Crowdfunding: Brussels Sprouts!

At last, the European Commission has realised that peer-to-peer finance might really be more efficient than banks at getting funding to those who need it. In Brussels, that translates roughly into "let's regulate". So, today the Commission launched a consultation aimed at understanding "crowdfunding: its potential benefits, risks, and the design of an optimal policy framework to untap the potential of this new form of financing."

The consultation paper is here, and responses are due by 31 December. The relevant Commission officials can be reached here. 

If my experience of the Commission's approach to regulating other aspects of e-commerce is anything to go by, it will be a huge challenge to educate officials - particularly for fast-moving entrepreneurs who have little time or resources to spare. 

Yet the risk of awkward, confusing and disproportionate regulation is high, so no one resident in the EEA can afford to be complacent.

So, at the very least, I'd recommend that any UK platforms and/or trade bodies capitalise on the evidence they've submitted to UK officials and Parliamentary committees over the past year or so, including whatever submissions are made in the current round of FCA consultations on peer-to-peer lending and crowd-investment. 

FCA's Consumer Credit Rules

The UK's Financial Conduct Authority (FCA) has published its detailed proposals for regulating consumer credit from 1 April 2014. Specific areas of focus include payday lending (Chapter 6), debt management (Chapters 7 and 9) and peer-to-peer lending (Chapter 8). The detailed rules are in the Appendices.

Peer-to-peer lending (P2P lending) is mentioned in the context of protection for borrowers and the transition arrangements for those who hold a Consumer Credit Licence or wish to take advantage of the interim permission regime. However, a separate consultation paper will cover the new regime for peer-to-peer finance or 'crowdfunding' platforms more generally, including protection for consumers who lend or invest through such platforms. I understand that is likely to be issued around 17 October. 

The consultation period ends on 3 December, and responses may be made online here. The final rules are expected in March 2014. 

The FCA's rules related to borrowing on P2P lending platforms are consistent with the way the consumer borrowing platforms already operate. Which is no surprise, since they have been calling for proportionate regulation for years now, and adopted their own self-regulatory code in July 2011. The key protective rules may be summarised as follows:

• It is proposed that platform operators cannot be an appointed representative of another firm 

• FCA proposes similar provisions in relation to pre-contractual explanations and creditworthiness for P2P lending. 

• introduces the concept of a 'P2P agreement' as a distinct form of regulated agreement

• the platform must provide adequate explanations of the key features of the credit agreement to borrowers (including identifying the key risks) before the agreement is made (see CONC 4.4)

• the platform must assess the creditworthiness of borrowers before granting credit (see CONC 5.5) 

•  rules relating to ‘financial promotions’ (see CONC 3 (where applicable)) 

• the platform must include in the agreement between borrower and lender a right for the borrower to withdraw from the agreement, without giving any reason, by giving verbal or written notice, within 14 days of the agreement being made (see CONC 11.2) 

• peer-to-peer lending platforms should be required to provide notices and information sheets to borrowers in arrears or default, directing them to sources of free and impartial debt advice (see CONC 7.18 to 7.20) 

• equivalent rules should be applied to the peer-to-peer lending platforms that help borrowers get high-cost short-term credit as to those applied to lenders providing such credit (see CONC 6.7.17 to 26 and 7.6.12 to 14) 

• peer-to-peer lending platforms should be required to provide a specific risk-warning to a borrower if the loan is secured against the borrower’s home – see CONC 4.4.5) 

• equivalent rules should be applied to peer-to-peer lending platforms carrying on debt collection (see CONC 7) and credit information services, including credit repair (see CONC 8.10) as to other consumer credit firms carrying on the same activities

• Borrowers with loans not regulated under the CCA (because of one of the exemptions) who borrow from firms currently authorised by the FCA will generally have access to FOS in relation to these loans.

Interestingly, the FCA does not anticipate that requirements with respect to P2P lending will affect mutual societies.