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