The following rules may be relevant for firms operating in the loan-based crowdfunding (including peer-to-peer and peer-to-business) market when considering their investment activities.
Our other rules and legislation will also be relevant for some firms depending on their business models. So firms will need to consider (and may need to seek their own advice as to) specific rules which apply to them having regard to their particular business model.
The summary relates only to requirements in relation to investment activities.
Some of the rules set out below are subject to change. The prudential requirements and some of the requirements to report information to us do not apply to firms with an interim permission and will only be relevant once firms become fully authorised.
PRIN: The Principles for Businesses
The Principles for Businesses are the fundamental obligations that firms must comply with at all times. We can take enforcement action if they are breached.
- Integrity: a firm must conduct its business with integrity.
- Skill, care and diligence: a firm must conduct its business with due skill, care and diligence.
- Management and control: a firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.
- Financial prudence: a firm must maintain adequate financial resources.
- Market conduct: a firm must observe proper standards of market conduct.
- Customers’ interests: a firm must pay due regard to the interests of its customers and treat them fairly.
- Communications with clients: a firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading.
- Conflicts of interest: a firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client.
- Customers: relationships of trust: a firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgment.
- Clients’ assets: a firm must arrange adequate protection for clients’ assets when it is responsible for them.
- Relations with regulators: a firm must deal with its regulators in an open and cooperative way, and must disclose to the appropriate regulator anything relating to the firm of which that regulator would reasonably expect notice.
SYSC: Senior Management Arrangements, Systems and Controls
Principle 3 states that, ‘a firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems’.
The systems and controls rules describe what we will expect, in practice, from firms when complying with Principle 3.
Broadly, the rules (as they apply to firms operating loan-based crowdfunding platforms) cover:
- robust governance arrangements (SYSC 4 6 and 7)
- skills, knowledge and expertise of staff (SYSC 5)
- outsourcing responsibilities (SYSC 8)
- record-keeping (SYSC 9)
- conflicts of interest (SYSC 10)
The types of systems and controls a firm must have in place should reflect the nature, scale and complexity of the firm’s business and the risk the activity may pose to consumers.
We have introduced specific requirements in SYSC 4.1 for firms running loan-based crowdfunding platforms. These rules require firms, amongst other things, to take reasonable steps to ensure that arrangements are in place to ensure that existing loan agreements facilitated by the platform will continue to be managed and administered, in accordance with the contract terms, if at any time the firm becomes unable to continue operating the platform.
COND: Threshold Conditions
This module of the Handbook sets out the minimum statutory conditions which a firm is required to satisfy, and continue to satisfy, in order to be granted and to retain authorisation. It also gives guidance on these conditions. The threshold conditions are found in the Financial Services and Markets Act 2000 (FSMA) Schedule 6 and relate to:
- legal status of the firm
- location of the firm’s offices
- effective supervision (including the firm’s close links)
- the firm’s resources
- suitability of the firm and its personnel
- the firm’s business model
APER: Statements of Principle and Code of Practice for Approved Persons
This module sets out the standards of behaviour that the FCA expects of a firm’s approved persons. The code of practice outlines the behaviour that, in the FCA and PRA's opinion, will or will not comply with a statement of principle. There are seven statements of principle:
- An approved person must act with integrity in carrying out his controlled function
- An approved person must act with due skill, care and diligence in carrying out his controlled function
- An approved person must observe proper standards of market conduct in carrying out his controlled function
- An approved person must deal with all regulators in an open and cooperative way and must disclose appropriately any information of which the FCA or PRA would reasonably expect notice
- An approved person performing a significant influence function must take reasonable steps to ensure that the business of the firm for which he is responsible in his controlled function is organised so that it can be controlled effectively
- An approved person performing a significant influence function must exercise due skill, care and diligence in managing the business of the firm for which he is responsible in his controlled function
- An approved person performing a significant influence function must take reasonable steps to ensure that the business of the firm for which he is responsible in his controlled function complies with the relevant requirements and standards of the regulatory system
FIT: The Fit and Proper Test for Approved Persons
This module sets out the FCA’s minimum standards for becoming and remaining an approved person. These standards are relevant when a firm submits an application for an employee or other person to become an approved person and for the purposes of assessing the continuing fitness and propriety of approved persons.
