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1Allens is an independent partnership operating in alliance with Linklaters LLP.
Peer-to-Peer Lending – A disruptive
marketplace lending phenomenon
Credit Law Conference
Gavin Smith
Partner, Allens
7 October 2015
2
Overview
What is P2P
Lending
State of the
market
Regulatory framework
Case studies
Peering ahead
3
What is P2P Lending?
4
What is Peer-to-Peer lending?
A mechanism to connect people or businesses who want to borrow
money with investors who want to lend money, without going
through a traditional financial intermediary such as a bank or
financial institution.
In what sense disruptive…?
• lower cost to borrower
• lower operating costs
• expanded market
• lower spec?
5
State of the Market
6
Peer-to-Peer – State of the Market
United States
Market worth US$14bn by end of 2014
Up 128%
Key players: LendingClub, Prosper
Lending Club - $4.97bn market cap
United Kingdom
market worth £3.15bn, 2015 (Q2)
key players: Funding Circle, Zopa, RateSetter
7
Peer-to-Peer – State of the market
Australia – still comparatively small
market approx AU $20m
key players: SocietyOne, RateSetter
But new players all the time
Morgan Stanley
8
Peer-to-Peer: Global market projections
“The [global] market could reach $150 billion
or higher by 2025.”
- PwC, February 2015
9
Peer-to-Peer: Australian market projections
By 2020 we could see …
- Morgan Stanley Blue Paper, 'Global Marketplace Lending: Disruptive Innovation in Financials' (May 19, 2015)
Lending to consumers:
$10.4bn
Lending to small businesses:
$11.4 bn
Total P2P lending: $22bn
10
Regulatory Framework
11
Regulatory Framework
• Registered MIS (Chapters 5C and 7 of Corporations Act)
• Unregistered MIS (Chapter 7)
Managed Investment Schemes
• AFSL holder or authorised representative of AFSL holder
• Net tangible assets requirements
Australian Financial Services
Licence (AFSL)
• Offering credit arrangement to consumers
• NCCPA 2009 (Cth)ACL
12
Regulatory Framework Cont’d
• Anti-Money Laundering and Counter Terrorism Financing Act 2006 (Cth)
• AML/CTF RulesKYC
• Part IIIA of the Privacy Act
• Comprehensive Credit Reporting?Credit Reporting
• Collection and use of personal information generallyPrivacy
13
Peer-to-Peer – Challenges for ASIC
• Or ‘marketplace lending’ as ASIC prefers to call it
• Regulatory approaches
Internal working group comprising of licensing and stakeholders
Innovation Hub – helping start-ups and businesses to navigate
regulatory system
Publishing industry and consumer guidance
14
Case Studies
15
Case Study – Society One
Source: SocietyOne Submission to the Financial Services Inquiry
16
Society One
Unregistered MIS. Wholesale,
sophisticated investors only – no
retail investors
Holds own ACL
Authorised representative of
Ironbark Asset Management – does not hold own AFSL
Investor chooses “grades” of loan to
invest in, not individual borrowers
or loans
Default risk managed by fractionalising investment funds
across multiple loans. 40 investors per loan.
Minimum investment: $25,000
Loans - $5,000 minimum to $35,000
maximum Livestock speciality –
secured loans
Average gross yield for investors: 11.5%
before defaults and impairments (8 – 10%
after)
17
Case Study - RateSetter
18
Ratesetter
Registered MIS with detailed PDS. Retail investors as well as wholesale investors.
Holds own ACL and AFSL
Investor chooses to lend into a particular lending “market” – 1 month or 1/3/5 years
Investments could be matched to a single
loan or small number of loans, depending on how rates are matched
Default risk managed by operation of the
Ratesetter “Provision Fund”
Minimum investment: $10
Loans - $2,001 minimum to $35,000
maximum
Strategic equity investment from Carsales.com -
channel for lending products
3 year market yield for investors: 8.5% before
any defaults
19
Peering ahead - the
international context
20
The international context
US
Consumer credit regimes –
Dood_Frank Act; Truth in Lending Act
Lending and funding – SEC registration of
“platform notes”
UK
FCA review of crowdfunding regulations;
concluded no need for regulatory
change
FCA scrutiny over advertising terms –
“savings”, “guaranteed”
NZ
Specific P2P lending services licences under
Financial Markets Authority
21
Questions and discussion
@AllensLegal // @GSmith_Allens
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