1. PEER-TO-PEER FINANCE POLICY SUMMIT 2012 How P2P Finance Models Work: Risks, Controls And Regulatory BarriersSimon Deane-Johns7 December 2012 Keystone Law

2. Peer-to-Peer Finance Policy Summit 7 December 2012 Types of P2P FinanceCrowd- investingDebentures Crowd- Crowd- investinginvestingOther (e.g.Equitiesinvoices)CrowdfundingP2P Payments (e.g. ForeignDonations/rewardsexchange)CrowdfundingP2P lendingcharities/socialConsumers/SMEs Microfinance 3. Peer-to-Peer Finance Policy Summit7 December 2012 How P2P Finance Works Transaction Flow Offer/acceptance => Loan agreement LenderBorrowerShare/debenture Offer/acceptance => Investment agreementInvestorEntrepreneur Platform Operatorplatform agreementplatform agreement Lender/InvestorsPlatform Operators Borrower/Entrepreneurs BankBank (Seg Account)Bank 4. Peer-to-Peer Finance Policy Summit 7 December 2012 How P2P Finance Works Funds FlowLoan agreement Lender Borrower Share/debentureInvestment agreement Transfer requestInvestor EntrepreneurTransfer request Platform Operatorplatform agreementplatform agreement Funds Transfer Disburse Loan/Investment Funds Transfer Repayment/dividend Lender/Investors Platform Operators Borrower/Entrepreneurs Bank Bank (Seg Account)Bank 5. Peer-to-Peer Finance Policy Summit 7 December 2012Common Features Platform operator is not a party to instrument agreed between participants Segregates participants funds rather than treating them as own assets; Margin stays with the participants; Online only > low cost > lower fees Low minimum commitment accessible to ordinary people Aids diversification of small investment amounts; Finance from many in small amounts at outset > no need to securitise; Data centralised to aid risk assessment, performance analysis, collections, enforcement Transparency and funds segregation removes moral hazard 6. Peer-to-Peer Finance Policy Summit 7 December 2012 Standard Operational Risks Lack of adequate internal controls, governance Financial mismanagement, operator insolvency; Internal fraud; lack of system integrity/availability; lack of business continuity; failure to manage/respond appropriately to customer complaints; Unclear, unfair or misleading promotions/communications. Basic credit or investment risk Money laundering, external Fraud 7. Peer-to-Peer Finance Policy Summit7 December 2012Common Operational Controls Senior management systems and controls; Minimum working capital; Segregation of participants funds; Clear, fair and not misleading service terms/communications/promotions; Secure and reliable IT systems; Fair complaints handling; Orderly administration if platform ceases to operate; Appropriate risk assessment, AML and anti-fraud measures Extra measures appropriate to specific instruments available 8. Peer-to-Peer Finance Policy Summit7 December 2012Regulatory Barriers Confusion as to whether you can lawfully participate on platforms; Tiny differences have seismic implications in permission or licence needed; Regulatory creep: uncertainty/ risk aversion leads to unnecessary complexity; Regulatory overlap/conflict (e.g. FSMA/MiFID, Prospectus Directive/Cos Act); Different business test criteria for different activities; Unclear when participants might be acting in the course of a business; Different rules for promoting vs offering a security; Unregulated operators may still face rules on public offers and promotions; Regulators can only look inside the regulated markets to foster competition; Regulation (coupled with perverse tax incentives) discourages diversifying beyond regulated cash/investment products, limiting innovation and competition.