FCA’s failings on P2P lending raise concerns about crypto approach

The Tory party insists there is no connection and some defenders of the government point out that in any case, regulation of crypto is the responsibility of the independent Financial Conduct Authority.

But just how independent of politicians is the FCA? Not very, seems to be the answer, judging by an extraordinary cache of internal emails about the regulation of peer-to-peer lending that have been released as part of an unfair dismissal case.

The emails show that years before problems surfaced in the sector, there were serious concerns among senior FCA officials about the risk to investors. Yet the FCA dragged its feet and did nothing until platforms had failed taking investors’ savings with them.

Several of the exchanges suggest that the FCA felt pressured by Chancellor George Osborne and the Treasury not to stifle what was viewed as an exciting challenge to the existing banking system that could improve small companies’ access to capital.

One of several officials pushing for tougher regulation was Walker Sigismund, a risk manager who is now claiming he was unfairly dismissed in 2018. In June 2016, he wrote in an email that “substantial pushback” was expected from the Treasury to proposed new regulation and that the FCA would need to provide the department with fair warning to “give GO time to write to tell us not to do it”. GO appears to refer to Osborne, who was then strongly backing the development of peer-to-peer lending.

Sigismund was not the only official to refer to the influence of the Treasury. In terms of authorising peer-to-peer lenders, “the Treasury appears to be moving the boundary quite frequently, which doesn’t help”, Fod Barnes, an experienced regulatory economist who was serving as a senior adviser, wrote in July 2016.

The emails, which were first reported by investigative legal blog The Mouse in the Court, show that Andrew Bailey, then the FCA’s chief executive, was fully briefed on officials’ concerns about the risks posed by peer-to-peer lenders. “We are still concerned that consumers stepping in the P2P world do not know that they are potentially exposed to high risks and we believe that they cannot be expected to understand the risks even with enhanced disclosure,” Barbara Frohn, then director of risk and compliance oversight, wrote to Bailey in 2017.

Indeed, insiders say Bailey made clear he shared the concerns. But the FCA did not introduce new rules for the sector until late 2019, by which time platforms such as Lendy and FundingSecure had failed, leaving investors owed hundreds of millions of pounds.

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Some internal critics suggested Bailey was slow to act because he did not want to cross the chancellor and spoil his chances of becoming the next Governor of the Bank of England. Seen in the Treasury as a “safe pair of hands”, Bailey was duly appointed to his dream job at the end of 2019.

The FCA has dismissed suggestions that it was slow to react or was influenced by political pressure. It insists that the emails show a healthy level of debate within the organisation and that the rules were changed in response to developments in the market.

In its defence, the FCA has had to contend with a wave of innovations in recent years, from peer-to-peer lending to cryptocurrencies, and its resources aren’t limitless. But even some insiders question whether all those resources are well-used.

In addition to the political pressure and arguments over where in the organisation responsibility for peer-to-peer lending should sit, one former FCA official says the regulator’s big failing was to focus on form over substance — to concentrate on whether the correct regulatory procedures were being followed rather than asking fundamental questions about risk and likely outcomes for investors.

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A similar approach can be seen in the early response to the growth of cryptocurrency investing. The FCA dithered over whether it had the power or responsibility to regulate crypto when officials should have come out earlier to warn that cryptocurrencies had no intrinsic value and that investors were likely to lose all or most of their money.

To be fair, the FCA has been tougher on the crypto industry than regulators in many other countries. But after its failings over peer-to-peer lending, crypto will be a big test of the regulator’s ability to resist increased political pressure and strike the right balance between encouraging innovation and protecting investors.

To contact the author of this story with feedback or news, email David Wighton