Gillian Roche-Saunders, is a partner at the law firm of Bates, Wells & Braithwaite in London. She is a leading regulatory consultant in the Fintech sector having been engaged in alternative finance for the past five years – before the FCA jumped in to officially regulate emerging funding platforms. She represents some of the largest P2P and investment crowdfunding platforms in the UK today assisting with compliance, business models, marketing and regulatory approval. She also works closely with the UKCFA and is a Director at the EIS Association, and thus has a unique perspective into the inner workings of both platform and regulators.
Last week, Crowdfund Insider spoke with Roche-Saunders to gain a better understanding of the FCA review process which was announced earlier this month.
The FCA is in the process of reviewing its initial set of rules for both debt and equity internet finance. Today the environment has evolved quite a bit since the initial rules were released by the FCA in 2014. Alternative finance has grown rapidly, not just in the UK, but around the world. As the UK has been recognized as the leader in innovative forms of finance, many countries look towards the Brits to help guide their regulatory process. So while any regulatory changes enacted may profoundly impact the operations of UK alternative finance platforms, these changes will be closely monitored by regulators around the world.
Reflecting on this renewed interest by policymakers in the UK, Crowdfund Insider asked Roche-Saunders if the FCA was getting outside pressure to provide stricter rules for P2P/equity crowdfunding platforms, and if so, what was the origin of this pressure?
“Yes. The FCA is under pressure in both directions right now…These pressures are both internal and external. They are being pushed from all sides. My opinion is there are some internal individuals that believe more stringent regulations are demanded. Other teams have been asking to go above and beyond what is written rules. They are definitely being pulled in different directions. Two of the core priorities are consumer protection and competition. You will find a spectrum of FCA staff on different places in that continuum.”
Roche-Saunders believes the external pressure is also coming from traditional finance players. Having recently attended an FT event, she said it was clear that traditional finance sees “P2P encroaching on their space.” Of course lobbying on behalf of one’s industry has always been a way for an industry to compete.
In June, a UK Parliamentary Treasury Committee expressed concern on the risk of peer to peer lending. In a letter signed by Conservative MP Andrew Tyrie, Chairman of the Treasury Select Committee, he asked if the FCA was “paying due attention to the risks.”
Roche-Saunders stated there is no doubt that some MPs are being lobbied based on these concerns. Even while some understand the need to keep regulation proportionate there is a “lot of political pressure at play.”
Asked to elaborate on the FCA’s interest regarding P2P and growing institutional participation and the fact that some platforms are using Provision Funds/Collective Investment Schemes. Roche-Saunders stated;
“One of the key things of the institutional participation is the conflict of interest. Retail investors may not be at the heart of the investment. From a regulators perspective, if you get institutional money that purchases a P2P loan, and then later is assigned to a retail investor, then the loan never [effectively] becomes a P2P loan. This is not what Treasury anticipated. This may be rewritten to turn that around. The Treasury will change it to allow it. The FCA [on the other hand] believes it is not P2P.”
So the way the rules are drafted now, they are not taking into consideration the inclusion of institutional funds – a relatively recent occurrence. Regarding Collective Investment Schemes (CIS);
“…[this is] any pot of money where the investors share risk and reward,” said Roche-Saunders. “There are two reasons where the FCA believes a CIS may be present. One: Provision Funds. The other is Auto-Aggregation. It is all about the sharing of risk across the platform. The trick about a CIS is that you cannot promote them to a retail audience. CIS is a term that incorporates a wide range of vehicles. P2P platforms many not be able to promote this. Platforms may drop their provision funds. But if they are of benefit to investors that would be an unfortunate occurrence for retail investors.”
Asked about the sentiment within the P2P/Marketplace lending sector regarding the review; Roche-Saunders said uncertainty created anxiety;
“I think the industry is a bit concerned. What is particularlyconcerningn is how long and how much the goalposts are moving. There is not much certainty for them.”
The difference between what the FCA regulatory team may want and what is currently written in the rules does not allow for the platforms to prepare their business models. Although Roche-Saunders believes the FCA is under pressure to be seen to be doing something, she is of the opinion the FCA really understands the business model.
“I do not believe the Platforms are overly concerned about additional rules but they are concerned about the lack of clarity…They need certainty.”
The document published in concert with the review indicated the FCA will demand more diligence from platforms and additional transparency. Asked as to how are the platforms reacting to this? Roche-Saunders assured this was certainly fine;
“I think the platforms are ok with this. Everybody wants to protect the industry. Minimum standards do not seem like a bad idea. It will always come down to where the FCA draws a line. I will be really interested to see how the diligence requirements go for the investment crowdfunding platforms.”
It will be very interesting to see where the FCA goes. One approach is to require the amount of diligence necessary so you would put your own money into the investment. But how would you qualify this? Platforms are currently researching both the company and the principles for any bad actions so today, by the time a pitch is launched, there has been quite a bit of checking.
“To go further Platforms may become more like a wealth manager or fund manager. I do not know if that is what the industry is supposed to be doing,” stated Roche-Saunders.
One area of personal concern for Roche-Saunders is the reference to platforms mischaracterizing investors.
“I am really worried about this. The FCA is threatening to sanction any firm that mischaracterizes investors. These are self-certifications though, and they are not supposed to be policed. The FCA may require a robust test to make certain the investor understands what they are doing. The investor has to prove themselves under these tests.”
As previously mentioned, regulators around the world study the FCA and their rule-making process and final actions. Asked if the FCA is aware of its collateral impact on the global alternative finance sector, Roche-Saunders said they were definitely aware.
“…They [the FCA] are showing both openness… but I am not certain it will let them effect their intent to regulate. I am sure their explanations will be worded to cater to the global audience. It adds pressure but it will not change the course of events.”
The FCA is unique in its competition mandate as part of its overriding mission. Investor protection is balanced by the need to foster competition as this is deemed the best method to benefit all consumers. Will this competition requirement play a part in the crowdfunding review?
“The competition mandate has revolutionized the FCA and their approach but only in that it has helped to build the continuum. Previously consumer protection was the be all and end all. Consumer protection was unchallenged. Now competition helps to put the breaks on that,” stated Roche-Saunders. “Everyone wants this sector to flourish. The competition mandate is for the consumers. It helps the conversation. [But] if it comes down to it, consumer protection trumps competition.”
As additional rules may sometimes equal additional costs which are inevitably passed onto consumers, Roche-Saunders said there is not much concern regarding higher expenses. At least not right now.
“Perhaps further on down the line once they start looking at things. But we have not yet seen any new rules. Perhaps at the next point with a consultation paper and new draft rules included.”
In closing, Crowdfund Insider asked for Roche-Saunders to predict the final outcome.
“I think the financial promotion rules will be extended to P2P platforms. They will be subjected to similar rules as crowdfunding platforms. I would expect minimum standards will be forthcoming for investors too. For the moment there are only a few rules that P2P must follow. That is not necessarily a bad thing. It all comes down to where that line is drawn.
“Regarding equity crowdfunding and the areas the FCA commented on; it is difficult to see how they will improve there. Having seen some of the supervision they have done on the crowdfunding platforms it is hard for me to see anything additional unless the review reveals any other problems.”