Peer-to-peer lending sites: MSE guide discussion

jamesd wrote: »

None of those regulatory restrictions apply to unregulated investments, They apply to certain types of regulated investment and the FCA administers them as specified by the acts of Parliament that imposed them.

Zopa started out as an almost unregulated investment, with no FSA supervision, just the OFT lending license that was required, but not to protect lenders. They imposed their own limits to help lenders avoid being classed as lending as a business activity but neither the OFT nor HMRC required it.

They apply to unregulated mini-bonds. For example, those who invested in London Capital & Finance mini-bonds were required to complete an investor declaration and classify themselves as either High Net Worth, Sophisticated or Restricted, and Financial Promotions about the bonds had to be approved by a FCA Authorised Firm, even though the investment was unregulated.

Both EISs and VCTs are unregulated collective investment schemes, and investors in those coming through retail channels need to self-certify as belonging to one of the above investor classes, and again I believe the Financial Promotions must be approved by a FCA Authorised Firm.

The Restricted Investor Statement includes the text "I undertake that in the twelve months following the date below, I will not invest more than 10% of my net assets in non-readily realisable securities."
See COBS 4.7 Direct offer financial promotions, in particular 4.7.7 which applies to Financial Promotions that are disseminated in such a way that they are likely to be received by a Retail Client.
Non-readily realisable securities include (c) a non-mainstream pooled investment, such as (a) a unit in an unregulated collective investment scheme.

None of this currently applies to P2P lending (though a small number of P2P platforms voluntarily comply with COBS 4.7.9-10). It is currently regulated under the 'light touch' regime, but it wouldn't be difficult for the FCA to include P2P within the non-mainstream pooled investment umbrella and wash its hands of trying to regulate the sector any more stringently than unregulated investments. I doubt anyone would notice the difference, other than Retail Clients who arguably have too much of their net assets invested in P2P.

jamesd wrote: »

Not sure whether you missed my point. You seem to be writing as though the FCA UCIS regulations mean there's no regulation of them, rather than them not fitting into certain FCA-regulated category, so something can be a U (by the FCA) CIS but still be a collective investment that is regulated in various ways.

Hopefully I'm writing as though these types of non-mainstream investments have more restrictions around their sale to retail clients than P2P does, as that was the point I have been trying to make. Yes, I fully acknowledge that unregulated investments are regulated in various ways, such as those in COBS 4.7 discussed in my previous post - that's exactly what I am trying to get across.

Retail investors must make a declaration and pledge not to invest more than 10% of their net worth into these types of investment, whereas there is no such restriction for P2P. My previous post #2437, which started our exchange stated that I wouldn't be surprised if the same rules were applied to P2P such that investors would either need to certify as high net worth or sophisticated or agree not to put more than 10% of their net assets into P2P. This wouldn't be a bad thing in my view.

jamesd wrote: »

The biggest issue is that it wouldn't address the key trouble areas in P2P, like Moneything grossly misrepresenting the risk of the Birkenhead loan by not mentioning the earlier overspending by the developer, then them defaulting by overspending being the reason for the third loan. Thereby largely disregarding their regulatory requirement for them to properly disclose the risk, which is a critical role the P2P firms are supposed to be fulfilling. It's a thing that should be distinguishing P2P from mini-bonds. The Birkenhead spending issues continued until the loan defaulted, leading to substantial initial losses on the security sale to those who'd had the history of this kept from them, that might not be recovered by the various forms of legal action that Moneything are trying.

It's the sort of thing that caused me to recommend against using Lendy in 2016. If you can't trust the loan descriptions you aren't in a position to know whether a loan's risk level is appropriate and the platform ends up being uninvestable because you aren't able to pick which loans to go into.

I agree with your sentiments, but this regime of 'light touch' regulation clearly isn't working. There are several ways to address this:

(1) Make P2P firms liable in cases where they have not met their regulatory requirement to make their communications clear, fair and not misleading, preferably with FSCS protection for Financial Ombudsman decisions against the firm [very unlikely]
(2) Take enforcement action against firms who issue misleading financial promotions and other communications such that it is sufficiently harmful to their business that they would not dare risk it [possible, but the FCA is not known for acting swiftly - it might take them a year or two to get around to doing something, and this course of action risks platform failure]
(3) Withdraw the FCA stamp of approval from this type of investment and make the platforms issue the same sort of health warnings and restrictions required of non-mainstream investments.

It wouldn't incur any extra penalty, but there is a slim chance HMRC might forgive your original mistake and not take any action, which is even less likely if you have both oversubscribed overall and subscribed to an invalid combination of ISAs.