Client Money: Loan-Based Crowdfunding CP16/4

Since the FCA assumed responsibility for the regulation of loan-based crowdfunding in April 2014, an investor’s money, subject to certain transitional provisions, held by a platform (P2P agreements) – both for the purposes of lending out to borrowers and repayments from borrowers to be provided back to clients – is afforded the protection of CASS 7 (‘client money rules’).

The recently published FCA Consultation Paper CP16/4 (‘Loan-based crowdfunding platforms and segregation of client money’) informs us that some firms consider this burdensome as firms in the P2P industry have generally not developed systems that distinguish between monies held under P2P agreements (CASS protection) and that held under business to business agreements (‘B2B’ falls outside CASS). Such comingling of funds is not compliant with CASS and on insolvency would result in consumer detriment given the costs and time that would be involved in ‘unwinding’ such monies.

The Consultation Paper proposes allowing firms that hold money in relation to both P2P and B2B agreements to elect to hold all lenders’ monies together without breaching CASS. This would mean that B2B monies will need to be held as client money under CASS 7 – the professional client opt-out for non-MiFID business (CASS 7.10.10) will not be available. Firms proposing to make such an election will have to inform the FCA at least one month before holding B2B monies in accordance with CASS 7.  In addition, electing firms must also inform their P2P customers (with at least one month’s notice) of their intention.

Although most of the proposed rule changes will, of course, be to CASS 7, SYSC 4.1.8E will be amended to extend the prohibition on firms taking on full ownership of lender monies under title transfer.

The draft Handbook changes can be found in Appendix 1 of CP16/4.

The consultation period closes 11 February 2016.