Out-Law News 2 min. read
31 Jul 2018, 9:42 am
The compliance function would need to be completely separate from the service side of the business and would be responsible for checking that policies and procedures designed to detect compliance failings, and actions taken to address deficiencies, are adequate and effective.
The risk management function would perform a similar role in respect of the platform's risk management policies and procedures, which will need to be bolstered under the FCA's proposals.
The internal audit function would be tasked with "establishing, implementing and maintaining an audit plan to examine and evaluate the adequacy and effectiveness of the platform’s systems, internal control mechanisms and arrangements", as well as with "issuing recommendations and verify compliance with those recommendations".
The compliance, risk management and internal audit functions would all need to have reporting lines into senior personnel in the organisation who would be subject to the FCA's 'Approved Persons Regime', and in time the Senior Managers & Certification Regime (SM&CR).
The FCA's proposals were outlined in a new consultation paper published following a previous post-implementation review of crowdfunding rules it introduced in 2014.
The regulator has been spurred to recommend reforms to loan-based platforms' approach to governance and risk management after identifying cases of potential harm being suffered by investors in the sector.
Those concerns include in relation to the clarity and accuracy of information investors are being presented with around the financial products being advertised, the presence of risks to their investments, and in regards to the remuneration on offer for the risks investors are being invited to take.
In addition to the proposed reforms on governance, the FCA has proposed that loan-based platforms establish an "enhanced risk management framework" and also outlined plans to restrict which type of investors certain platforms can communicate financial promotions to.
"We propose to require P2P platforms that communicate direct offer financial promotions for P2P agreements to only communicate these promotions to… those who are certified or self-certify as sophisticated investors; those who are certified as high net worth investors; those who confirm before a promotion is made that, in relation to the investment promoted, they will receive regulated investment advice or investment management services from an authorised person, or; those who certify that they will not invest more than 10% of their net investible portfolio in P2P agreements," the FCA said.
The regulator has also said the platforms should be clearer about the way they operate, the fees and charges they apply, and help investors account for the potential failure of businesses they lend money to.
Under the proposals, the platforms would be required to provide ongoing disclosures to investors throughout the period of their investment, better explain to borrowers that the interest they are charged is linked to their credit risk, and ensure that the target rate of return on loans being advertised on their platforms can be achieved in reality.
"Platforms must ensure that their risk management framework is adequate at all times," the FCA said. "In practice, this means that the expected target rate of return predicted by the framework should match the expected outcome, within a reasonable degree of confidence. To ensure that the risk management framework is sound, we propose that platforms should keep it under review by assessing outcomes against expectations, modifying it if necessary. In other words, expected and actual returns should not diverge considerably."
The FCA said that this means platforms should "only expose investors to services which they can adequately control and manage".
The FCA's proposals are open to consultation until 27 October. The regulator said it would set out its finalised new rules in a policy statement later in the year.
Christopher Woolard, executive director of strategy and competition at the FCA, said: "When we introduced new rules for crowdfunding, we said we’d review the market as it developed. We believe that loan-based crowdfunding can play a valuable role in providing finance to small businesses and individuals but it’s essential that regulation stays up to date as markets develop. The changes we’re proposing are about ensuring sustainable development of the market and appropriate consumer protections."