The Financial Conduct Authority (FCA) has recently implemented drastic restrictions on the size of peer-to-peer?(P2P) investments.
The measures outlined by the FCA have been taken to better protect investors from making poor decisions with their financial investments. The new regulations implemented by the FCA have made it so that new investors can only invest a maximum 10% of their valuable assets.
This rule will only be applied to new investors, not to more advanced, sophisticated lenders who are more experienced and less likely to fall victim to bad financial investments. The FCA have allowed these P2P lending platforms until the end of the year (9th December) to adhere to the new regulations.
In addition, new investors will also have to both take and pass a test created by the lending platforms, demonstrating to the UK’s financial watchdog that they have a substantial awareness and understanding of the risks involved in peer-to-peer lending.
The FCA’s executive director of strategy and competition Christopher Woolard commented:
these changes are about enhancing protection for investors while allowing them to take up innovative investment opportunities.These reforms have come into action after the administration of Lendy, a peer-to-peer platform that the FCA had commented on, claiming that its investors were often unaware as to what they were investing into. Over 20, 000 investors are now thought to be taking legal action after Lendy’s administration. This is not the only major peer-to-peer lending firm feared to be the ruin for many investors, with rumours of more than 10 other P2P lenders close to administration.
Strong returns
Peer to peer lenders offer a strong return for those individuals looking to invest, with returns of 6% to 9% per year often obtainable. Individuals invest in peer-to-peer loans which are lent out to other people, with low-risk borrowers generating an ROI of 3% and higher risk borrowers with bad credit offering the highest returns. From within the industry, BDO’s Matt Hopkins has claimed that These proposals will move the P2P industry much closer to the standards that the FCA expects of other financial products. However, the tightening of regulations may also lead to many of these P2P lenders, already on the brink of administration, to crash. Indeed, Hopkins further predicts that:?Enforcing the crackdown
While many investors within the industry do welcome these changes fully, there is still uncertainty surrounding how these reforms will be put into action. Many professionals, experienced in the investment field, such as Laura Suter, have spoken up about the FCA’s recent announcement, claiming that this limit is not only arbitrary to enforce in the first place, but also will be tricky to effectively manage. Suter states:?it will be interesting to see how investors have to calculate and declare their investible assets to ensure they don’t exceed the cap. The flood of money to peer-to-peer in recent years has placed a spotlight on the sector, but it’s baffling that this limit is in place for peer-to-peer but not for other high-risk investment areas, such as cryptocurrencies, for example.Elsewhere, the guarantor loan industry has seen an increase in complaints by over 3, 000 more in the last year, with a recent Panorama documentary showing that Britons had over 1 billion in debt from guarantor loans. With this type of loan, borrowers can borrow up to 15, 000 using a co-signature from a guarantor with a good credit rating. (Source: Guarantor Loan Comparison).
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