Analysis Featured

The Evolution of Peer-to-Peer Lending Regulation

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The regulation of financial services is a delicate balancing act for regulators and a topic which can quickly divide the opinions of participants. On the one hand, the presence of increasingly tightening regulation can add credibility to a sector, encourage intermediary and institutional involvement, and create barriers to entry for rogue firms which may be looking for an easy ride in a hot new sector. On the other hand, it can also create barriers to entry to legitimate disruptors, increase costs for all involved, and generally stifle innovation.

The history of the FCA and P2P

The history of the FCA’s involvement in the regulation of peer-to-peer (“P2P”) lending is a relatively short one, starting April 2014 when they took over the regulation of consumer credit from the Office of Fair Trade.

Source: Intelligent Partnership.

The FCA’s definition of what constitutes P2P lending can be found in article 36H of the Regulated Activities Order. The language is designed with online P2P platforms in mind. Notably, invoice finance platforms do not fall within the definition. The regulation requires that P2P lenders meet minimum capital and client money requirements, and adhere to the principles and conduct of business rules of the FCA handbook.


One of the most important developments in the regulation of P2P lending came in the form of the Innovative Finance ISA (“IF ISA”), launched in April 2016. These IF ISAs allowed for P2P loans to be held within a tax-efficient ISA wrapper. To offer IF ISAs, P2P providers must be fully authorised by the FCA and approved by the HMRC.

The IF ISA was, and still is, significant for a number of reasons: It is a shining example of the FCA’s commitment to the growing P2P sector and the ISA represents a trustworthy structure and brand with broad, mass market appeal.

You can read more about IF ISA’s in our blog from April 2017 and you can view the Orca IF ISA tracker on our website.

Risks and Worries

So how do participants feel about the current levels of regulation? Well, in a 2016 study by Nesta, it was found that over 90% of P2P lending platforms regarded current regulation as “adequate and appropriate”, with 6% citing it as “too relaxed” and just 4% claiming it was “excessive”. It makes sense that P2P platforms had felt relatively happy with the regulatory environment at the time, as the FCA has taken a relatively light touch with them and there have not been any major hiccups in the market.

But what are participants worried about? The same report asked platforms their perceptions of industry risks. Highest on the list was the “collapse of one or more well knows platforms due to malpractice” with 57% deeming this either high or very high risk. Second on the list was a cyber security breach, with 51% considering the risk as high or very high.

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Source: Nesta Report, February 2016.

The future of FCA regulation

The FCA’s relatively light touch has arguably helped early market entrants at this critical stage, but some could argue that it has also been to the detriment of some of the larger platforms. The FCA’s rules meant that platforms formed prior to April 2014 were only granted interim permission, whereas new platforms would need to apply for full authorisation. This meant that newer platforms, without legacy infrastructure, were able to get their full authorisation quicker. It has only been in recent weeks that two of the “Big 3” platforms, Zopa and Funding Circle, have been granted full authorisation and the third, RateSetter, is expected to receive it imminently. The total number of platforms with full authorisation now stands at 16 according to the Orca IF ISA tracker, which is up from just two in November 2016, and we expect the flurry of newly authorised platforms to continue through 2017.

What does this mean for the industry? With the heavy hitters now passing the bar and further entrants getting the FCA’s stamp of approval, it seems likely that the sector will continue on its growth trajectory. One area of growth expected is in IF ISAs, which, once HMRC ISA plan manager approval has been granted, can be offered by the larger platforms thanks to their full authorisation.

Regulation is likely to continue to tighten as the sector grows and matures. Indeed, in December 2016, the FCA published its interim feedback on the call for input to the post-implementation review of its crowdfunding rules. In it, the regulator states that there’s enough concern to warrant some changes and clarifications to the current rules.

The FCA highlighted some of its concerns, as follows:

  • Inadequate disclosures and transparency about risk and loan performance. Firms’ desire to maintain confidence is leading firms to act in a non-transparent manner.
  • Regulatory arbitrage. Firms are testing the boundaries of the regulation, introducing the risk of arbitrage with investment management or banking activities.
  • Unfamiliar markets. Firms are targeting growth through new products or in new markets, without appropriate expertise, exposing longer-term investors to unforeseen lending risks.
  • Consumer protection. Consumers may not realise they do not have the usual protections as borrowers, where agreements are non-commercial, and firms may not make them aware of this.
  • Institutional investors could bring benefits for retail investors but better controls are needed to mitigate the risks – particularly around conflicts of interest.
  • Cross Investment and Due Diligence. Some platforms allow investment in loans formed on other platforms, which can make it harder for investors to conduct due diligence and the failure of one platform may have a direct impact on the viability of others.
  • Wind-down Plans. Improvements are needed in wind-down plans to reduce risks to investors of the plans not operating as usual.

The FCA expects to publish new rules later this year.

The concerns of the FCA are clearly somewhat echoed by the market, as there has been little uptake from intermediaries and, although it’s increasing, institutional involvement is still relatively subdued. As a mitigating factor, the P2P ecosystem will continue to develop; independent third parties such as Orca will help to educate investors and provide the necessary transparency and tools required to conduct in-depth due diligence.

So, as long as the FCA maintains its commitment to ensuring innovation is allowed to flourish, while strengthening the sector, new rules should be welcome news to all involved.


Samantha McBride, OrcaSamantha McBride is a Director at Orca, which provides investors and financial advisors with the research required to perform in-depth due diligence on peer-to-peer investments. Samantha gained her Law degree in 2009 from the London School of Economics and has worked in financial services for the last eight years. Samantha began her career in mergers and acquisitions, working as an Investment Banking Analyst for both Nomura and Deutsche Bank, before moving into Investment Management. Prior to joining Orca, Samantha worked as a Senior Investment Associate at Partners Capital, a global outsourced investment office, and, most recently, a Portfolio Manager & CCO at Elm Partners, a quant-driven, low-cost investment manager.


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