In August this year, the FCA set out new policy and handbook rules for loan-based peer-to-peer platforms and other firms which provide high-risk investments. These changes focus on the consumer journey into high-risk investments, and must be implemented between 1 December 2022 and 1 February 2023. As such, you will soon see a number of changes across the rebuildingsociety.com website, as well as changes to how we onboard prospective lenders and reward our current lenders.
Background
These changes are an attempt to reduce misleading adverts of high-risk investments (HRIs) in Financial Services. The FCA wishes to ensure that:
- firms communicating and approving financial promotions do so to a high standard;
- consumers receive high-quality financial promotions that enable them to make effective, well-informed investment decisions; and
- consumers only receive promotions of HRIs where they understand the risks involved.
FCA's target: A 50% reduction in investors investing in HRIs who indicate a low tolerance to risk or demonstrate particular characteristics or vulnerabilities.
If you would like to read the FCA's Policy Statement, it is available online as a PDF: https://www.fca.org.uk/publication/policy/ps22-10.pdf
5 Key aims of the new rules:
- Strengthening risk warnings
- Banning inducements to invest
- Slowing the client journey
- Improving client categorisation
- Introducing stronger appropriateness tests
What are the specific changes stipulated by the FCA?
Strengthening risk warnings
- Personalised risk warning pop-ups for first-time investors.
- P2P-specific risk warning with this proscribed wording: "Don’t invest unless you’re prepared to lose money. This is a high‑risk investment. You may not be able to access your money easily and are unlikely to be protected if something goes wrong. Take 2 mins to learn more."
- Hyperlink in the above risk warning to a >500 word risk statement written by the FCA.
Banning inducements to invest
- Banned inducements include bonuses for investing, bonuses for referring other people, cashback and discounts when investing, and free gifts or free investments once an investment has been made.
At rebuildingsociety.com, 'Refer a Friend' will no longer be part of our Introducer scheme. Going forward, commissions will only be paid out for referrals of business borrowers and Director's Loan ISA applicants, not individual lenders. This option has already been removed from the website.
Also as a result of this ban, our Lender Cashback Incentives will end. These include: New Lender, Largest Lender, Growing Lender and Local Lender. We are currently reviewing how best to replace these.
Slowing the client journey
- Introduction of a 24-hour cooling off period for first-time investors. Also, first-time investors will not be able to view all details of lending opportunities within the first 2 hours and will not be able to bid or buy microloans.
- Firms must keep more detailed records to monitor the outcome of the consumer journey.
- Specific consumer journey proposals must be implemented for investments already subject to financial promotion rules.
Improving client categorisation
- The current investor classification system of 'restricted', 'high net worth' and 'sophisticated' will remain in place.
- However, the investor must provide an 'evidence declaration' stating why they believe they meet the relevant criteria for a particular category. For example, stating their income if they sign the high‑net‑worth investor declaration or stating which company they are the director of if they sign the self‑certified sophisticated investor declaration.
- The firm must check that the evidence stated by the consumer does in fact meet the relevant criteria. For example, that the income/net asset amount stated is above the relevant threshold and that the company stated does in fact exist.
Introducing stronger appropriateness tests
- 24 hours must elapse between a second failed attempt and each subsequent attempt to pass the appropriateness test.
- Prospective lenders cannot know which test questions they have answered incorrectly.
- Platforms cannot encourage or persuade people to retake the test.
- There must be various sets of questions and answers so that, should a prospective lender fail the test, they are presented with a different set.
In summary
Our current lenders will be able to continue to support small businesses, lending to SMEs as and when they choose to do so. However, there will be no cashback bonuses when investing, and lenders will not be able to earn a commission when referring other lenders.
Within a year of the appropriateness test revisions, all lenders, including current lenders, will have taken the new test and successfully demonstrated their understanding of P2P lending and the risks involved.
Prospective lenders will see additional changes in the form of lender classification, delayed access to loan opportunities and a stronger risk warning.
We are working hard to bring our platform in line with these new changes and appreciate your continued support. Together we can help small businesses take that next step towards securing their future.
