COBS 18.12 Operating an electronic system in relation to lending

1This section applies to an operator of an electronic system in relation to lending, but only in relation to a person becoming a lender under a P2P agreement.

This section does not apply in relation to a current account agreement where:

1. (1)

   there is a possibility that the account holder may be allowed to overdraw on the current account without a pre-arranged overdraft or to exceed a pre-arranged overdraft limit; and

2. (2)

   if the account holder did so, this would be a P2P agreement (overrunning).

In the remainder of this section:

1. (1)

   references to a P2P agreement include non-P2P agreements included in a P2P portfolio;

2. (2)

   unless the context otherwise requires, references to “lender” also include a prospective lender;

3. (3)

   a firm is treated as having determined the price of a P2P agreement in cases other than where the lender and the borrower have entered into a genuine negotiation to determine the price of that P2P agreement; and

4. (4)

   references to repayment refer to repayment of capital or payment of interest or other charges (excluding any charge for non-compliance with a P2P agreement).

Where a firm determines the price of a P2P agreement, it must undertake a reasonable assessment of the credit risk of the borrower before the P2P agreement is made.

A firm must base its credit risk assessment on sufficient information:

1. (1)

   of which it is aware at the time the credit risk assessment is carried out;

2. (2)

   obtained, where appropriate, from the borrower, and, where necessary, any other relevant sources of information.

The firm must consider the risk that the borrower will not make one or more repayments under the P2P agreement by the due date.

1. (1)

   The extent and scope of the credit risk assessment, and the steps that the firm must take to satisfy the requirement that the assessment is a reasonable one and based on sufficient information, is dependent upon, and proportionate to, the individual circumstances of each case.

2. (2)

   The firm must consider:

   1. (a)

      the types of information to use in the credit risk assessment;

   2. (b)

      the content and level of detail of the information to use;

   3. (c)

      whether the information in the firm’s possession is sufficient;

   4. (d)

      whether and to what extent to obtain additional information from the borrower;

   5. (e)

      whether and to what extent to obtain information from any other sources;

   6. (f)

      whether and to what extent to verify the accuracy of the information that is used; and

   7. (g)

      the degree of evaluation and analysis of the information that is used,

   having regard to the factors listed in (3) where applicable to the agreement.

3. (3)

   The factors to which the firm must have regard when complying with (2) and deciding what steps are needed to make the credit risk assessment a reasonable one include each of the following where applicable to the agreement:

   1. (a)

      the type of credit;

   2. (b)

      the amount of the credit or the credit limit;

   3. (c)

      the duration (or likely duration) of the credit;

   4. (d)

      the frequency of the repayments;

   5. (e)

      the amount of the repayments;

   6. (f)

      the annual percentage rate of charge; and

   7. (g)

      any other costs, including any charge for non-compliance with the agreement, which will or may be payable by or on behalf of the borrower in connection with the agreement.

A firm must:

1. (1)

   establish, implement and maintain clear and effective policies and procedures:

   1. (a)

      to enable it to carry out credit risk assessments; and

   2. (b)

      setting out the principal factors it will take into account in carrying out credit risk assessments;

2. (2)

   set out in writing the policies and procedures in (1), and (other than in the case of a sole trader) have them approved by its governing body or senior personnel;

3. (3)

   assess and periodically review:

   1. (a)

      the effectiveness of the policies and procedures in (1); and

   2. (b)

      the firm’s compliance with those policies and procedures and with its obligations under COBS 18.12.5R to 18.12.8R;

4. (4)

   following the review in (3), take appropriate measures to address any deficiencies in the policies and procedures or in the firm’s compliance with its obligations;

5. (5)

   maintain a record of each transaction where a P2P agreement is entered into sufficient to demonstrate that:

   1. (a)

      a credit risk assessment was carried out where required; and

   2. (b)

      the credit risk assessment was reasonable and was undertaken in accordance with COBS 18.12.5R to 18.12.8R,

   and in each case to enable the FCA to monitor the firm’s compliance with its obligations under COBS 18.12.5R to 18.12.8R; and

6. (6)

   (other than in the case of a sole trader) establish, implement and maintain robust governance arrangements and internal control mechanisms designed to ensure the firm’s compliance with (1) to (5).

Where a firm determines the price of a P2P agreement it must ensure that the price is fair and appropriate.

To determine a fair and appropriate price for a P2P agreement the firm must at least ensure:

1. (1)

   the price is reflective of the risk profile of the loan; and

2. (2)

   the firm has taken into account:

   1. (a)

      the time value of money; and

   2. (b)

      the credit spread of the P2P agreement.

Where a firm selects which P2P agreements to facilitate for a lender, it must facilitate only those P2P agreements which are in line with the disclosures made pursuant to COBS 18.12.27R.

