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Britain's crowdfunding firms face 'Darwinian' new rules

* Rules cap new investors at 10% of liquid assets

* Industry has seen high-profile failures in 2019

* Minnows could close as retail investor inflows slow

LONDON, Dec 9 (Reuters) - Britain’s peer-to-peer lenders faced tough new rules on Monday, which industry executives and analysts expect to prompt a clearout after the failure of two firms in the last six months.

The collapses of Lendy and FundingSecure and a Financial Conduct Authority (FCA) letter to executives in September warning it was monitoring bad practices at some firms have shaken the sector, with shares in Funding Circle, its only listed player, down 72% so far this year.

Under the regulations finalised by the FCA in June, new customers will only be able to invest up to 10% of their assets in peer-to-peer, while the platforms face more scrutiny of their governance and marketing.

Analysts said the new rules could slow the inflow of funds and put pressure on smaller or less well known players.

“It will be a Darwinian process ... that will lead to a stronger industry,” Rhydian Lewis, Chief Executive of RateSetter, one of Britain’s largest peer-to-peer players, said.

Peer-to-peer firms, which match lenders with borrowers via online platforms, have grown steadily in Britain since Zopa’s launch in 2005, managing more than 5.3 billion pounds ($6.8 billion) in 2019, independent research firm 4thWay data shows.

Investors can expect average returns of around 4.5%, according to an index compiled by 4thWay, compared with rates of around 1% for savings accounts in Britain.

For that investors accept additional risks and their funds are not protected by government guarantees.

Seventeen firms have withdrawn applications to be authorised as peer-to-peer lenders since the FCA first announced its proposed rule changes in June 2018, consultancy Bovill said.

“It would not surprise me if a few more platforms close as a result of these rules,” Neil Faulkner at 4thWay said.

If Britain experiences an economic downturn after its exit from the European Union, the peer-to-peer sector which has sprung up since the financial crisis in 2008 could face a first real test of its lending choices.

“I would have concerns about a pickup in loan defaults to companies that have been funded by peer-to peers, you could well see some less well-managed players consolidate or fall out of the market,” said John Cronin, analyst at Dublin-based Goodbody. ($1 = 0.7794 pounds) (Reporting by Lawrence White; Editing by Alexander Smith)

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