The City regulator has designed a “bespoke risk warning” for peer-to-peer lending platforms to display to customers as part of its updated rules, after accepting industry feedback that its proposed wording was misleading.
It is mandating all relevant firms to include a standardised risk warning on financial promotions, which is as follows:
“Don’t invest unless you’re prepared to lose all your money invested. This is a high‑risk investment. You could lose all the money you invest and are unlikely to be protected if something goes wrong. Take 2min to learn more [linked to a risk summary].”
However, feedback from the P2P lending industry during the consultation process was that the risk warning would be misleading for investments in P2P loans. Respondents said it would be overly conservative, given the low overall loss rate in the sector, and the remoteness of the possibility of an investor losing 100 per cent of their invested capital in P2P.
The regulatory requirements on P2P platforms and the recoveries that can be made on defaulted loans were also cited as supporting factors.
The argument that P2P investors are unlikely to lose all their money was stressed particularly strongly for cases where the investor is diversified over a large portfolio of loans, and where the loans are asset‑backed.
Some respondents also said that P2P lending is not a high-risk investment.
“We understand the factors raised that mean the risk warning as consulted, and the final standard risk warning above, may not be appropriate for the P2P sector,” the FCA said in the policy document.
“However, we disagree with the premise that investing in P2P is not high risk. These investments still tend to be highly illiquid, often involve lending to borrowers about whom limited public information may be available and are not within scope of the Financial Services Compensation Scheme.
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“We also believe the likelihood of losing money on the investment is such that this should still be highlighted in the risk warning.
“So we have written a bespoke warning that is tailored to the risks of investing in P2P lending:
“Don’t invest unless you’re prepared to lose money. This is a high‑risk investment. You may not be able to access your money easily and are unlikely to be protected if something goes wrong. Take 2 mins to learn more.”
As well as the standard risk warning, firms will also need to offer personalised risk warnings as part of its financial promotions:
“[Client name], this is a high‑risk investment. How would you feel if you lost the money you’re about to invest? Take 2min to learn more.”
The FCA said findings from its behavioural research showed that personalised messages and prominent directions to further information were the most effective way of getting consumers to click on the risk summary.
The FCA also said it did not think it would be particularly burdensome for firms to collect the name of the respondent before displaying a personalised risk warning, as it expects firms to already collect this information.
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It said it expects most firms will integrate this proposal into their client onboarding process. However, it is not prescriptive as to how firms achieve this so long as the warning is displayed before the client categorisation and appropriateness assessment stages for restricted mass-market investments (including P2P lending).
The FCA said it will look at whether any further differentiation of the risk warning is needed in its second phase of work planned for next year, alongside assessing the classification of investments within its financial promotion rules.
All firms offering high-risk investments must implement the updated risk warning by 1 December 2022.
All other rules outlined in the policy document, including the personalised risk warnings, come into force on 1 February 2023. The FCA had extended the deadline “to ensure an orderly implementation of the rules”.