9 October 2019

The FCA’s letter to P2P platforms – the only surprise is that it became necessary at all

Last week, the FCA sent a necessary and not-before-time letter to 65 peer-to-peer platforms whose operations they felt were not up to scratch. We welcome it being sent but suspect the same can’t be said for the recipients.

Now, we haven’t seen the letter at CapitalStackers because we’re not one of the 65. But we do have a vested interest in the FCA raising the bar to a level that excludes all but the most scrupulous. Not because it removes competition – the more the merrier – but because every bad actor in the market reflects badly on the rest of us.

We can’t stress too strongly that the charlatans, the incompetents and those who take risks beyond their expertise need to clean up their acts or clear out altogether. When you’re dealing with other people’s money there is no room for half measures.

So we welcome wholeheartedly the points noted in The Times (who have seen a copy) that the FCA have asked those firms to address in their 7-page missive.

Their criticisms include weaknesses in disclosure of information to clients, opaque charging structures and inadequate record keeping.

Let’s just take a moment here to shake our heads. These are fundamentals. Up there with restaurants not keeping pet rats and remembering to wash up every now and then. A financial institution should not need to be reminded that a flow of regular, detailed and accurate information from the borrower to the lender is an obligatory part of the deal. Verified by an independent party where appropriate. Those whose money is on the line need to be kept fully informed of the risks they’re taking. As former bankers and (current) accountants, the directors of CapitalStackers are lettered all through with this, and to us, it beggars belief that any financial platform can carry on without such prerequisites.

The FCA has also identified companies who advertise “headline-grabbing returns” that might lead consumers to take on “considerably greater risk than they appreciate”. There are two parts to this. One – return is an inextricable function of risk. They go together like the moon and the tides. A promise of big interest on its own should rightly ring alarm bells. An interest rate with an appropriate risk level is an invitation to do business. It’s what sophisticated investors look for – “How much will I make? Is that worth it for the risk?” – and that’s how they decide whether they’re in or out. The second part is, “Why are some operators selling risk to people who don’t understand it?” The new guidelines requiring all potential retail investors to complete a questionnaire assessing their knowledge of investment risks will certainly help – but only if adequate information is provided to them in the first place. Again, this is in our DNA at CapitalStackers. Investors visiting our deal pages will see detailed information on borrowers: their history, their plans, the up-hill-and-down-dale due diligence that takes into account everything from cost overruns to flooding forecasts to valuation sensitivity.

Which is another point brought up by the FCA. It highlighted an endemic problem in the industry with poor due diligence – not going deep enough into the background of borrowers; not monitoring the progress of developments closely enough, not being straight about default rates and recovery actions. Once more, we shake our heads. That anyone can run a financial platform without attention to these basics is beyond us. Default rates should be made clear. Of course, some would say that CapitalStackers is lucky to have incurred zero losses in our five years of business – but to paraphrase Sam Goldwyn, the harder we work, the luckier we get. Since nearly £2 million of our own money is invested in CapitalStackers schemes (and since we protect investors’ money as jealously as we do our own), we don’t mess around when it comes to due diligence before a deal is drawn down and then throughout its lifetime up to and including repayment. Even though we work in partnership with big banks on most projects, we don’t rest on their laurels. We accept their due diligence, of course, but we will have already looked into every nook and cranny of the deal, under every carpet and behind every curtain, before we’re satisfied enough to ask any investor for a penny.

As for the FCA’s point about some platforms displaying “Inadequate financial collateral and weaknesses in the handling of client money”, once again, with banking being in our blood, this is what we’d regard as a principal principle. Client money should be held in an independently adjudicated escrow account, the same way a solicitor handles funds paid into court. End of.

So yes, of course we welcome the FCA’s proposals. But it should never have come to this. Those who have played fast and loose with investors’ savings and the reputations of us all will get their come-uppance. And then the P2P industry can get on with its powerful and valuable purpose – supplementing the post-2008 banking industry to provide intelligent finance options to well-run businesses, and offering rewarding opportunities to well-informed investors.

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