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.