Crowdfunding and segregation of client assets (FCA CP 16/4)

On 21 January 2016 the FCA published its CP16/4 Consultation Paper on crowdfunding and segregation of client assets. In the paper, the regulator consults on rules to simplify the current client money requirements for firms that operate electronic systems in relation to lending (P2P platforms) and who hold both regulated and unregulated client money accounts.

Crowdfunding enables people, organisations and businesses, including start-ups, to raise money through online portals in order to finance or re-finance their activities. The money can be crowdfunded in a number of ways by both individuals and businesses and as a result some crowdfunding activity is unregulated (this is the case with B2B loans and non P2P agreements), some is regulated (loan-based crowdfunding such as P2P lending) and some is exempt from regulation altogether. The CP16/4 Consultation seeks to collect feedback on regulated crowdfunding on a number of questions in order to target the following issue.

Currently, investor’s money held by a firm in relation to P2P agreements (money to be lent or received in repayments) falls within the definition of client money for the purposes of the client money rules in CASS 7 and must therefore be segregated from the firm’s own assets and any other client assets.

As the P2P industry generally do not have developed systems that distinguish between money held for the purposes of P2P agreements and that held for B2B agreements, such a requirement can be burdensome in practice. However, it remains necessary, as on insolvency, commingling in a way that is not compliant with CASS could cause significant delay and expense in returning client money, leading to consumer detriment. In this regard, the FCA have proposed 3 changes to the current regime, of which we have provided summaries below:

Proposed changes:

  • firms that hold money in relation to both P2P and B2B agreements, will be able to elect to hold all lenders’ monies under CASS 7 if they wish to do so. Firms may then segregate P2P and B2B monies from their own money without breaching the CASS rules and without necessarily needing to distinguish between P2P and B2B agreement monies. However, if a firm does make the election to hold all P2P and B2B monies under CASS 7, then all lender monies in relation to B2B agreements would need to be held as client money under CASS 7, and the firm would not be able to rely on the professional client opt out;
  • the FCA is proposing to extend the existing FCA restriction against firms taking on full ownership of lender monies under title transfer, so that it covers the scope of the election. Firms making the proposed election would need to keep a record of the decision and notify the FCA and all their lender clients in writing. Similarly, on ceasing the election, firms would need to notify B2B clients and the FCA; and
  • there will also be clarifications through guidance that, 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 (for example, the firm contracted with the client that its money would only be lent under a B2B agreement). As is currently the case, for loan repayments, firms will be able to continue to use the mixed remittance rule at CASS 7.13.31R which allows a firm to receive a single loan repayment from a borrower into a client bank account and remove any B2B monies at the firm’s next daily reconciliation.

To view the full Consultation Paper and list of questions on which the FCA are seeking feedback, please follow this link. Responses should be sent to the FCA by 11 February 2016 using the form on this link. Following consideration of the feedback the FCA aims to publish a policy statement (PS) making final rules in March 2016.

Should you require any further advice or information on the above, Cleveland & Co, your external in-house counsel, are here to help.

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