Loan-based crowdfunding platforms may no longer require permission of ‘accepting deposits’

Of relevance to: All firms operating a loan-based crowdfunding platform which facilitates loans to lending businesses
Key date: Legislation to be passed in 2018

The Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) Order 2001 (SI 2001/1177) is to be amended by a draft Statutory Instrument (“SI”) currently laid before Parliament.

You may ask why this minor change is important – it’s because it appears to be an example of a past FCA stance being overruled by new legislation.

Articles 2 and 3 of SI 2001/1177 make provision as to the circumstances in which a person who accepts deposits, or carries on certain kinds of dealing and other investment activities, is not to be regarded as doing so by way of business.

The new legislation will clarify the situation for those operating an electronic system in relation to lending (Article 36H of the Regulated Activities Order), most prominently P2P lenders and others that operate a loan-based crowdfunding platform which facilitates loans to lending businesses.

This new legislation is a direct contradiction to the FCA’s ‘Dear CEO’ letter of 28 February 2017 which included the following paragraphs:

The FCA is writing to firms that operate loan-based crowdfunding platforms to highlight that if a lending business borrows through a platform and then lends that money to others, it may be ‘accepting deposits’ within the meaning of Article 5 of the FSMA (Regulated Activities Order) 2001 (RAO). If the borrower does so without regulatory permission to accept deposits, this would involve a breach of FSMA and may be a criminal offence.’

Where a loan-based crowdfunding platform facilitates the acceptance of deposits by a borrower that does not hold the correct permission that platform would not be acting in a manner consistent with our expectations for regulated firms and may be in breach of certain regulatory requirements; in particular, Principle 6 (Treating Customers Fairly) and threshold conditions 2E (Suitability) and 2F (Business Model).’

This impacted on the business model of several businesses as they were told by the FCA later in the same letter to ‘stop facilitating the acceptance of deposits by these borrowers’; it would appear they may soon be able to revisit the business model the FCA frowned upon.