Where a firm is assembling or managing a P2P portfolio, it must ensure that it includes in that P2P portfolio only those P2P agreements it has determined with reasonable certainty will enable the lender to achieve the target rate.

Where a firm determines the price of a P2P agreement it must review the valuation of each P2P agreement in at least the following circumstances:

1. (1)

   when the P2P agreement is originated;

2. (2)

   where the firm considers that the borrower is unlikely to pay its obligations under the P2P agreement in full, without the firm enforcing any relevant security interest or taking other steps with analogous effect;

3. (3)

   following a default; and

4. (4)

   where the firm is facilitating an exit for a lender before the maturity date of the P2P agreement.

Where a firm that determines the price of P2P agreements is facilitating an exit for a lender before the maturity date of a P2P agreement, the firm must ensure that the price offered for exiting the P2P agreement is fair and appropriate.

1. (1)

   Where any of COBS 18.12.11R to 18.12.17R apply, a firm must have and use a risk management framework that is designed to achieve compliance with those rules.

2. (2)

   The firm’s risk management framework must at least:

   1. (a)

      be appropriate to the nature, scale and complexity of its business;

   2. (b)

      take into account any credit risk assessment, credit-worthiness assessment or assessment of affordability under MCOB;

   3. (c)

      categorise P2P agreements by their risk, taking into account the probability of default and the loss given default; and

   4. (d)

      set out the circumstances in which the firm will review the valuation of each P2P agreement.

3. (3)

   The firm must set out in writing the risk management framework, and have it approved by its governing body or senior personnel.

A firm with a risk management framework must:

1. (1)

   assess, monitor and periodically review the adequacy and effectiveness of the risk management framework, including by assessing outcomes against expectations;

2. (2)

   pursuant to (1), take appropriate measures to address any deficiencies in the risk management framework;

3. (3)

   maintain a record of each transaction where it has used the risk management framework to facilitate a P2P agreement sufficient to demonstrate that:

   1. (a)

      the price of the P2P agreement was fair and appropriate in line with the risk management framework;

   2. (b)

      where the firm selected which P2P agreements to facilitate for a lender, that its selection was in line with the risk management framework;

   3. (c)

      any inclusion in a P2P portfolio was in line with the risk management framework,

   and in each case to enable the FCA to monitor the firm’s compliance with its obligations regarding the risk management framework;

4. (4)

   establish, implement and maintain robust governance arrangements and internal control mechanisms designed to ensure the firm’s compliance with (1) to (3); and

5. (5)

   allocate to an approved person overall responsibility within the firm for the establishment and maintenance of an effective risk management framework and record that allocation.

Where a firm determines the price of P2P agreements in any financial year of the firm, it must publish an outcomes statement within four months of the end of each financial year.

A firm must ensure that each outcomes statement remains publicly available for at least 10 years from publication.

An outcomes statement must include, as applicable, for the financial year of the firm:

1. (1)

   the expected and actual default rate of all P2P agreements the firm has facilitated by risk category, by reference to the risk categories set out in the risk management framework, in line with the requirements in COBS 4.6 on past and future performance;

2. (2)

   a summary of the assumptions used in determining expected future default rates; and

3. (3)

   where the firm offered a target rate, the actual return achieved.

A firm must provide to a lender a description of its role in facilitating P2P agreements. That description must include:

1. (1)

   the nature and extent of due diligence the firm undertakes in respect of borrowers;

2. (2)

   a description of how loan risk is assessed, including a description of the criteria that must be met by the borrower before the firm considers the borrower eligible for a P2P agreement;

3. (3)

   whether the firm will play a role in determining the price of a P2P agreement and, if so, what role;

4. (4)

   where lenders do not have the choice to enter into specific P2P agreements, what role the firm will play in selecting P2P agreements for the lender;

5. (5)

   where a firm offers a P2P portfolio to lenders, what role it will play in assembling or managing that P2P portfolio;

6. (6)

   an explanation of the firm’s procedure for dealing with a loan in late payment or default;

7. (7)

   an explanation of how any tax liability for lenders arising from investment in P2P agreements will be calculated;

8. (8)

   whether the firm will play a role in facilitating a secondary market in P2P agreements and, if so, what role, including:

   1. (a)

      the procedure for a lender to access their money before the term of the P2P agreement has expired and the risk to their investment of doing so; and

   2. (b)

      whether the firm displays P2P agreements that lenders wish to exit and that other lenders may choose to enter into; or

   3. (c)

      whether the firm decides if the P2P agreement should be transferred to another lender without involving either lender in that decision.

A firm must provide confirmation to a lender that there is no recourse to the Financial Services Compensation Scheme.

