- 1. FAQ ON PROPOSED AMENDMENTS TO THE FINANCIAL SERVICES BILL
1What amendments have you proposed?To promote effective competition
in the interests of consumers and small businesses in theregulated
financial markets, the new Financial Conduct Authority should:1.
Consider developments in the markets for unregulated financial
services that are in the interests of consumers and businesses;
and2. Establish a new authorisation regime for direct finance
platform providers.A direct finance platform is an electronic
system which brings together multiple participants, themajority of
whom are consumers and/or small businesses, for the purpose of
agreeing certainbilateral finance arrangements. These would include
peer-to-peer arrangements for loans, shares incompanies,
debentures, prepayment of trade invoices, donations and currency
transactions.Why are the amendments important?Our regulated
financial system is failing to enable the cost efficient flow of
surplus funds fromordinary savers and investors to creditworthy
people and businesses who need finance. It isestimated that small
businesses face a funding gap of up to 59bn over the next 5 years,
within anoverall finance gap of up to 190bn for UK business sector
as a whole. 2 There is insufficientcompetition in the markets for
consumer and business finance, and it is vital that we find ways
toencourage innovation and competition and new entrants to these
markets. 3Yet our regulatory authorities are only empowered to
promote competition amongst regulatedfirms. As a result, emerging
peer-to-peer models that reflect wider trends in other retail
sectors donot fit neatly within the existing regulatory framework.
4 Entrepreneurs complain that the process oflaunching and
developing new finance platforms has been overly complicated and
expensive.1Briefing paper prepared by Simon Deane-Johns, Consultant
Solicitor, Keystone Law (with the assistance ofTony Watts of
Keystone Law where noted in the Schedule of
Amendments):http://www.slideshare.net/Pragmatist/proposed-amendments-to-the-financial-services-bill-sdj-21-06-122Boosting
Finance Options For Business:
http://www.bis.gov.uk/assets/biscore/enterprise/docs/b/12-668-boosting-finance-options-for-business.pdf3Boosting
Finance Options For Business:
http://www.bis.gov.uk/assets/biscore/enterprise/docs/b/12-668-boosting-finance-options-for-business.pdf;
Towards a Common Financial Language, a speech by Mr AndrewG
Haldane, Executive Director, Financial Stability, Bank of England:
http://www.bis.org/review/r120315g.pdf;Report of Lord Young to the
Prime Minister of May 2012 Make Business your Business: Supporting
the Start-up and development of Small Business in which many of the
platforms referred to in Annex 1 of this Reportare referred to with
approval:http://www.startupbritain.org/resource/binary/userfiles/Make_Business_Your_Business_2.pdf)4Andrew
Haldane, Executive Director, Financial Stability, Bank of England
has said: Commercial peer-to-peerlending, using the web as a
conduit, is an emerging business. For example, in the UK companies
such as Zopa,Funding Circle and Crowdcube are developing this
model. At present, these companies are tiny. But so, adecade and a
half ago, was Google. If eBay can solve the lemons problem in the
second-hand sales market, itcan be done in the market for loans.
With open access to borrower information, held centrally and
virtually,there is no reason why end-savers and end-investors
cannot connect directly. The banking middle men may intime become
the surplus links in the chain. Where music and publishing have
led, finance could follow. Aninformation web, linked by a common
language, makes that disintermediated model of finance a
morerealistic possibility. Towards a Common Financial Language:
http://www.bis.org/review/r120315g.pdf;
2. Investors are confused about whether they are acting
unlawfully when using some platforms.Coupled with distorted
personal tax incentives, the regulatory framework discourages
ordinaryinvestors from diversifying beyond regulated investment
products.Together, these factors contribute to the erosion of UK
investors long term financial security, thedistortion of the
markets for both regulated and unregulated financial services, and
further inhibitinnovation and competition in the markets for retail
financial services. In these circumstances, it isunrealistic to
assume that new business models will thrive without some alteration
to the regulatoryframework.What impact would the amendments
have?These amendments should open up existing retail finance
markets to greater competition byencouraging transparent new
services to emerge and grow more quickly. Proportionately
regulatingthe operation of direct finance platforms reflects the
carve-out of low risk payment services fromthe historic banking
monopoly. 5 Regulating activities at the platform level will also:
Enable economies of scale and consistent best practice in the
management of operational risksthat are common to all platforms;
and Remove the need to treat participants on direct finance
platforms as if they are operating abusiness, since the platform
itself will meet all the compliance requirements for a business
ofthat kind.The background to the peer-to-peer lending element of
the BillPeer-to-peer platform operators have openly invited the
government to establish definitive routesto market for direct
finance platforms. 6 Three firms established the Peer-to-Peer
Finance Associationto promote a set of Operating Principles as a
framework for controlling operational risks that arecommon to all
platforms. 7 This self-regulatory initiative was welcomed by the
government in itsresponse to the report of the Breedon Taskforce as
helping raise awareness among SMEs andinvestors and establish
industry standards to protect investors and borrowers. 8 Yet the
regulatoryframework itself has not evolved in line with these
developments, and the Financial Services Bill hasso far failed to
support any of these objectives. As such, the Bill misses an
opportunity to establish asound foundation for the future
regulation of financial services. 95Implemented in the UK via the
Payment Services Regulations 2009 and the Electronic Money
Regulations2011.6Boosting Finance Options For Business:
http://www.bis.gov.uk/assets/biscore/enterprise/docs/b/12-668-boosting-finance-options-for-business.pdf;http://www.redtapechallenge.cabinetoffice.gov.uk/themehome/disruptive-business-model/7http://www.p2pfinanceassociation.org.uk/8Boosting
Finance Options For Business: Government Response to the Industry
Taskforce:http://www.bis.gov.uk/assets/biscore/enterprise/docs/b/12-669-boosting-finance-options-government-response.pdf9It
is also in contrast to the situation in the USA, where the JOBS Act
has recently introduced a proportionateregime for securities
crowdfunding platforms see Implementing the JOBS Act in the UK
prepared by TonyWatts of Keystone Law.