Regulating P2P Finance

From a standing start in March 2005, this year peer-to-peer finance will account for more than £100 million of loans to individuals and small businesses in the UK. The timing is perfect, given that our banks are lending less and paying lower savings rates, and new capital rules will drive further need for alternative funding.

Yet, as I noted last year, while these platforms deliver very real social and economic benefits by enabling people rather than banks to share most of the margin between savings rates and funding costs, the financial regulatory and tax framework does not directly accommodate them. So, ironically, new entrants whose business models are founded on openness, fairness, transparency and individual consumer control must spend a huge amount of time and start-up capital figuring out a regulatory path through a regime that is not only designed to force recalcitrant 'traditional' financial institutions to treat customers fairly but also subsidises their marketing efforts with favourable tax allowances.

While the various P2P providers were also considering the merits of forming a self-regulatory body to act as a focal point for more helpful enabling regulation, a further catalyst was the BIS consultation on moving responsibility for consumer credit from the OFT to the Financial Conduct Authority (the FSA's replacement). Having helped frame Zopa's positive response to that consultation, I was happy to help apply the same regulatory approach we'd suggested to a set of operating principles that could form the basis of an interim self-regulatory framework. Collaboration with both Ratesetter and Funding Circle ultimately led to the formation of the "Peer to Peer Finance Association" in July, with invitations extended to others.

The intention of the P2PFA is to enable the development of platforms that facilitate open consumer and small business participation, rather than merely 'investment clubs' or networks reserved for sophisticated investors. As a result, the term “Peer to Peer Finance” is broadly defined in the Rules to mean "any funding arrangement that comprises direct, one-to-one contracts between a single recipient and multiple providers of funds, where the majority of providers and borrowers are consumers or small businesses." The desire for scalable, open or 'mass' access is underlined by the definition of “Platform” as "an electronic system that facilitates Peer to Peer Finance." Generally, funding is likely to be in the form of simple one-to-one loans, but other instruments may evolve over time.

As stated on the Association's web site:

"The Association’s Rules and Operating Principles set out the key requirements for the transparent, fair, robust and orderly operation of peer-to-peer finance platforms and cover:

1. Senior management systems and controls;
2. Minimum capital requirements;
3. Segregation of participants’ funds;
4. Clear rules governing use of the platform, consistent with these Operating Principles;
5. Marketing and customer communications that are clear, fair and not misleading;
6. Secure and reliable IT systems;
7. Fair complaints handling; and
8. The orderly administration of contracts in the event a platform ceases to operate.

The Peer-to-Peer Finance Association is run by a Management Committee, made up of one representative from each member, with one member acting as Chairman for one year on a rotating basis. Giles Andrews, CEO of Zopa, will act as the Committee’s initial Chairman. As new members join the Association, their representative will join the Management Committee.

Membership of the Peer-to-Peer Association is subject to the Rules of the Association and members must comply with the Association’s Operating Principles."

The Rules, Bye-laws and Operating Principles are set out here.