Where a lender has the choice to enter into specific P2P agreements, a firm must provide the lender with at least the following information about each P2P agreement:

1. (1)

   where the firm determines the price of P2P agreements, the price of the P2P agreement;

2. (2)

   where not provided under (1), the annual percentage rate that will be paid by the borrower in respect of that P2P agreement, where applicable to that agreement;

3. (3)

   when the P2P agreement is due to mature;

4. (4)

   the frequency of the repayments to be made by the borrower;

5. (5)

   the amounts of the repayments to be made by the borrower;

6. (6)

   the total amount payable by the borrower;

7. (7)

   a fair description of the likely actual return, taking into account fees, default rates and taxation;

8. (8)

   where the firm determines the price of P2P agreements, details of the credit risk assessment, credit-worthiness assessment or assessment of affordability under MCOB carried out;

9. (9)

   whether the P2P agreement is backed by an asset (for example, secured against property developments) and if so, details of that asset;

10. (10)

    fees to be paid by the borrower or the lender, including any deduction from the interest to be paid by the borrower;

11. (11)

    where the firm determines the price of P2P agreements, the risk categorisation of that P2P agreement and an explanation of that risk categorisation, by reference to the risk categories set out in the risk management framework; and

12. (12)

    where any of the terms in respect of which information must be provided under sub-paragraphs (1) to (7) is set by auction, a description of the auction process and of how those terms will be determined.

Where a firm selects which P2P agreements to facilitate for a lender, including where a firm offers a P2P portfolio to a lender, the firm must provide the lender with the following information about the P2P agreements it may facilitate for the lender:

1. (1)

   the minimum and maximum interest rate that will be payable under any P2P agreement that may be facilitated for the lender;

2. (2)

   the minimum and maximum maturity date of any P2P agreement that may be facilitated for the lender;

3. (3)

   a fair description of the likely actual return, taking into account fees, default rates and taxation;

4. (4)

   fees to be paid by the borrower or the lender, including any deduction from the interest to be paid by the borrower; and

5. (5)

   the range and distribution of risk categories that the P2P agreements may fall into and an explanation of those risk categories by reference to the risk categories set out in the risk management framework.

1. (1)

   A firm must notify each lender of the firm’s arrangements made under SYSC 4.1.8AR to ensure that P2P agreements facilitated by it will continue to be managed and administered in accordance with the contract terms between the firm and the lender.

2. (2)

   Where a firm’s arrangements made under SYSC 4.1.8AR include particular terms in its contracts with lenders, or include obtaining particular prior consents from lenders, the firm must clearly identify these arrangements and explain how they operate.

3. (3)

   Where a firm’s arrangements made under SYSC 4.1.8AR involve another person taking over the management and administration of P2P agreements if the firm ceases to operate the electronic system in relation to lending, the notification must inform lenders of:

   1. (a)

      the identity of the person with which the arrangements have been made;

   2. (b)

      how that person will hold the lenders’ money; and

   3. (c)

      whether that person is authorised by the FCA and, if it is, which relevant Part 4A permissions it holds.

4. (4)

   A firm must also explain to each lender the particular risks to the management and administration of P2P agreements in the event of its own failure, including:

   1. (a)

      the possibility that P2P agreements may cease to be managed and administered before they mature;

   2. (b)

      the possibility that any person involved in the continued management and administration of P2P agreements after the firm fails may not be subject to the same regulatory regime and requirements as the firm, and the resulting possibility that regulatory protections may be reduced or no longer available; and

   3. (c)

      the likelihood that the majority of balances due to the lender are those due from borrowers rather than from the firm itself, so if the firm fails a lender’s entitlement to any client money held by the firm would not include those balances that the firm has not yet received from borrowers.

1. (1)

   The information to be provided in accordance with COBS 18.12.24R to 18.12.25R and 18.12.27R to 18.12.28R must be provided in good time before a firm carries on the relevant business for a lender.

2. (2)

   The information to be provided in accordance with COBS 18.12.26R must be provided each time before a firm facilitates a person becoming a lender under a P2P agreement, and in good time before doing so.

3. (3)

   Where any of the terms in respect of which information must be provided under COBS 18.12.26R(1) to (7) are set by auction, that information must be provided as soon as reasonably practicable after those terms have been set as a result of the auction.

1. (1)

   A firm must notify a lender in good time about any material change to the information provided under the rules in COBS 18.12.24R and 18.12.28R.

2. (2)

   The notification in (1) must be given in a durable medium if the information to which it relates was given in a durable medium.

