CP16/4 Loan-based crowdfunding platforms and client money segregation

On 21 January 2016 the FCA issued consultation paper 16/4 (CP 16/4), proposing changes to client money requirements for firms that operate crowd funding platforms. Crowdfunding is a way in which funds can be raised – typically many small amounts are donated or invested by a large number of individuals/businesses/organisations via the internet using online …

by | February 2, 2016 | AutoRek

On 21 January 2016 the FCA issued consultation paper 16/4 (CP 16/4), proposing changes to client money requirements for firms that operate crowd funding platforms.

Crowdfunding is a way in which funds can be raised – typically many small amounts are donated or invested by a large number of individuals/businesses/organisations via the internet using online portals.

Some firms operating loan-based crowdfunding platforms arrange both loans that are business-to-business (B2B) agreements and loans that are P2P agreements. Under existing rules (PS14/4), an investor’s money held by a firm in relation to a P2P agreement would need to adhere to CASS 7 client money rules, and therefore would need to be segregated from firm’s own money, as well as from other monies including unregulated B2B agreements.

FCA Action

The FCA have recognised that some firms do not have robust systems to distinguish between P2P and B2B monies, which in turn could lead to co-mingling, and potential delay in returning funds in the event of insolvency.

In response, the FCA are proposing to simplify rules on client money requirements for firms that operate electronic systems in relation to peer-to-peer (P2P) lending, and hold both regulated and unregulated client money accounts.

CP 16/4 Proposals

CP 16/4 proposals include:

  • Allowing firms that hold money in relation to both P2P and B2B agreements, to elect to hold all lenders’ monies in accordance with CASS 7. This would allow P2P and B2B monies together to be segregated from firm’s own money without breaching CASS rules, and without necessarily needing to distinguish between P2P and B2B monies.
  • Extending existing FCA restrictions against firms taking on full ownership of lender monies under title transfers, in order to cover the scope of the election.
  • If the election is taken, a firm would have to keep a record of the decision and notify in writing the FCA and all lender clients. On ceasing the election firms would need to notify the FCA and all B2B clients.
  • All monies held by a firm in relation to P2P and B2B agreements would be treated as client money under CASS 7 and, on insolvency, would be dealt with in accordance with CASS 7A client money distribution rules.
  • Where a firm operating a loan-based crowdfunding platform holds money that has not yet been invested for a client, this should be client money held under the CASS rules, unless the circumstances are such that it could never be invested in relation to a P2P agreement.

The FCA are in the process of gathering responses to the CP16/4 proposals, and expect to publish a policy statement with final rules in March 2016.

By Gillian Boston, Associate Director at AutoRek.

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