Regulation watch: banking overdraft changes, P2P market rules tightened
The FCA has announced changes to the retail banking market and to the peer-to-peer lending market, which could change the effect that both are having on the SME leasing and lending market.
The Financial Conduct Authority (FCA) is to cap fees for overdrafts in the retail banking market, in a move that could affect how micro-SMEs and SMEs fund their businesses.
The FCA is introducing regulation that is stopping banks and building societies from charging higher prices for unarranged overdrafts than for arranged overdrafts.
In addition it is banning fixed fees for borrowing through an overdraft, requiring banks and building societies to price overdrafts by a simple annual interest rate, and requiring banks and building societies to advertise arranged overdraft prices with an APR to help customers compare them against other products.
The changes in regulation will come into effect from April 2020, apart from the guidance on refused payment fees, which will take effect immediately, and the repeat use remedies which will come into force on 18 December 2019.
Smaller SMEs have used bank overdrafts as an expensive form of finance for years instead of more targeted bespoke finance like leasing and asset-based finance.
However the trend has changed over the past decade as funders made small business owners more aware of finance products like asset finance, and schemes like the bank referral scheme were brought in for SMEs (despite questions about its efficacy).
In 2015, Close Brothers said more SMEs were using asset finance ahead of the traditional bank finance and overdraft.
In 2016, Funding Options said overdraft lending to SMEs had fallen by 37% in five years, with the value of overdrafts falling to £12bn over that time period.
And in 2017, the Bank of England pointed out that £9.5bn was lent to small and mid-sized businesses in asset based finance in 2016 – up 3% from £9.2bn in 2015. At the same time the amount of outstanding bank overdrafts decreased by 2% to an average £12.4bn in 2016, down from £12.6bn in 2015.
While alternative finance seems to be taking more of the overdraft bank business away from the high street banks, the reforms introduced by the FCA are likely to drive this trend.
Additionally banks will seek to recoup the losses from regulation, most likely with higher interest rates, strengthening the cause for lessors.
FCA issues rules for P2P sector in wake of Lendy failure
The FCA has introduced rules to tighten up lending in the P2P market, following in the wake of the collapse of the Lendy P2P platform last month.
Lendy, a £165m peer to peer network for secured property lending went into administration on 24 May 2019, with RSM overseeing the returns to creditors.
RSM is working closely with the FCA who has consented to its appointment over the companies.
As originally proposed, the FCA is placing a limit on investments in P2P agreements for retail customers new to the sector of 10% of investable assets. This is an important means of ensuring that they do not over-expose themselves to risk. The investment restriction will not apply to new retail customers who have received regulated financial advice.
In addition to these restrictions, the rules cover:
- More explicit requirements to clarify what governance arrangements, systems and controls platforms need to have in place to support the outcomes they advertise, with a particular focus on credit risk assessment, risk management and fair valuation practices.
- Strengthening rules on plans for the wind-down of P2P platforms if they fail.
- Introducing a requirement that platforms assess investors’ knowledge and experience of P2P investments where no advice has been given to them.
- Setting out the minimum information that P2P platforms need to provide to investors.
- Applying the Mortgage and Home Finance Conduct of Business (MCOB) sourcebook and other Handbook requirements to P2P platforms that offer home finance products, where at least one of the investors is not an authorised home finance provider.
P2P platforms need to implement these changes by 9 December 2019, except for the application of MCOB, which applies with immediate effect.
The FCA will continue to closely monitor the P2P market as it develops further