivatives and repos. A regular speaker at industry events both at home and abroad, Jonathan is also heavily involved in next generation disruptive financial products such as virtual currencies (including Bitcoin), blockchain technology and the use of Big Data in financial predictive analytics and disruptive insurance models.

 

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