'Perfect storm' of FCA authorisation work behind P2P delays, says expert

Specialist in financial services regulation Thomas Howard of Pinsent Masons, the law firm behind Out-Law.com, said that the last of the application periods for 'interim permission' consumer credit firms is scheduled to end on 31 March. Interim permission firms are firms that previously held a consumer credit licence, and who have been awaiting assessment for full authorisation by the FCA.

Separately, a large volume of peer-to-peer (P2P) lending platforms have applied for authorisation to enable them to take advantage of new tax treatments which will come into force as a result of changes introduced by the 2015 Summer Budget, he said.

The combination of the workload across both initiatives has created a "perform storm" that the FCA is having to deal with, and is likely behind delays in the processing of some applications for authorisation filed by P2P firms, Howard said.

The FCA has written to some P2P firms to explain that their applications for authorisation might be delayed as it works through a "high volume" of applications for authorisation from businesses, according to a report by FT Alphaville. Many P2P platforms are looking to offer lenders the chance to invest in loans through new innovative finance individual savings accounts (IFISAs), which will become available to offer from 6 April.

In a statement the regulator confirmed the administrative challenges its office is currently dealing with.

The FCA said: "We have received a very high number of applications from P2P firms, which coupled with recent regulatory changes, has created particular pressures on our authorisation process. The FCA has already authorised a number of firms and we are working hard to get as many firms that meet our standards authorised as we can by 6 April. We will be keeping firms informed about progress over the next few weeks."

"There are a significant number of people working on consumer credit authorisations at the FCA, and we are increasing the number working specifically on P2P. The FCA must continue to ensure that authorisation is rigorous and carefully considers authorisation applications so that risks to consumers are mitigated," it said.

P2P firm Lending Works told Out-Law.com that it has been affected by the administrative backlog at the FCA.

It said: "It would have been preferable to have approved well in advance of the go-live date of 6 April for IFISA. That said, we are still hopeful of being approved on – or shortly after – 6 April, and have taken all the necessary steps in preparation from our end to ensure that we are ready to go as soon as we receive the green light from the FCA."

Lending Works said that P2P firms also have to be approved as an ISA Manager by HM Revenue & Customs before they can offer IFISAs.

Howard said he has sympathy with the workload the FCA has to handle.

"Some 50,000 businesses were involved in consumer credit activities at the time the FCA took over the regulation of consumer credit from the Office of Fair Trading (OFT) in April 2014," Howard said. "Prior to that, the FCA was responsible for regulating 27,000 firms, so the number of companies that were potentially subject to its regulation nearly tripled overnight."

"To take account of the strengthening of its consumer credit framework, the FCA has, over the past couple of years, been operating a system of interim permissions to allow businesses to move towards full authorisation under the new consumer credit regime. Whilst the FCA has attempted to stagger its workload by assigning firms in receipt of interim permission a three month application window, as the deadline for firms to apply for authorisation has got nearer the regulator has had to handle a large number of applications with finite resources in terms of trained personnel and physical space constraints in its offices," he said.

"That workload has only been added to as P2P firms scramble to become authorised to take advantage of the opportunity to offer IFISAs amid the growing popularity of P2P lending in an era of low interest rates and low returns for traditional savers," Howard said.

Howard said that it is incumbent on the FCA to operate a stringent authorisation process to avoid a repeat of the problems that arose with some consumer credit businesses under the OFT's licensing framework, and that the authorisation process is designed to ensure that firms are equipped to comply with the regulator's rules and have sufficient governance, policies and procedures in place to operate within the rules and without causing consumer detriment.

Lending Works said it is a "tremendous coup" for the P2P lending sector to be given the chance to facilitate tax-free returns to investors through new IFISAs.

"P2P lending has already brought tremendous benefits to investors at a time when bank interest rates remain at record lows, and the stock market proves to be increasingly volatile," Lending Works said. "The added tax efficiency that an IFISA will bring for consumer lenders will hugely enhance its appeal, and it is no surprise to us that experts expect the industry to swell to £50 billion (from its current £3.2 bn) within the next couple of years. We as a platform are very much looking forward to facilitating a significant share of this figure as a result of delivering this exciting new product."

Howard warned, though, that although P2P lending is seen as an alternative means of getting a better return on investment than cash deposits, potential investors should be aware that some important consumer protections do not apply. He said funds invested via P2P lending platforms are not covered by the Financial Services Compensation Scheme, which underwrites the losses of retail depositors up to a maximum of £75,000 in the event that a bank, building society or credit union fails.