FCA Authorisation team should share its findings from P2P applications

15 May 2015

The FCA's authorisation process is quite opaque and does not give the regulator much latitude to comment upon individual applications.

Consequently there is no published information available to those who might be considering investing with companies that have been authorised by the FCA.  This is unfortunate, but particularly so when the FCA is authorising business models that it has previously never encountered.

Over the next few months the (approximately) 55 peer-to-peer lending firms will be finalising their applications for authorisation ahead of the 'landing slot' for this segment of the plethora of consumer credit firms which the FCA now regulates.  Many, if not all, of these alternative lenders will successfully navigate this process and will be authorised.  Whilst some potential P2P investors will not be influenced in their decision by the imprimatur from the FCA that an authorised firm receives, it is likely that many individuals will take some comfort from the fact that the FCA has seen fit to authorise a particular firm when they make their decision to lend their money. This is an entirely rational factor for potential investors to take into account; the FCA may not be a product regulator, but it does regulate firms and in doing so it makes assessments of the risks (including the risks to consumers) inherent in firm's business models and how effectively they manage these risks.

However what many of these potential investors may not appreciate is that authorisation is not the clean bill of health that you might hope. It is not axiomatic from the fact that the FCA has authorised a firm that the regulator does not have any concerns about a firm. Furthermore potential investors may well assume that the FCA has conducted a thorough assessment of each individual firm, when in fact the level of scrutiny applied to a particular application may well be far less than they imagine.  The issue is exacerbated by the fact that the FCA is dealing with a huge number of applications for authorisation from consumer credit firms which will stretch its ability properly to assess some applications, and in the case of P2P lending platforms the FCA is having to make assessments about firms whose technology focussed business model is quite unfamiliar to them.

At the same time as having to grapple with these difficulties the FCA will also need to balance the need to protect consumers with its competition objective, particularly when P2P platforms have been championed as an additional source of lending and as a sector that can potentially compete with the dominance of the banks.  In these circumstances it seems likely that there will be a real difference between what potential investors may assume and what the FCA may know and what it will have done when authorising P2P firms, because the FCA is inhibited from commenting on individual applications for authorisation.

Greater levels of transparency in the authorisation process for all firms would be beneficial to the financial services market.  However this is particularly true with P2P lending platforms because of the novelty of this sector and the associated risks. The sector has yet to go through a downturn, so whatever the platforms may assert about the conservativeness of their estimates for their projections for potential returns, these may still prove to be quite optimistic when the economic cycle turns. This matters because in P2P lending platforms because the credit risk is borne entirely by the individuals who invest and there is no compensation scheme ready to reimburse them if borrowers default in large numbers on their debts. Transparency will not take away the risks associated with this sector but it could at least ensure that individuals who are considering lending sums that may reflect a substantial portion of their resources would have the information available to them to be able to make an informed choice.  At present potential investors can consider the FCA's policy statement produced in March 2014 as well as a short review that was published in February 2015.  Additionally the FCA has indicated that it will be conducting a review of the crowdfunding markets and regulatory framework at some point in 2016.  However potential investors would undoubtedly benefit from having access to more up to date information that is informed by detailed reviews of particular firms.

If the FCA were minded to reject an application for an individual firm and that firm were to challenge the decision to the point where the FCA's Regulatory Decisions Committee (RDC) were to decide on the application (and they decided against the applicant firm) then some transparency would be provided to the process.  In such circumstances the FCA would publish a Decision Notice which would set out the reasons for rejecting an application and the applicant firm's arguments against the decision.  However such notices are extremely rare because firms (and indeed individuals) generally withdraw their applications before the RDC can make a decision. Thus, and in the absence of a Decision Notice, the FCA should look at ways to inform customers on an anonymised basis about what issues it has been looking at, what is has found and what residual concerns it has had when considering applications for authorisation from P2P lending platforms.

Stay connected and subscribe to our latest insights and views 

Subscribe Here