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Dear Board | Release Date: 15th January 2024

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

To access the original FCA document, click here.

Long Summary

The Financial Conduct Authority (FCA) has directed this communication to the boards of Loan-based Peer-to-Peer (P2P) Lending platforms, now overseen by the Consumer Investments Directorate. This letter aims to outline potential consumer and market harms from P2P business models and delineate the FCA’s strategic approach for addressing these issues.

Importance of Supervisory Engagement

The letter stresses the importance for P2P firms to acknowledge and mitigate possible risks of harm in their operations. Future supervisory interactions will focus on the actions taken by the boards and senior managers to safeguard consumers and markets effectively.

Data-Driven Supervision Approach

The FCA is adopting a more data-oriented approach, utilising regulatory returns and supplementary direct information requests. This method aims to identify outlier firms that may pose a heightened risk of harm and engage with them to mitigate any identified or potential harm.

PS22/10: Key Feature for P2P Firms

PS22/10, which addresses financial rules for high-risk investments, is a critical area of focus. This policy aims to enhance the customer journey into restricted mass market investments, which include P2P agreements. Its key features include:

The rules are designed to ensure firms communicate and approve financial promotions effectively, enabling consumers to make well-informed investment decisions.

Compliance with PS22/10

A December 2022 review found that compliance levels with PS22/10, especially in risk warnings, were below expected standards. Consequently, the FCA conducted a more detailed examination of firms’ adherence to the remaining rules from February 2023. The findings, along with examples of good and poor practices, have been made public.

Expectations from P2P Firms on PS22/10

The FCA expects all P2P firms to review these findings, including examples of good and poor practices, and implement necessary changes to align with FCA expectations. This action is vital to improve consumer understanding and outcomes.

FCA’s Proactive Engagement

The FCA will actively engage with firms in the portfolio to ensure complete integration of the new rules in PS22/10. Where weaknesses or failings are identified, especially those resulting in poor consumer outcomes, the FCA intends to intervene swiftly and seek redress for investors. Firms that identify potential or actual harm are expected to notify the FCA, along with a mitigation plan.

Wind-Down Plans, Triggers, and Liquidity Monitoring

Concerns regarding disorderly wind-downs and potential financial losses to investors have prompted the FCA to require P2P platforms to strengthen their wind-down plans. This process includes incorporating effective triggers and establishing a liquidity buffer for a solvent wind-down.

May 2021 Letter and Follow-Up Actions

In May 2021, the FCA engaged with all firms to fortify their wind-down plans. The firms responded by setting individual levels of adequate liquid resources and committed to regular reviews of these minimum levels.

November 2022 Review

Amid a challenging economic environment, the FCA revisited this issue in November 2022. All firms reaffirmed their most recent reviews, including any changes to their liquid resources and wind-down plans.

Ongoing Economic Pressures

The sustained high interest rates and cost-of-living crisis continue to exert financial pressures on firms, making the risk of disorderly wind-down a prominent concern.

Expectations Regarding Wind-Down Plans

P2P platforms are required to identify minimum liquid and capital resources that, if breached, would trigger a wind-down. Firms should continuously monitor their financial health and maintain adequate financial resources. At least annually, firms must assess their liquid resources, confirm sufficient levels for wind-down, and review their wind-down plans for relevance.

FCA’s Continuous Monitoring

The FCA will persist in requesting wind-down plans through its supervisory work. Firms lacking adequate preparation for an orderly wind-down, or those with insufficient capital or liquid resources, will face stringent FCA actions, including potential capital injections or reassessments of their eligibility to offer new loans to retail investors.

Self-Certification Attestation Requirement

Firms are asked to complete a Self-Certification Attestation, confirming compliance with the FCA’s requirements. This attestation should be signed by senior individuals who can ensure the completion of required actions. The FCA uses attestations to ensure accountability within regulated firms and holds senior individuals responsible for action. Firms are to identify the appropriate senior individual(s) accountable for the described actions.

Consumer Duty and Its Implications

With the Consumer Duty effective since July 2023, it has become a key focus for supervising P2P firms. The Duty mandates firms to prioritise consumer needs and deliver favourable outcomes. Areas aligned with the Consumer Duty include:

FCA’s Approach to Consumer Duty

The FCA will assertively intervene using the Consumer Duty to prevent or address harms. Formal tools may be employed to restrict business activities and seek redress for investors.

Next Steps and Data Requests

The FCA plans to issue data requests supplementing regulatory returns. This approach will help monitor firm behaviours and business models, identify risks, and enable quicker, more assertive interventions.

Board Responsibilities and Governance

Boards are responsible for ensuring their firm’s compliance with regulatory requirements and expectations. They must ensure that senior managers are accountable for delivering on FCA expectations.

Conclusion and Contact Information

The FCA looks forward to nominations for senior individuals responsible for wind-down plan attestations. Firms should maintain open communication channels with the FCA for any queries or concerns.

Key Take-Aways and Actions for P2P Lending Platforms

  1. Review and Comply with PS22/10 – P2P platforms must rigorously review and comply with PS22/10 rules, focusing on enhancing consumer understanding and experience.
  2. Maintain and Monitor Wind-Down Plans – Continuously assess, update, and ensure the adequacy of wind-down plans, including liquidity and capital resources.
  3. Fully Implement Consumer Duty – Embed the Consumer Duty in all operations, prioritizing consumer understanding, support, and delivering good outcomes.
  4. Ensure Accountability and Compliance – Complete the Self-Certification Attestation and maintain clear accountability at senior management levels.
  5. Proactively Engage with the FCA – Respond to data requests and engage proactively in supervisory interactions, demonstrating compliance and transparency.

By adhering to these directives and maintaining high standards of consumer protection and market integrity, P2P lending platforms can continue to operate effectively within the regulatory framework set by the FCA.

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