Crowdfunding and P2P lending firms: time for a regulatory stock-take
At the end of January, the FCA issued a couple of slightly odd portfolio letters, to firms in the investment-based crowdfunding (IBCF) platform and P2P Lending platform portfolios. For the most part the letters did not raise anything new and arrived at a time when there are a lot of well-publicised developments these firms are already dealing with. On closer inspection though, they should be read as a stock-taking exercise by FCA, perhaps precisely because there is so much regulatory change affecting these firms.
These are two of the highest-risk portfolios within the Consumer Investments Directorate's remit, being platform operators largely facilitating retail investment into high-risk investments, which might explain the apparent singling out of these types of firms. Their profiles and activities also bring them into scope of a whole host of different regulatory initiatives that are currently ongoing.
In the letters, the FCA summarises its areas of priority for each portfolio, having regard to where it sees the most potential for harm to consumers and markets, and restates its expectations of firms. No bones are made that the FCA will act in these areas, and will increasingly gather data on firms to inform the direction of its supervision.
It is notable that the letters are addressed to the Board, and not the Chief Executive as is typical with portfolio letters. The FCA is clearly signalling its expectation that all of these topics are considered by the top-level of firms as a collective and that all Board members assume some responsibility for them.
Below, we have summarised the topics that are raised in the letters and what the FCA wants firms to do:-
Both sectors (IBCF and P2P)
Consumer Duty
In both letters the FCA says this is the most important item, unsurprisingly. In a way, there is nothing new to see here, with the FCA outlining the four outcomes and high-level considerations under each for firms in these portfolios. Due diligence (on raising companies or borrowers) is a focus in both letters.
What is notable is the language the FCA employs in regard to the Duty, referring to Consumer Duty as 'a tool' at their disposal and how they will 'use the Consumer Duty' where they see the need to intervene. Firms would do well to recognise that the FCA sees the Consumer Duty as part of its supervisory arsenal and not only another set out rules for firms to follow. You may be tired of hearing about how Consumer Duty is outcomes-based and how the overarching principle and cross-cutting rules are always in the background, but this really is a new approach. From what the FCA is saying in these letters, we can expect them to be proactive in supervising the outcomes that firms are actually delivering, beyond what is in the black and white letter of the rules.
PS22/10 - Financial promotions rules for high-risk investments
This may seem like old news as PS22/10 was published in November 2022 with an effective date of 1st February 2023, but here the FCA highlights that the level of compliance with the new rules across both portfolios has been poor, based on what it found from a review in December 2022 and a review in the first half of 2023. The FCA directs firms to the good and poor practices it has observed, as a guide, here: Financial Promotions for high-risk investments | FCA
The FCA says that where it identifies consumer harm resulting from non-compliance with these rules, it will act to ensure redress is put in place. So firms should review the good and bad practices outlined by FCA as part of ensuring they are meeting the expected standard - non-compliance could be costly.
IBCF platforms do get more focus here, with FCA unequivocally stating its position that it considers so-called 'restricted documents' (that is, documents that might not be available initially but are requestable by investors) to form part of the financial promotion, and not eligible for the 'one-off communication' exemption in the Financial Promotions Order. Many firms were previously availing themselves of this exemption for these types of documents, so it would be wise to review your approach if you are still doing so.
P2P Lending Platforms only
Wind-down planning
This is the only item in either letter with a specific instruction for firms: P2P firms are required to complete a 'Self-Certification Attestation', which is a formal statement (to be signed by the most appropriate senior individual at the firm with oversight and accountability for this area) that it has taken, or will take, the FCA's required action.
What is the required action? In this regard, firms are required to at least annually:
Complete an assessment of adequate liquid resources that would facilitate an orderly wind-down;
Confirm that sufficient levels of liquid resources are held to implement a wind down, if necessary, and that these are held appropriately, ring-fenced for the sole purposes of wind-down; and
Conduct a review of the Firm’s wind-down plan for suitability, including an assessment of the triggers that could prompt a wind-down and that these are still relevant.
In the first instance, firms are required to email FCA and inform them of the most senior individual at the firm accountable for the items above and with oversight of this. FCA will then email the individual a template for them to complete and return. Firms should notify the FCA of the relevant individual by way of an email to: portfolioletters@fca.org.
No deadline is given for this nomination to FCA, but firms should do this at the earliest opportunity. You do not need to have completed the required review before nominating the responsible individual and completing the attestation.
IBCF Platforms only
S21 Financial Promotions Approvals
Not surprising this is included, as a hot topic for these firms; firms wanting to approve financial promotions for unauthorised third-parties, which IBCF platforms commonly do, now need a specific regulatory permission to do so.
Firms that routinely approve third-party promotions should have applied for the permission before 6th February to be able to continue to do this under a transitional period while the FCA assessed their application. From 7th February, unless an application was filed before the deadline, it is prohibited to do this without the permission.
This letter was issued prior to the transitional period application deadline - just - and clarifies that the FCA expects most IBCF platforms will require the new permission. We know that close to the deadline there was still some debate between firms in the portfolio and FCA on whether the permission was needed in light of the firms' specific business models. So hopefully this letter offered some indication of the FCA position, albeit falling short of clarity.
New 'Public Offer Platform'
This gets only a passing mention as the formal consultation has not yet launched; it is expected this year.
Firms that facilitate raises over the £5m threshold, which will be in-scope, are advised to read the FCA Engagement Paper 5 from July 2023. In the paper, the FCA summarises its proposed approach to the new regime which will include a new permission for operating a public offer platform and related rules for the operation of the platform.
It will be interesting to see whether they use the s21 Approvers applications to get a sense of industry practice, e.g., around due diligence, to inform their rule proposals.
Financial Resilience
FCA comments that regulatory return data is showing financial resilience as a 'real issue' for IBCF platforms, with income streams being inconsistent.
The FCA invites firms to review their Wind-down planning guide, and reiterates that it may ask firms for firms' wind-down plans during its supervisory work. This does not go as far as the requirement for P2P firms to nominate a responsible individual and attest to having completed specific reviews in this area, as most IBCF firms will be subject to MiFIDPRU rules which require wind-down planning as part of the ICARA. However, IBCF firms might consider carrying out a similar review as best practice, to check that you are comfortable with your plan as a stand-alone exercise, as the FCA might well request it.
Trading Venue Perimeter Guidance
Firms are directed to review the PS23/11 Guidance on the Trading Venue Perimeter in the context of bulletin boards that they operate, to make sure they are not crossing the line into operating an multi-lateral trading facility (MTF). Inadvertently operating an MTF without the specific regulatory permission to do so would be a serious regulatory breach.
We have been helping firms across the IBCF and P2P portfolios with the areas above. If you have any questions or are unsure about your compliance in any of these areas, please get in touch.