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Financial Regulation: Crowdfunding & P2P Lending
12th November 2015
Today the FCA issued a Discussion Paper on Possible Handbook changes to reflect the introduction of the Innovative Finance ISA and the regulated activity of advising on peer-to-peer agreements (Discussion Paper DP 15/6).
In this paper, the regulator sets out their initial thinking about potential changes to the Handbook to ensure their regulatory approach takes into account government legislative developments that are set to affect the regulated loan-based crowdfunding sector.
It seems that crowdfunding has gathered increasing interest in the past few years and in particular in the past few weeks, with crowdfunding again being on the radar of not only the regulator - with peer-to-peer lenders being warned that they may face the same rules as banks – but also of the government, with the Economic Secretary, announcing the government’s wish to see peer-to-peer lending continue to grow and evolve as well as the Media with details of a bankrupt peer-to-peer firm and £3M missing money scandal.
But, what exactly is crowdfunding? Is this the same as peer-to-peer lending (P2P) and what exactly is all the fuss about?
Crowdfunding refers to a reasonably modern and alternative method of raising finance. Whilst the norm for financing a business or venture has invariably been to ask a small amount of people (such as a Bank) for a large amount of money, Crowdfunding instead does this by asking a large number of people each for a small amount of money – often via online platforms that are able to reach hundreds, thousands and millions of potential investors. As the FCA summarises:
“Crowdfunding is a way in which people, organisations and businesses, including business start-ups, can raise money through online portals (called crowdfunding platforms) to finance or re-finance their activities. Money is subscribed mainly by individuals but also by institutions.”
Peer-to-Peer (P2P) lending is a particular type of crowdfunding. P2P is loan-based and is also referred to as peer-to-business (P2B) lending.
Regulation of Crowdfunding & Peer-to-peer lending (P2P)
At the beginning of the year, the FCA undertook a review of the regulatory regime in relation to peer-to-peer lending (P2P) and crowdfunding, the results of which was published in February. This review, entitled, ‘A review of the regulatory regime for crowdfunding and the promotion of non-readily realisable securities by other media’, outlined the aspects of crowdfunding that they are responsible for regulating and discussed how the crowdfunding rules, laid out in Policy Statement 14/4 in March 2014, had been implemented so far.
As the FCA noted in February, at present “Some crowdfunding activity is unregulated, some is regulated and some is exempt from regulation.”
Thus regulation is dependent upon the type of crowdfunding to be undertaken.
The FCA clarifies that, loan-based crowdfunding is when “people lend money to individuals or businesses in the hope of a financial return in the form of interest payments and a repayment of capital over time” However, this excludes some business-to-business (B2B) loans.
And if the Government’s plans for developing legislation relating to loan-based crowdfunding are finalised, then the FCA will have increased regulatory oversight for those that wish to advise upon activities within this sector.
Towards the end of last month the Economic Secretary, Harriett Baldwin MP gave a speech at the P2P Finance Association Summit advising that Peer-to-Peer lending “is a brilliantly innovative new form of finance – which we want to see continue to grow and evolve.”
Amongst its plans, the Government intends to permit loan-based crowdfunding investments to be included in Individual Savings Accounts (ISAs) in a new component known as Innovative Financial ISA (IFISA), which is anticipated to be available from 6th April 2016.
In addition, the Government intends to amend the existing Regulated Activities Order to make the provision of advice about loan-based crowdfunding investments (such as P2P lending agreements) a regulated activity.
In order to support the growth in this sector, and in light of doubts cast over the safety of P2P lending by recent scandals, such as the TrustBuddy Bankruptcy last month, then inevitably, there has to be greater regulation within this sector.
This was also a fact highlighted by Ms Baldwin at the summit stating that, “for the sector to mature, it would be important to bring it within the correct statutory framework” and that “Proportionate regulation will protect consumers lending and borrowing via a P2P platform and allow the sector to continue to grow.”
Furthermore, John Griffiths-Jones, chairman of the Financial Conduct Authority (FCA), told the Treasury Select Committee the day after the Economic Secretary’s summit address that as the growth of P2P lenders and crowdfunders continues and the more they start to behave like banks, then the regulation of them will have to evolve respectively which is “being kept under constant review”.
So, following today’s FCA Discussion Paper proposals, it seems that another step has been taken towards greater crowdfunding regulation since P2P lending was first brought within the scope of the Financial Conduct Authority back in April 2014.
Comments upon DP 15/6 are due to the FCA by 31 December 2015, who will then consult with the industry on the feedback received once the government legislation has been finalised with their aim to publish a policy statement and final rules in March 2016.
Regulation: Crowdfunding & Peer-to-Peer Lending (P2P)
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“While one wants to encourage alternative sources of lending, one doesn’t want to open up risk. I think sooner or later these platforms will tend to offer packages rather than lending to individuals. At that point, they become awfully like a bank, and I think it’s very important for the regulator not to allow regulatory arbitrage in the system.”
John Griffiths-Jones, Chairman of the FCA, 22nd October 2015