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Dear CEO | Release Date: 7th March 2019

To read a shorter summary of this Dear CEO letter, click here.

To access the original FCA document, click here.

Long Summary

The Financial Conduct Authority (FCA) has issued a directive to CEOs of Loan-based Peer-to-Peer (P2P) crowdfunding platforms, emphasising the necessity of reviewing and potentially enhancing their wind-down arrangements. This request aims to ensure that P2P platforms are well-prepared to manage and administer P2P agreements effectively, even if the platform ceases operations for any reason. The FCA underscores the critical nature of these plans in safeguarding consumer interests should a platform stop functioning.

Importance of Robust Wind-Down Arrangements

Regulatory Requirements

The FCA mandates that P2P platforms must have reasonable steps in place to continue the management and administration of P2P agreements if the platform ceases operations. These arrangements must be specifically tailored to the platform’s business model and must be adequately funded. Furthermore, any third-party engaged for wind-down processes must possess the appropriate regulatory permissions.

Potential Consumer Harm

Inadequate wind-down arrangements pose significant risks to consumers, primarily if the platform stops providing management and administration services for loans made through it. Risks highlighted include the possibility that investors may not receive loan repayments or might have to directly engage with borrowers, which is often not economically viable due to the fragmentation of individual agreements.

Key Areas of Concern Identified by the FCA

Systems and Controls

The FCA findings indicate that some platforms lack adequate systems and controls to ensure effective wind-down arrangements. This includes a failure to:

Management Information and Trigger Points

Platforms are required to develop management information systems that can detect the crystallisation of risk and trigger the implementation of a wind-down plan. The FCA has observed that many platforms do not have effective systems to monitor such triggers, which could delay the timely execution of wind-down plans.

Governance and Third-Party Diligence

The review also pointed out that some platforms have not conducted adequate due diligence on backup service providers (BSPs) integral to their wind-down plans. It’s crucial that these BSPs have the capability, capacity, and appropriate permissions to support wind-down arrangements effectively.

Financial Planning and Platform Funding

Concerns were raised about the sustainability of platforms’ funding models, particularly those reliant on continuous new business to fund operations. The FCA stresses that wind-down plans must demonstrate how they will be funded, ensuring that platforms do not rely on acquiring new business during wind-down phases.

Next Steps and Expectations from the FCA

Review and Improvement of Wind-Down Plans (WDPs)

Platforms are expected to thoroughly review their current WDPs using the guidance provided in the FCA’s Wind-down Planning Guide (WDPG). This includes assessing the realism of scenarios that could end their business viability and preparing accordingly.

Collaboration with Third Parties

Where wind-down plans involve third parties, platforms must ensure these parties have the necessary permissions and capabilities. Platforms should work closely with these entities to ensure their WDPs are integrated and robust.

Notification and Communication with the FCA

Platforms must notify the FCA immediately if there is any threat to their ongoing viability. They should also be prepared to provide detailed plans and receive feedback on their WDPs as part of the FCA’s supervisory activities.

Conclusion and Key Takeaways

Proactive Management

Platforms must proactively manage their wind-down plans, ensuring they are comprehensive, adequately funded, and capable of being implemented effectively under various scenarios.

Regulatory Compliance

Adhering to FCA guidelines and ensuring all aspects of wind-down plans comply with regulatory requirements is crucial for maintaining consumer trust and platform integrity.

Continuous Review and Adaptation

Ongoing evaluation and adaptation of wind-down plans are necessary to respond to changing market conditions, business models, and regulatory landscapes.

This directive from the FCA highlights the importance of meticulous planning and robust governance in managing the risks associated with the wind-down of P2P platforms, ensuring that consumer protection remains a top priority.

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