E-finance: P2P Lending and Crowd-investment
SCL Annual Conference
Simon Deane-Johns
Consultant Solicitor
October 2014
Origins Types, scale Problem with traditional models Similar Platforms, Different Instruments Regulatory Mismatch
Agenda
1995 Peer-to-peer auctions (US)
1999
P2P retail payments (US) (UK)
2003 P2P donations (“crowdfunding”) to avoid US securities laws
2005
P2P lending (UK)
2010 P2P business lending (UK)
‘Crowdfunding’ – Origins
‘Crowdfunding’ – Origins
2011 P2P investing (‘Crowd-investing’) (UK)
2012 P2P Finance EU Policy Summit
Types of Crowdfunding, By Regulatory Heat
Crowdfunding charities/social
Crowdfunding Donations/rewards
P2P lending Consumers/SMEs
Crowd-investing
Other (e.g. invoices)
Microfinance Emerging market
SMEs
Crowd-investing Debentures Crowd-
investing Equities
P2P Payments (e.g. Foreign
exchange)
Source: Collins, L., Swart, R., Zhang, B. “The Rise of Future Finance”, Nesta, December 2013 http://www.nesta.org.uk/publications/rise-future-finance
Source: Collins, L., Swart, R., Zhang, B. “The Rise of Future Finance”, Nesta, December 2013
Source: Collins, L., Swart, R., Zhang, B. “The Rise of Future Finance”, Nesta, December 2013
Source: Collins, L., Swart, R., Zhang, B. “The Rise of Future Finance”, Nesta, December 2013
Lender/Investor’s Bank
Savings Bank Fund’s Bank
Borrower/Entrepreneur’s Bank
Saver
Investor Issuer
Borrower
Bank/Fund
Tran
sfer
requ
est
Savings, investment Bank or Fund’s Loan/Investment
Saving/investing terms Loan/investment terms
Traditional Retail Finance Services Model
…What You Don’t See What You See…
Interest/dividend/capital Interest/dividend/capital
Transaction Flow
Lender/Investor’s Bank
Platform Operator’s Bank (Seg. Account)
Borrower/Entrepreneur’s Bank
Lender
Investor Issuer
Borrower
Platform Operator platform agreement platform agreement
Crowdfunding – Similar Platforms
Transaction Flow
Lender/Investor’s Bank
Platform Operator’s Bank (Seg. Account)
Borrower/Issuer’s Bank
Lender
Investor Issuer
Borrower
Platform Operator
Offer/acceptance => Loan agreement
Offer/acceptance => Investment agreement
Share/debenture
Crowdfunding – Different Instruments
Funds Flow
Lender/Investor’s Bank
Platform Operator’s Bank (Seg. Account)
Borrower/Issuer’s Bank
Lender
Investor Issuer
Borrower
Platform Operator
Tran
sfer
requ
est
Loan/investment Disburse Loan/Investment
Interest/dividend/capital
Transfer request
platform agreement platform agreement
Crowdfunding – Similar Platforms
Interest/dividend/capital
• Platform operator not a party to instruments – Agreed between participants, not issued by product provider – Lenders/investors control how proceeds are used, not product provider; – Margin stays with the participants, not provider/multiple intermediaries;
• Segregates participants’ funds rather than treating them as own assets
• Centralised, online system => efficient risk assessment/pricing,
performance analysis, enforcement => lower cost => lower fees
• Low minimum commitment – Accessible to retail customers (may be subject to questionnaire and/or cap); – Aids diversification of small investment amounts; – Finance from many in small amounts at outset –> no need to securitise;
Crowdfunding vs Traditional Financial Services
P2P lending: • Rules for lenders (COBS) • Rules for loans/borrowers
(CONC) • capital requirements; • loans to be managed after
platform failure;
Crowd-investment: • only retail clients who are:
– HNW/sophisticated or – won’t invest >10% of ‘net
investible portfolio’ and get advice or pass ‘appropriateness test’
• Types of permission (arranging, custody, UCIS…) and capital
FCA Regulation Doesn’t Reflect Similarities
Similarities: • FCA Principles (fairness), management systems/controls, AML • Safeguarding client money (some outsource); • Complaints handling; • FCA reporting requirements • Record-keeping requirements
Twitter: sdjohns Blawg: The Fine Print (http://sdj-thefineprint.blogspot.co.uk) Blog: Pragmatist (http://sdj-pragmatist.blogspot.co.uk/)
Email: [email protected]
Questions?