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Regulator Assessment Summary: PS 16/8 - FCA Handbook Changes

Core Content

This document outlines the FCA's assessment of regulatory provisions introduced through the proposal PS 16/8, which aims to align the regulatory framework with changes in UK legislation regarding loan-based crowdfunding platforms, the Innovative Finance ISA (IFISA), and the regulated activity of advising on peer-to-peer (P2P) agreements. The assessment was conducted by the FCA and published on 29 July 2016, with the commencement dates of the rules set for 21 March 2016 (for client money segregation on loan-based crowdfunding platforms) and 6 April 2016 (for IFISA and P2P advisory activities).

The changes are part of the CASS (Changes at the FCA) initiative, which involves updating the FCA's rules to reflect legislative changes. This assessment does not include the implementation of the Cutting Red Tape review.

Main Areas of Impact

• Client Money Segregation: Firms holding money related to both P2P and business-to-business agreements may now elect to hold all lenders' monies under the FCA's client money rules.
• Innovative Finance ISA (IFISA): The introduction of the IFISA allows P2P agreements to be held within an ISA wrapper, which is subject to specific regulatory requirements.
• Regulated Activity of Advising on P2P Agreements: Advising on P2P agreements is now a regulated activity under the Regulated Activities Order (RAO), requiring appropriate supervision, competence, and qualifications.

Key Regulatory Changes

• Client Money Rules: Firms can now hold all lenders' monies under client money rules if they choose, providing greater flexibility.
• Disclosure Requirements: Guidance was introduced to clarify existing disclosure rules, ensuring that firms provide a fair and prominent indication of relevant risks to clients.
• Suitability and Commission Rules: Firms providing personal recommendations on P2P agreements must adhere to suitability rules and are prohibited from receiving or paying commission for such advice.
• Supervision and Competence: Financial advisers must be appropriately supervised and assessed for competence in advising on P2P agreements, including obtaining relevant qualifications.
• Redress and Compensation: Advisers must ensure that consumers who receive advice on P2P agreements have access to the Financial Ombudsman Service (FOS) and Financial Services Compensation Scheme (FSCS).

Affected Businesses

The following types of businesses are affected by the changes:

• Loan-based crowdfunding platforms: Approximately 90 firms are estimated to be affected (25 currently fully authorised, 54 seeking authorisation).
• Firms managing IFISAs: Currently around 7 firms, with an eventual estimate of up to 79 firms.
• Financial Advisers: Only about 1,400 advisers (9% of the total population of ~15,500) are expected to consider loan-based crowdfunding in their advice.

Impact on Business

Incremental Costs

• IFISA Tax Wrapper: The guidance introduced does not impose additional cost requirements on firms. It merely clarifies existing disclosure obligations, so no incremental costs are expected.
• Advising on P2P Agreements: Financial advisers who wish to provide regulated advice on P2P agreements may face minimal incremental costs, as they already have systems in place for investment advice. The opportunity cost is considered low due to limited interest in entering the P2P advisory market.
• CASS Changes for P2P Platforms: The change to allow P2P platforms to segregate client monies under CASS is optional and introduces flexibility. As such, there are no incremental costs. Indirect benefits, such as cost reductions from efficiency gains, may arise but are not quantifiable in this assessment.

Benefits

• Regulatory Alignment: The changes align the FCA's rules with legislative updates, ensuring a consistent and clear regulatory environment.
• Consumer Protection: Enhanced disclosure, suitability, and redress requirements protect consumers and ensure they receive appropriate advice and support.
• Market Flexibility: P2P platforms gain more flexibility in managing client money, potentially leading to indirect cost savings.

Additional Information for BIT Score Validation

• Price Base Year: 2016
• Implementation Date: 2016
• Duration of Policy: 10 years
• Business Net Present Value: 0
• Net Cost to Business (EANDCB): 0
• BIT Score: 0

The assessment concludes that the regulatory changes do not impose significant incremental costs on firms, and the benefits primarily lie in improved consumer protection and regulatory alignment. The BIT score reflects the low cost impact and the absence of new regulatory burdens.