Will New P2P Rules Hit SME Funding?

Entrepreneurs and small businesses considering raising money from the peer-to-peer finance sector take note: new regulation may soon make picking up funding in this way more difficult.

The Financial Conduct Authority, the UK’s chief financial watchdog, has just spent months investigating the sector, where it has already intervened with new rules once to safeguard investors. Now the FCA says the sector has further problems that must be addressed, including poor standards of disclosure, opaque pricing structures, over-optimistic marketing claims and poor record-keeping. It is consulting on a series of potential reforms and has also warned individual businesses in the industry could be investigated for compliance failures.

Much of the regulator’s ire is reserved for the peer-to-peer lending sector, where online platforms facilitate loans from investors to consumers or small businesses. While defaults have been relatively rare – though the regulator points out most platforms have not been tested through a complete economic cycle – the FCA is worried that investors are sometimes being given false expectations about the returns they should expect.

The regulator is also anxious about the way in which most peer-to-peer lending platforms now give investors exposure to a pool of loans, rather than allowing them to choose for themselves about who to lend to. While this concept is supposed to reduce risk by providing investors with diversification benefits, the FCA complains that investors often have little idea about where their cash is allocated – and that they have no visibility of the risk they are taking. In some cases, the regulator says, poor administration means the platform isn’t sure itself which investors have invested in which loans.

As for the equity crowdfunding market, where investors are invited to subscribe for shares in growing businesses, the FCA has fewer concerns. However, the regulator has warned that platforms aren’t always doing basic due diligence on companies looking to use them to raise money; investors may therefore be exposed to risks they thought had been assessed.

Given the higher risk profile of equity crowdfunding, where there is no guarantee investors will ever get a return on their money, the FCA’s view that there are fewer problems in this part of the sector might be considered surprising. However, equity crowdfunding platforms are already subject to more exacting regulatory standards than their peer-to-peer lending counterparts.
Source: https://www.forbes.com

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