The changes largely match the proposals within the original consultation with some subtle differences/clarifications. The requirements which must be complied with by 9 December 2019 (except for the application of MCOBS which is applied with immediate effect) are summarised below.
Risk Management Framework
The rules in COBS 18.12 set out detailed provisions in relation to pricing and risk awareness.
Where a platform sets the price of the P2P agreement, the rules set out a minimum common standard to ensure that the platform:
- gathers sufficient information about the borrower to be able to competently assess the borrower’s credit risk
- categorises borrowers by their credit risk in a systemic and structured way
- sets the price of the agreement so it reflects the risk profile of the borrower
(Where the platform does not set the price, the platform need not undertake a credit risk assessment).
Where defaulted loans are transferred, the loan must be re-priced to ensure the transfer is done at a fair price.
A new COBS rule 18.12.16 confirms that all P2P agreements must be valued in each of the following circumstances:
- when it is originated
- where the platform believes the borrower is unlikely to pay its obligations under the P2P agreement without recourse by the platform
- following a default
- where the lender is exiting before maturity of the P2P agreement
It also adds that this list is non-exhaustive, and the frequency of re-pricing will depend on the platform’s business model.
Publishing a target rate of return can only be done if a platform can demonstrate that it has the data and modelling to support the figure advertised. Platforms will also be required to publish outcomes statement (showing their actual performance against target rates) for each financial year starting after 9 December 2019 (as part of the outcomes statement).
Risk management policies and procedures must be documented, monitored, reviewed and reported on.
Also with immediate effect, MCOBS and other relevant areas of the handbook (including reporting and data retention) will be applied to P2P Platforms which facilitate regulated mortgage contracts, home purchase plans, home reversion plans or regulated sale and rent back agreements where at least one of the parties is not an authorised home finance provider.
All P2P platforms must consider if it meets the nature, scale and complexity threshold (which is not published) to require it to have:
- an independent risk management function and an independent internal audit function
- maintain a permanent and effective compliance function which operates independently
(As a rule of thumb, where the platform sets the price and chooses the investor’s portfolio, that platform should have the above independent functions).
The risk management function development and oversight must be performed by either:
- SMF1: Chief Executive
- SMF3: Executive Director
- SMF27: Partner
- SMF9: Chair
- SMF16: Compliance Oversight
- SMF17: Money Laundering Reporting Officer
All P2P firms must also ensure that their senior personnel receive certain reports at least annually in relation to a number of areas of SYSC.
Essentially, the FCA will treat promotions of loans in the same way as promotions of investments are regulated, and will restrict the permitted recipients of direct offer financial promotions. So long as an advert isn’t classed as a DOFP, a platform can provide details of:
- the identity of borrower(s)
- the price or target rate
- the term
- the risk categorisation
- a description of any security interest, insurance, guarantee or other risk mitigation measures adopted by the platform.
Where the advert is a DOFP, the COBS requirements on direct offer financial promotions must be complied with (as amended by the rules).
Platforms will also require to carry out an appropriateness assessment in line with the FCA guidance (COBS 10.2.9G) that considers a client’s knowledge and experience of the P2P investment before they can accept an instruction to invest. This should include understanding of a number of warnings (e.g. that all capital is at risk, that the investment is not covered by the FSCS etc).
Wind-down Arrangements and the Resolution Manual
A platform must disclose it’s wind-down arrangements to investors pre-sale. These arrangements must not be biased towards a particular type of investor. Wind-down arrangement requirements are set out in SYSC 4.1.8 C.
All platforms must maintain a resolution manual which contains information about the platform in the event of the firm’s insolvency and would assist in resolving the firm’s business of management and administration of the P2P agreements it has facilitated. A non-exhaustive list of requirements is included in the rules (including details of critical staff and roles, IT systems, outsourcing arrangements, bank account details etc).
In addition to any other risk warnings that must be given by a firm, a firm which offers a contingency fund must include the risk warning (set out in 18.12.33R) and a copy of the contingency policy in a prominent place on every page of each website and mobile application of the firm containing any reference to a contingency fund, or in a durable medium in good time before the firm carries on business for a lender where a website/app has not been used.
There are additional reporting requirements that must be complied with in relation to contingency funds.