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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:
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:
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