A firm must ensure that, at any point in time, a lender is able to access details of each P2P agreement they have entered into which was facilitated by that firm, including:

1. (1)

   the price of the P2P agreement;

2. (2)

   where not provided under (1), the annual percentage rate that will be paid by the borrower in respect of that P2P agreement, where applicable to that agreement;

3. (3)

   the outstanding capital and interest payments in respect of that P2P agreement;

4. (4)

   when the P2P agreement is due to mature;

5. (5)

   any fees paid in respect of that P2P agreement by the lender or the borrower;

6. (6)

   if the firm has carried out a valuation of the P2P agreement:

   1. (a)

      the most recent valuation;

   2. (b)

      the valuation date; and

   3. (c)

      an explanation of why the firm conducted the valuation;

7. (7)

   a fair description of the likely actual return, taking into account fees, default rates and taxation;

8. (8)

   where the firm determines the price of P2P agreements, details of the credit risk assessment, credit-worthiness assessment or assessment of affordability carried out under MCOB;

9. (9)

   whether the P2P agreement is backed by an asset (for example, secured against property developments) and if so, details of that asset;

10. (10)

    where the firm:

    1. (a)

       determines the price of P2P agreements;

    2. (b)

       selects which P2P agreements to facilitate for a lender; or

    3. (c)

       offers a target rate,

    the risk categorisation of that P2P agreement and an explanation of that risk categorisation, by reference to the risk categories set out in the risk management framework;

11. (11)

    whether the firm considers that the borrower is unlikely to pay its obligations under the P2P agreement in full without the firm enforcing any relevant security interest or taking other steps with analogous effect and, if so, information to that effect; and

12. (12)

    whether a default by the borrower under a P2P agreement has occurred and, if so, information to that effect.

The documents and information provided in accordance with COBS 18.12.24R to 18.12.28R and COBS 18.12.31R must be in a durable medium or available on a website (where that does not constitute a durable medium) that meets the website conditions.

1. (1)

   In addition to any other risk warnings that must be given by a firm, a firm must provide the following risk warning to a lender when it offers a contingency fund, modified as necessary to reflect the terminology used by the firm to refer to a contingency fund:

   “The contingency fund we offer does not give you a right to a payment so you may not receive a pay-out even if you suffer loss. The fund has absolute discretion as to the amount that may be paid, including making no payment at all. Therefore, investors should not rely on possible pay-outs from the contingency fund when considering whether or how much to invest.”

2. (2)

   The firm must provide the risk warning in a prominent place on every page of each website and mobile application of the firm available to lenders containing any reference to a contingency fund.

3. (3)

   Where the lender has not approached the firm through a website or mobile application, the risk warning must be provided in a durable medium in good time before the firm carries on any business for that lender.

The standardised risk warning must be:

1. (1)

   prominent; and

2. (2)

   contained within its own border and with bold text as indicated.

1. (1)

   A firm which offers a contingency fund to lenders must have a contingency fund policy.

2. (2)

   The contingency fund policy must contain the following information:

   1. (a)

      an explanation of the source of the money paid into the fund;

   2. (b)

      an explanation of how the fund is governed;

   3. (c)

      an explanation of who the money belongs to;

   4. (d)

      the considerations the fund operator takes into account when deciding whether or how to exercise its discretion to pay out from the fund, including examples. This should include:

      1. (i)

         whether or not the fund has sufficient money to pay; and

      2. (ii)

         that the fund operator has absolute discretion in any event not to pay or to decide the amount of the payment;

   5. (e)

      an explanation of the process for considering whether to make a discretionary payment from the fund; and a description of how that money will be treated in the event of the firm’s insolvency.

   6. (f)

      The contingency fund policy must be provided on every page of each website and mobile application of the firm available to lenders and must be:

3. (3)

   The contingency fund policy must be provided on every page of each website and mobile application of the firm available to lenders and must be:

   1. (a)

      prominent;

   2. (b)

      in an unrestricted part of the website or mobile application; and

   3. (c)

      accessible via a link contained in the standardised risk warning in COBS 18.12.33R.

4. (4)

   Where the lender has not approached the firm through a website or mobile application this information must be provided in a durable medium in good time before the firm carries on any business for that lender.

1. (1)

   A firm must notify a lender if they receive payment from a contingency fund.

2. (2)

   This notification must state the amount paid to the lender from the contingency fund.

3. (3)

   This notification must be provided either:

   1. (a)

      at the time the payment is made; or

   2. (b)

      on an aggregated basis at least once every three months.

A firm which offers a contingency fund must make public on a quarterly basis the following facts about how the fund is performing:

1. (1)

   the size of the fund compared to total amounts outstanding on P2P agreements relevant to the contingency fund;

2. (2)

   what proportion of outstanding borrowing under P2P agreements has been paid using the contingency fund; and

3. (3)

   a firm must:

   1. (a)

      only include the actual amount of money held in the contingency fund at the relevant time, net of any liabilities or pay outs agreed but not yet paid; and

   2. (b)

      not include any amounts due to be paid into the contingency fund that have not yet been paid into it.

A firm must ensure that information that contains an indication of past performance only contains information that is reflective of the actual payments received by lenders from borrowers under P2P agreements.