peer to peer lending in the uk - lendit conference...
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Peer to Peer Lending in the UKChristine Farnish CBE
Chairman Peer-to-Peer Finance Association
www.p2pfa.info July 2016
http://www.p2pfa.info
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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
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p2p platform
lenders credit worthy borrowers
platform manages risk on behalf of
consumers
direct legal contract
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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
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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
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UK alternative finance market 2015
Source: Pushing Boundaries, The 2015 UK alternative Finance Industry Report Feb 2016, Nesta, University of Cambridge
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Cumulative lending
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Benefits
• access for all – ‘democratic’
• lower cost
• faster, better customer service
• disintermediation and better economic efficiency
• dynamic benefits from competition and innovation
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Risk profile
bank deposits
high risklow risk
p2p lending equity investment
(including equity crowdfunding)
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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
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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
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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
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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
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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
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FCA Review of crowdfunding regulation
• investor information and understanding?
• credit risk underwriting?
• resilience to economic shocks?
• impact on competition?
Outcome early 2017
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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