Peer to Peer Lending
 in the UKChristine Farnish CBE

Chairman Peer-to-Peer Finance Association

www.p2pfa.info July 2016

http://www.p2pfa.info

What is it?

• internet-based digital p2p lending

• new type of retail financial service •NOT banking •NOT asset management•NOT equity investment •NOT insurance

• debt-based finance to consumers or SMEs via direct peer-to-peer contracts

p2p platform

lenders credit worthy borrowers

platform manages risk on behalf of

consumers

direct legal contract

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Timeline

Zopa

Funding Circle & RateSetter

P2PFA & self regulation

New law defining p2p as a discrete financial services

activity

FCA began authorising platforms. Tax reforms announced

FCA review of regime

UK vs US

Both big, fast growing p2p lending markets but…

UK US

~60-70% retail consumer funded

~20% retail consumer funded

direct peer-to-peer loan contracts

complex contractual arrangement

involving third parties

bespoke regulatory regime

no bespoke regulatory regime

UK alternative finance market 2015 


Source: Pushing Boundaries, The 2015 UK alternative Finance Industry Report Feb 2016, Nesta, University of Cambridge

Cumulative lending

Benefits

• access for all – ‘democratic’

• lower cost

• faster, better customer service

• disintermediation and better economic efficiency

• dynamic benefits from competition and innovation

Risk profile 


bank deposits

high risklow risk

p2p lending equity investment

(including equity crowdfunding)

Risks

Risk Mitigation

loan defaults and capital loss▪ sound debt recovery processes ▪ honest, clear, effective disclosure ▪ robust credit risk underwriting

fraud ▪ client money safeguards ▪ sound systems and controlsinsolvency ▪ robust independent run-off plans

liquidity/ access to funds ▪ honest disclosure ▪ development of secondary market

incompetence/mistakes▪ senior management responsibilities ▪ complaints handling systems ▪ Ombudsman

New 2015 P2PFA requirements

• headline returns to be shown net of defaults and fees

• standardised methodology for default calculation and mandatory default disclosure

• full loan book transparency

• no discrimination between retail and wholesale investors

• no raising of ‘own funds’ on p2p platforms

UK statutory regulation

• P2P lending defined as “operating an electronic system in relation to lending”

• FCA Rules: – clear, honest, balanced and not misleading marketing and

platform information – robust systems and controls – client money safeguards – sound, independent run-off plans – c£50k prudential capital – complaints systems and Ombudsman cover

• FCA review of regime H2 2016

Tax

• Investors were taxed on expected returns (i.e gross of defaults and fees)

• bad debt relief now implemented

• lender fees still cannot be offset

• p2p loans now fall within Personal Saving Allowance

• p2p loans to be included in Innovative Finance ISA

Brexit

• period of economic and political uncertainty

• macro economic consequences

• no single EU market for p2p

• little cross border business

• fundamental economic and commercial advantages of p2p lending remain the same

FCA Review of crowdfunding regulation

• investor information and understanding?

• credit risk underwriting?

• resilience to economic shocks?

• impact on competition?

Outcome early 2017

Conclusion • significant economic and customer benefits

• regulatory framework needed, but…

• …needs to be proportionate and not kill innovative, beneficial business models

• regulation should address specific risks to consumers

• regime needs to be dynamic