The Dear CEO Letter found that, following a recent supervisory review, some P2P firms are falling short of the standards set out in the FCA’s rules which require firms to take reasonable steps to ensure they have arrangements in place to continue if the platform ceases to operate.
As a result, the FCA have asked for all firms to review and, where necessary, improve their wind-down plans (“WDPs”) and the FCA will be asking certain firms to provide it with details of their revised WDPs.
The FCA found three main areas of concern:
- Systems and controls relating to wind-down;
- Platform funding and remuneration models; and
- Third-party permissions required for wind-down.
Systems and controls relating to wind-down
The FCA found that some firms did not take reasonable steps to put arrangements in place for wind-down. As such it recommended that firms review their WDPs and consider the guidance provided in the FCA’s Wind-down Planning Guide.
The main concerns for the FCA were as follows:
- a lack of adequate consideration of the “triggers” for the implementation of a WDP;
- firms not identifying or monitoring “triggers” for the implementation of a WDP;
- a lack of appropriate governance arrangements for developing and maintaining WDPs;
- a lack of due diligence carried out on back-up service providers;
- a lack of consideration of the tax implications of a wind-down;
- platforms holding client money not making appropriate arrangements should this book of loans be transferred; and
- a lack of consideration for the staff and support required to maintain the continuity of IT systems following a wind-down.
Platform funding and remuneration models
The FCA recommends that firms consider how their WDPs are funding and is concerned about the remuneration models of P2P platforms.
The FCA’s concerns are that the remuneration model of P2P loans rely on up-front fees and charges for the origination of loans, and provide relatively little or no residual income throughout the life of the loan. As a result, P2P firms often rely on new income to fund their operations. This makes it difficult to sell a P2P business in administration and may lead to a lack of funding for the winding-down of operations.
Third-party permissions required for wind-down
The FCA has asked for firms which enter into arrangements with other firms to take over the management and administration of P2P arrangements following a wind-down to consider what activities such a firm will be carrying out and whether that firm will have the appropriate regulatory permissions to carry out those activities.
This Dear CEO Letter follows concerns raised in the FCA’s Consultation Paper CP18/20 on crowdfunding platforms which are due to be addressed by a policy statement in Q2 of 2019. However, its release prior to the policy statement, which now also seems more likely to address winding-down in P2P platforms, highlights the immediacy of the concerns raised by the FCA and its demand for action.
Moreover, the concerns raised by the FCA also seem to go beyond addressing wind-down arrangements as highlighted by the issues surrounding remuneration models. P2P firms are now being actively encouraged to consider alternative or additional streams of revenue from their arrangements to provide remuneration throughout the course of their business. This could have a lasting impact on the P2P industry as it will need to consider whether its remuneration models can evolve, or whether the services they provide to customers can expand to justify these additional revenue streams.