Out-Law News 2 min. read
07 Dec 2012, 4:22 pm
In an open letter (2-page / 265KB PDF) published to coincide with a "broad industry summit" on the issue, companies including Seedrs, CrowdCube and Zopa warned that the existing regulatory regime made it difficult for more innovative forms of lending to establish themselves in the marketplace.
"The most successful new alternatives to retail bank finance are online marketplaces which facilitate small-scale, direct finance transactions between individuals and businesses, cutting out the 'middle-man' and reducing costs to the real economy," the letter said.
"But the operators of these platforms find it difficult to launch and flourish because existing EU and UK regulation does not fit the new models. In particular, regulations aimed at lending and investing unreasonably limit customer access and make platforms unnecessarily complex. In these circumstances, it is unrealistic to assume new business models will thrive without regulatory change."
The letter calls for the creation of a new regulated activity of "operating a direct finance platform" for loans and investments. This new activity would enable the industry to properly manage the risks of operating funding platforms while at the same time creating an obligation to behave responsibly, the letter said.
Online funding platforms use a range of methods to facilitate access to finance for small businesses and to fund specific creative projects. Methods include crowdfunding, where individuals contribute towards a particular project in return for specified rewards; crowd-investing, which enables investments in shares and other instruments; and peer-to-peer lending, used to facilitate simple loans.
In their letter, the lenders state that the new regulated activity should "recognise the lower risks associated with loans to creditworthy personal or businesses borrowers", with no need for 'suitability' or 'appropriateness' tests for investments below a reasonable threshold. Qualifying platforms should be exempted from potentially overlapping regulatory regimes, such as those applicable to collective investment schemes or investment funds. Participants dealing with a qualifying platform should also be treated as acting in a personal capacity, not acting in the course of a business, since in its capacity as a facilitator the platform itself would be unable to operate any compliance requirements, the letter said.
Last month, the Government confirmed that the new Financial Conduct Authority (FCA) would take over regulatory responsibility for peer-to-peer lending platforms as part of the wider transfer of consumer credit oversight in April 2014. The Financial Services Bill, which is currently before Parliament, has been amended to allow this to happen while a consultation on the type of activities that will be regulated by the FCA is due in January.
"The Government is keen to promote innovation in financial services and wants to support new entrants to the market, like peer-to-peer lenders," a Treasury spokesperson told Out-Law.com, "It's clearly very important that consumer credit providers are properly regulated which is why, as announced in November, we confirmed that the regulation of peer-to-peer platforms will be transferred to the new Financial Conduct Authority along with other consumer credit regulation."
"Both the Treasury and the Financial Services Authority will be issuing consultations early in the new year on further detail of the consumer credit transfer, which will cover peer-to-peer platforms," the spokesperson said.
The Office of Fair Trading (OFT), which currently regulates consumer credit providers, currently performs some regulatory functions in relation to those peer-to-peer lenders that require a licence for their 'debt administration' activities. Platforms do not require a licence to operate as a 'lender', because rather than lend any of their own money they instead 'match up' lenders and borrowers.
Financial services law expert Tony Anderson of Pinsent Masons, the law firm behind Out-Law.com, questioned how tougher regulation would interact with the existing financial services regulatory reform agenda.
"It is a positive development that a particular sector of the finance industry is calling for the introduction of regulation to govern it," he said. "One issue though is the already competitive and overlapping regulatory agendas at national and EU level for banking and shadow banking. How would peer-to-peer regulation meld with existing proposals in these areas, particularly as and when it gathers further momentum?"
