New regulated activity – advising on P2P agreements

Crowdfunding, peer-to-peer finance, P2P. All of these labels refer to the same phenomenon, a way to lend or borrow money that does not involve Banks or other traditional financial institutions.

Now a fast growing sector of the market, there are several variations on crowdfunding, mostly differentiated by how they raise the money that they lend. Since 1 April 2014, the FCA has regulated two of these variations, namely … 

  • Loan-based crowdfunding
    where people lend money to individuals and/or businesses in expectation of receiving a competitive rate of interest and eventual repayment of capital and;
  • Investment based crowdfunding
    where people invest in unlisted shares or debt securities issued by businesses.

Although P2P, as it is commonly called, has been around since 2005, this type of finance is still relatively unknown in the UK. That is likely to change since it is now possible to hold P2P agreements within an ISA wrapper. 

(P2P agreements are also known as article 36H agreements, and should not to be confused with P2B where individuals lend to businesses, or with B2B where businesses lend to businesses. For further information and background on crowdfunding, follow these links – FCA crowdfunding review, Summary of crowdfunding regulation).

 

IFISA
On 6 April 2016, a new member of the ever growing ISA family was born. The Innovative Finance Individual Savings Account (IFISA) can hold P2P agreements since that date.

Advising on P2P agreements
Unsurprisingly, also from 6 April 2016, there is a new regulated activity of ‘advising on P2P agreements’ (article 53(2) of the Regulatory Activities Order). This requires firms to have the relevant FCA permission.

Firms that currently hold permission for the regulated activity of ‘advising on investments’ have had their permissions varied automatically. This includes:

  • firms that hold the permission, but for whom providing investment advice is not their primary business, for example general insurance intermediaries;
  • firms that hold the ‘advising on investments activity in respect of non-investment insurance contracts’.

Advice on P2P agreements is subject to all the suitability, research and competence requirements that apply to any investment advice.

Implications of keeping the permission

It is likely that GI firms will want to remove this permission. Any firms that have no intention of advising on P2P agreements can apply for a variation of permissions to have the permission removed using this short form and sending it to P2Padvice@fca.org.uk

Otherwise, there is no cost involved for firms who choose to keep the permission, unless they earn income from that business and there are no additional reporting requirements. However, firms that do not undertake designated investment business will be subject to an additional fee in relation to the Financial Ombudsman Service. This is currently £45 and will not be charged until the 2017/18 financial year. Detailed information can be found in the FCA policy statement PS16-08.

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Our View

It is not known how much demand there will be for IFISA investment or advice.

Firms have been allocated permission to advise on P2P agreements by default, so firms that do intend to get involved in this area can – but should bear in mind the need for advisers to be demonstrably competent on any aspect on which they advise clients.

For the present, there is no requirement to advise on P2P agreements in order to maintain independent status, so firms can safely decide not to do so for the moment. That will be an appropriate decision for many firms, because advising in this area will require a degree of effort around T&C and, more importantly research and due diligence in a new and, to many, alien, product area. And, of course, there could be implications for PI cover which should be carefully considered and discussed with your PI broker and/or insurer.

Action Required By You

  • Decide whether you wish to advise on P2P agreements;
  • If not, remove your permission;
  • If so, consider what you need to do in terms of –
    – training and competence assessment
    – due diligence and research
  • And consider any implications in relation to the firm’s PI cover.

About the Author

Technical Manager - Often referred to as the Oracle or the Sage, Alistair has a wealth of financial services experience. He is our go-to Technical Manager and enjoys nothing more than a complicated conundrum. Feel free to test his renowned knowledge by getting in touch.

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