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Dear Board of Directors | Release Date: 26th August 2021

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

To access the original FCA document, click here.

Long Summary

The Financial Conduct Authority (FCA) is enhancing its supervisory focus on loan-based Peer-to-Peer (P2P) crowdfunding platforms to address the key risks these platforms pose to their customers and the financial markets. This letter outlines the identified areas of potential harm, the FCA’s expectations for P2P platforms, and the regulatory body’s supervisory strategy moving forward.

Key Risks and FCA Expectations

Secondary Markets and Risk Management

The FCA notes concerns with the operation of secondary markets that allow investors to exit their loans early. Issues have been exacerbated by the COVID-19 pandemic, leading to increased liquidity demands and the temporary closure of some secondary markets. Platforms using discretionary models to facilitate exits have sometimes slowed down the process of investor exits.

FCA Expectations:

Platforms must ensure the fair and appropriate pricing of P2P agreements when facilitating exits before the maturity date, in compliance with COBS 18.12.17 R and COBS 18.12.16 R.

Platforms unable to meet these pricing and valuation requirements should suspend secondary trading and seek formal approval from the FCA.

Wind-Down Plans (WDPs), Triggers, and Liquidity Monitoring

There are significant concerns regarding the adequacy of firms’ Wind-Down Plans (WDPs), especially in their ability to activate these plans solvency in realistic scenarios. The FCA emphasises the need for robust liquidity monitoring and effective triggers for initiating wind-down procedures.

FCA Expectations:

Firms must conduct regular liquidity and financial health assessments, ensuring adequate capital and liquid resources for an orderly wind-down.

WDPs should realistically identify triggers and ensure that liquid resources for wind-down are segregated and readily accessible.

Disclosure and Use of Contingency Funds

Amidst the financial strains of the pandemic, the FCA stresses the importance of transparent and accurate disclosures regarding loan performance and the use of contingency funds, particularly during periods of loan forbearance.

FCA Expectations:

Platforms must provide clear, fair, and non-misleading ongoing disclosures about each P2P agreement, in accordance with COBS 18.12.31 R.

Contingency fund policies must be clear about the fund’s governance and the conditions under which payouts are made, with performance updates provided quarterly.

Platform Fees, Charges, and Recovery Priorities

The FCA is concerned about the clarity of platform fees and charges and their impact on the recoveries by investors from defaulted borrowers. There is a need for better communication and transparency in how these fees affect the recovery process and the priority of payments.

FCA Expectations:

Platforms must ensure that their fee structures and terms of recovery are communicated clearly and comply with the FCA’s principles of fair treatment and transparency.

Any changes to fee structures or recovery terms, especially in scenarios like insolvency or wind-down, must be legally sound and clearly communicated to investors.

Supervisory Strategy

The FCA’s supervisory approach will focus on the aforementioned areas to ensure that P2P platforms adhere to regulatory requirements and mitigate risks effectively. This includes:

Conclusion and Next Steps

P2P platforms are urged to review their practices against the FCA’s expectations and take immediate corrective actions where necessary. Platforms should prepare and submit detailed assessments of their financial crime risks, counterparty analyses, and wind-down arrangements, demonstrating compliance with all regulatory expectations.

Key Takeaways and Actions

Risk Management: Enhance risk management frameworks to address identified deficiencies in secondary market operations, wind-down processes, and financial crime controls.

Transparency and Disclosure: Improve the transparency of fee structures and loan performance disclosures to ensure investors are adequately informed.

Regulatory Compliance: Ensure all operations are compliant with FCA regulations and prepare for rigorous FCA evaluations and potential interventions.

Engagement with FCA: Maintain open lines of communication with the FCA, responding promptly to inquiries and requests for documentation.

P2P platforms must now focus on aligning their operational and strategic frameworks with the FCA’s regulations to foster a safer, more transparent, and consumer-focused crowdfunding environment.

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