UK P2P lending platforms may be letting customers break the law
The Financial Conduct Authority (FCA) has informed UK peer-to-peer (P2P) lending platforms that they may accidentally be letting customers break the law. Finance firms borrowing from P2P lenders to fund their own lending to others could be in violation of UK law. Violations arise if the firm borrowing the money doesn't have a licence to take deposits. Borrowing money from a P2P platform to fund lending technically counts as taking a deposit. The FCA is asking lending platforms to review their business to see if deposit licences are held by the companies they lend to and to review their processes to ensure compliance. 
FCA CEO Andrew Bailey. Lefteris Pitarakis PA Archive/PA Images

LONDON — Britain's financial regulator has written to the CEOs of all the UK's peer-to-peer lending platforms to warn them they may inadvertently be letting customers break the law.

The Financial Conduct Authority (FCA) warns in a letter published on its website on Tuesday that finance firms borrowing money from peer-to-peer lenders to fund their own lending activities could be breaking the law.

The problem arises if the finance firm borrowing the money doesn't have a licence to take deposits, as the borrowing of money from the peer-to-peer platform to fund lending technically counts as taking a deposit. The FCA's director of supervision Jonathan Davidson, who authored the letter, says such activity "may be a criminal offence."

While the finance firm itself is the one that is technically in breach of the law, the FCA has written to the online lending platforms as they are the ones facilitating the problem. The FCA says that any platform that allows finance firms without deposit licences to borrow money "would not be acting in a manner consistent with our expectations for regulated firms and may be in breach of certain regulatory requirements."

Peer-to-peer lending platforms, also known as marketplace lenders, connect borrowers directly with groups of lenders through online platforms. They offer lenders good returns on their investment and borrowers faster service than a typical bank. The sector started out being funded by consumers investing small amounts of cash but is increasingly favoured by financial institutions looking for returns. Leading platforms in the UK include Funding Circle, which lends to small businesses, and Zopa, which lends to consumers.

The FCA is calling on all P2P lenders to review their businesses to see if they are lending to finance firms that do not hold deposit licences and to stop all this activity if they are. It also wants platforms to put processes in place to ensure they don't accept any non-licensed finance firms in the future.

The letter follows a review of the peer-to-peer and crowdfunding sector carried out by the FCA last year. The watchdog proposed tougher rules for the sector when the review concluded in December and FCA CEO Andrew Bailey told BI at the time: "Some of the directions in which [peer-to-peer lending is] going off are posing some quite big challenges in terms of transparency and fairness." He flagged platforms buying each other's loans without disclosing this as one risk identified.

The FCA does not name any finance firms found in breach of the rules in Monday's letter, nor does it give a number. Similarly, no figure is given for the number of peer-to-peer platforms it suspects may be breaching the rules or the specific number of CEOs the letter has been sent to.

You can read the FCA's letter to CEOs in full here.