The FCA will have regard to a number of factors when assessing the fitness and propriety of a person to perform a particular controlled function. The most important considerations will be the person’s:
- honesty, integrity and reputation
- competence and capability
- financial soundness
GEN: General Provisions
The general provisions contain a number of rules relating to mainly administrative duties. They include:
- a ban on firms claiming or implying that their business is endorsed by the FCA
- steps to be taken in situations when a firm cannot comply with our rules in an emergency
- how to interpret our Handbook of rules and guidance
- how firms authorised by us must describe their regulatory status: ‘status disclosure’
- restrictions on using our name or logo
- a ban on firms paying financial penalties imposed on their employees, directors or partners and on insurance against financial penalties
FEES: Fees Manual
FEES contains provisions relating to the funding of the regulators, including application, notification, vetting and periodic fees and provisions relating to the funding of the Financial Ombudsman Service and the Money Advice Service.
IPRU(INV): The Interim Prudential Sourcebook for Investment Businesses
IPRU(INV) 12 sets the prudential and specific notification requirements for firms operating in this market. Firms which only carry on the regulated activity of operating an electronic system in relation to lending are obliged to hold regulatory capital equal to either a percentage of loaned funds or a fixed minimum of £50,000 – whichever is higher. Note that the fixed minimum will be lower until April 2017, to allow platforms to acclimatise to the new regime. IPRU(INV) 12 contains detailed provisions on the calculation of a firm’s financial resources and the items which are eligible to be counted towards such resources. To ensure that firms hold the correct amount of regulatory capital, they must notify the FCA of changes to the total value of loans outstanding.
COBS: Conduct of Business
COBS sets out the conduct of business requirements applicable to firms operating loan-based crowdfunding platforms in relation to lending but only in relation to lenders and prospective lenders under P2P agreements. Of most relevance to firms in this market, it contains rules relating to:
- general conduct of business (COBS 2)
- client categorisation (COBS 3)
- communicating with clients, including financial promotions (COBS 4)
- distance communications (COBS 5)
- providing information about the firm, its services and remuneration (COBS 6)
- client agreements (COBS 8)
- providing product information to clients (COBS 14)
- cancellation (COBS 15)
- reporting information to clients (COBS 16)
CASS: Client Assets
CASS outlines rules and guidance on holding client assets and client money, including requirements as to segregation, statutory trusts in respect of client money, and retrieving information in the event of insolvency. CASS 1 and 1A (application provisions, firm classification and oversight), CASS 7 (client money rules and client money distribution) and CASS 10 (resolution packs) are particularly relevant for firms in this market.
The client money rules require firms to ensure adequate protection of client money when the firm is responsible for it (for example by holding it in different accounts from the firm’s own bank accounts, and by reconciling it at regular intervals). The purpose of the CASS resolution pack is to ensure that a firm maintains and is able to retrieve information that would, in the event of its insolvency, assist an insolvency practitioner in achieving a timely return of client money and safe custody assets to the firm's clients.
This module deals with supervisory issues and requirements concerning the FCA’s relationship with firms. It contains 21 chapters dealing with issues as diverse as:
- applications to vary permissions
- individual guidance for firms
- waivers and modifications of rules
- the controlled functions of approved persons
- controllers and close links
- appointed representatives
- notification and reporting requirements
DEPP: Decision Procedures and Penalties
DEPP is principally concerned with, and sets out, the FCA’s decision-making procedures that involve the giving of statutory notices, the FCA’s policy in respect of the imposition and amount of penalties, and the conduct of interviews to which a direction under FSMA section 169(7) (Investigations etc. in support of overseas regulator) has been given or the FCA is considering giving.
DISP: Dispute Resolution: Complaints
DISP contains rules and guidance relating to:
- firms’ internal handling of complaints about the financial services they provide, including:
- the procedures which a firm must put in place
- the time limits within which a firm must deal with a complaint
- the records of a complaint that a firm must make and retain and
- the requirements on a firm to report information about complaints to the FCA
- the operation of the Financial Ombudsman Service, which aims to ensure that complaints are resolved quickly and with minimum formality
PERG: The Perimeter Guidance Manual
PERG contains guidance about circumstances in which authorisation is required, or exempt person status is available, including guidance on the activities regulated under FSMA and the exclusions that are available. Of particular interest to firms in this market:
- PERG 2 explains which activities are regulated and what exclusions exist
- PERG 8 explains how the financial promotions regime works and how to determine whether a communication amounts to a financial promotion
FC: Financial Crime: a guide for firms
FC provides guidance to firms on how to prevent financial crime (in areas such as fraud and data security) and contains a summary of previous thematic reviews of various financial crime risks, including examples of good and poor practice.
UNFCOG: The Unfair Contract Terms Regulatory Guide
UNFCOG explains the FCA’s policy on how it uses its powers under the Unfair Terms in Consumer Contracts Regulations and our wider approach to regulating unfair terms in consumer contracts.
Terms are regarded as unfair if, contrary to the requirement of good faith, they cause a significant imbalance in the parties' rights and obligations to the detriment of the consumer.