Your browser is out of date!

Update your browser to see this website correctly.

Upgrade my browser now

Going forward, Goji will not be issuing any further bonds in order to allow us to focus on our platform technology services. Our Diversified Lending Bond has outperformed our target net return of 5% on all matured bonds to date and performance in our live bonds is also currently above this target. If you have an investment with us we will manage it to maturity and the Investment Management team will continue to focus on outperforming our target return. Please contact us if you have any questions - you can access your account by logging in here

The FCA’s review of Equity Crowdfunding and P2P regulation

Posted date: 7 August, 2018 Author: Jake W-P
The FCA’s review of Equity Crowdfunding and P2P regulation-Goji Direct Lending Investment Experts

Last week, the FCA published feedback on their post-implementation review (the Review) of Investment-based debt (e.g Goji, Abundance) and equity (e.g. Crowdcube) Crowdfunding and Peer to Peer Lending (P2P) regulation. Regulation for the sector was first introduced in 2014, and a review of the framework was announced back in 2016. The recently announced findings from the FCA’s post implementation review are therefore long overdue and don’t come as a surprise.

The much larger P2P sector is unsurprisingly the focus given its surge in popularity in recent years. Key risks and proposed regulatory changes are highlighted but you might want to pick a comfortable spot before you read all 121 pages of it! If you do find the time, you can read it here.

The main themes are nothing new and have long been mooted. They’re not so much a result of activity in the sector but more because the initial regulatory framework was so light. The Government decided to provide only lightweight regulatory permissions (investor qualification, broad marketing, light touch regulatory capital requirements).

I’ve summed up the key points below, for those of you who just don’t have a comfortable enough seat or enough spare time for the aforementioned full report:

  • Risk management –  the assessment and pricing of loans must be appropriate to the risk profile of the borrower. For “Autobid” platforms, such as Zopa, the advertised rate of return must be reasonably able to be achieved and not pie in the sky.
  • Governance – Platforms must operate at a standard similar to a firm who is ‘arranging deals in investments’ meaning P2P firms will have to operate in a similar way to platforms such as Goji. Platforms must adequately establish and maintain risk management policies and procedures. Larger platforms may be required to have an independent risk management function and all platforms must maintain a permanent Compliance function. This may put some cost and pressures on P2P firms but certainly brings the sector into line with the rest of the investment market. Platforms must take appropriate steps to identify and prevent conflicts of interest.
  • Eligible investors – The FCA say the complex nature of the way platforms manage, assess and structure their various investment options makes it difficult for investors to assess investment risk properly. As well as ensuring platforms are clearer about their information (see ‘Disclosure’ below) the FCA has also proposed restricting the investor base, similar to the way they regulate crowdfunding. Platforms may only promote their offerings to those who certify to not invest more than 10% of their net investable portfolio into P2P agreements (“restricted investors”) or to self-certified sophisticated investors, certified HNW, or advised clients. Whilst this doesn’t exclude any investors directly, it does raise the bar so non-advised investors will have to be assessed on their knowledge and understanding of the risks involved before they can invest.
  • Disclosure requirements – Platforms will be required to disclose information, including how loans are assessed, the due diligence process and default procedures. The aim is to make the underlying risk easier to understand and to allow comparisons to be made.

So what does Goji think about all this and how does it affect what we do?

Firstly, the findings have broad implications for P2P business models and specifically their disclosure of risk to retail investors, rather than implicating the underlying asset class. So it’s not as relevant to us as it might first appear. To an extent, one can’t be particularly surprised that business models have evolved as they have; given the choice, I’m sure humans will always choose to operate in the least restrictive (but compliant) way possible – which is what has happened.

The FCA hasn’t taken enforcement action against firms, but to the contrary they have taken a huge amount of time scrutinising them during the authorisation process and this tells us that firms are compliant, but it’s the design of the rules that needs to be enhanced and only the regulator can take responsibility for that.

Goji already operates under much more restrictive investment management regulations, and is therefore already subject to much more stringent regulations than those that have been outlined above. In fact some of the recommendations brought out by this review will bring the sector more into line with Goji’s own regime.  So we are well prepared for the final proposals and welcome the additional confidence these regulations will bring to the sector.

Secondly, Goji doesn’t invest much through the P2P sector, because not enough firms have passed our due diligence.  At present c.75% of the portfolio is invested through businesses that are not considered P2P firms but which we believe are fantastic credit originators. A good example of this is LendInvest, one of the most successful digital lending businesses. We will only invest in / through firms that can demonstrate sufficient experience, track record and suitable controls regardless of their FCA status. That’s why Goji doesn’t use authorisation as a qualifying attribute for lending partners.

Because Goji is an investment business, we already operate in line with a number of the issues highlighted in the report including:

  • restrictions on marketing
  • Investor appropriateness checks
  • high regulatory capital
  • consistent disclosures
  • senior employees being subject to the Senior Management Regime.
  • providing investors with fair reward for the risks being taken – in fact this is the reason we exist!

There are some fantastic P2P businesses and there are also some fantastic non-P2P lending businesses. Goji’s role is to select, thoroughly diligence and continually monitor the performance of firms regardless of their regulatory regime. We do this to ensure that their ability as credit originators, underwriters and recovers is as good as we need it to be in order to generate a steady risk adjusted return.

Jake Wombwell-Povey, CEO

Goji Investments