You may have seen that the Financial Conduct Authority (FCA) just announced new regulations which will cover peer-to-peer (P2P) investments. We wanted to outline what this means for you as an investor, as well as our response.
What this means for P2P investors
Before we go any further, the headline for you is that nothing changes with your Zopa investment. You don’t need to do anything, your investment – rates, loan book, target return – are not affected.
We are comfortable that we are well positioned to comply with the rules, which come into force on December 9 2019. They call for many things that Zopa is leading the sector on already, so in some ways they are simply formalising our best practices.
For investors in P2P generally, there are lots of good things in the new rules. You can expect platforms to be more transparent with disclosures so you can easily assess their track record of performance, approach to risk management, the underlying asset class you are investing in and the platform operating model.
So, what has happened?
The FCA announced a ‘post implementation review of loan-based crowdfunding platforms’ in July last year. In other words, they were considering additional regulations for P2P platforms. Today it confirmed which rules it’s going to bring in. As mentioned, the majority of these are reflective of how we do business already. But in addition, there will now also be appropriateness tests and marketing restrictions – which will place limits on how much some new investors can put into a P2P platform.
Existing customers of Zopa will not be affected by these limits. However, new customers to Zopa, who are not classed as ‘sophisticated’ or ‘high net worth’ investors, will start off with limits on how much they can put into a platform. Once they gain experience with the product, these restrictions will ease and they will be able to invest more. This actually reflects what we have seen over time from our customers who typically fund an initial amount and then build up their portfolio each year, as they get more comfortable with how the product works.
Why were these regulations brought in?
The FCA started to regulate P2P lending back in 2014 through a set of temporary regulations. Since then the peer-to-peer market has grown, bringing in many newcomers including platforms with more complex business models and a variety of different asset classes, ranging from high value loans like property development to smaller, personal loans, like Zopa offers.
These rules have been brought in to make sure that all the players in the sector meet the same standards, and they cover everyone – whether they’ve been in the business 14 days or 14 years.
What do we think?
Throughout the consultation period we have been in conversation with the FCA, and we’re broadly supportive of the new rules put forward. We have always believed strongly in a well-regulated industry and have lobbied for years for effective regulation.
We share the FCA’s view that investors need to recognise the risks of P2P lending and already require our customers to confirm they understand our product before they invest. We also have internal procedures in place to gather feedback from customers and make improvements based on this. Therefore, we are in favour of the proposed appropriateness tests as a way of gauging an investor’s knowledge of our specific platform and the associated risks, as well as their understanding of P2P lending more broadly.
We typically expect investors to build up how much money they have in Zopa over time and have always viewed P2P as part of a diversified portfolio of savings and investments. Therefore, we don’t see temporary investment limits on new P2P customers impacting our business. However, we are concerned that the introduction of these limits doesn’t take into account the diversity of risk levels to which investors are exposed across different platforms.
As the world’s first P2P platform we have 14 years’ experience in risk management and as specialists in consumer lending, benefit from the data available through the big three credit rating agencies. We don’t offer the highest returns in the sector but compete with traditional lenders for prime customers. Our approach of offering a low risk, well-diversified portfolio of personal loans saw us through the 2008 financial crisis and has generated over £250 million in interest for our investors.
What happens now?
Like we say, nothing changes for existing customers and you don’t need to do anything your end. The rules outlined by the FCA must be implemented by December 9 2019. We’ll be rolling out changes over the coming months.
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