Date post: | 13-Sep-2014 |
Category: |
Economy & Finance |
View: | 940 times |
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REGULATING PEER-TO-PEER AND
ALTERNATIVE FINANCE
ACCA Alternative Finance Conference 2013
Simon Deane-Johns Keystone Law
Agenda
• Peer-to-peer finance – Types – How they work – Common features – Operational risks and controls
• Other forms of alternative finance
– Supply chain finance – Marketplace finance
• Regulatory barriers and options for removal
Types of P2P Finance
Crowdfunding charities/social
Crowdfunding Donations/rewards
P2P lending Consumers/SMEs
Crowd-investing
Other (e.g. invoices)
Microfinance
Crowd-investing Debentures Crowd-
investing Equities
P2P Payments (e.g. Foreign
exchange)
How P2P Finance Works
Transaction Flow
Lender/Investor’s Bank
Platform Operator’s Bank (Seg. Account)
Borrower/Entrepreneur’s Bank
Lender
Investor Entrepreneur
Borrower
Platform Operator
Offer/acceptance => Loan agreement
Offer/acceptance => Investment agreement
platform agreement platform agreement
Share/debenture
How P2P Finance Works
Funds Flow
Lender/Investor’s Bank
Platform Operator’s Bank (Seg. Account)
Borrower/Entrepreneur’s Bank
Lender
Investor Entrepreneur
Borrower
Platform Operator
Loan agreement
Investment agreement
Tran
sfer
requ
est
Funds Transfer Disburse Loan/Investment
Repayment/dividend Funds Transfer
Transfer request
platform agreement platform agreement
Share/debenture
Common P2P Features • Platform operator not a party to instrument agreed between participants
– Segregates participants’ funds rather than treating them as own assets; – Margin stays with the participants;
• Online only –> low 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;
• Centralised data aids risk assessment, performance analysis, enforcement
Standard Operational Risks
• Lack of adequate internal controls, governance
– Financial mismanagement, operator insolvency; – Internal fraud; – Lack of system integrity/availability; – Lack of business continuity; – Failure to manage/respond appropriately to customer complaints; – Unclear, unfair or misleading promotions/communications.
• Basic credit or investment risk
• Money laundering, external Fraud
Common P2P Operational Controls
• Senior management systems and controls;
• Minimum working capital;
• Segregation of participants’ funds;
• Clear, fair and not misleading service terms/communications/promotions;
• Secure and reliable IT systems;
• Fair complaints handling;
• Orderly administration if platform ceases to operate;
• Appropriate risk assessment, AML and anti-fraud measures
• Extra measures appropriate to specific instruments
Other Forms of Alternative Finance
• Supply chain finance
– Funding the early payment of single invoices or batches of invoices – Shifting the credit risk from supplier to buyer – Crowd-funding individual invoices?
• Marketplace finance – As part of end-to-end e-commerce marketplace service – Independently of marketplace service – Crowdfunded?
Regulatory Barriers - Overview
• Exclusive framework limits types of products, suppliers, intermediaries
and activities
• Reinforced by guarantee of bank liabilities, Financial Services Compensation Scheme, personal tax rules and savings incentives
• Related silos of officials/regulators with powers focused inwardly, and no overriding supervisory powers, responsibility or accountability for how the ‘system’ works as a whole, either internally or in terms of external impact
Exclusive, rigid, self-reinforcing, officially-endorsed marketing environment creates super-normal profits for incumbents and limits innovation and
competition
Barriers for Platforms
• Confusion over what is lawful – Slight change in facts has big consequences, EU Directives overlap – Different rules for ‘promoting’ vs ‘offering’ a security; – Unregulated operators may still face rules on public offers and promotions; – Expensive in terms of advice + regulatory creep – Slows time to market
• High net worth investor limits – Limits accessible market, liquidity
• Incumbent competitors heavily subsidised – State guarantee of bank liabilities, – Financial Services Compensation Scheme – personal tax rules and savings incentives
Barriers for Entrepreneurs
• Confusion over what is lawful – Which platform to list on?
• High net worth investor limits
– Limits accessible market, liquidity
• Disincentives for ‘ordinary’ lenders/investors to engage with alternative finance and diversify – Inhibits trend towards customers directly supporting projects – Limits accessible market, liquidity
Barriers for Lenders/Investors
• Confusion over what is lawful – Lending or investing in the course of a business? – Easier to give or gamble money away than to receive repayment with
interest or a share in the business!
• Disincentives to engage with alternative finance
– Not available via ISAs – Can’t deduct bad debt before tax, distorting effective tax rate (unlike a bank) – Inhibits diversification beyond cash deposits and some regulated
bonds/shares – Deprives consumers of return on savings
Regulatory Options
• New regulated activity of “operating a Platform” – Rules similar to Operating Principles of the P2PFA;
– ‘hybrid’ businesses and small firms (e.g. Payment Services) • Specific exemptions - clarify meaning of “business” - remove EU
overlap - ease rules on promotions, offers to public via Platforms; • Issue permissive guidance where changes can’t easily be made; • ISA-status on instruments available via regulated Platforms; • Remove bad debt tax distortion for instruments available via
regulated Platforms. • Ensure framework is joined-up and permeable/responsive
Thank you
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Twitter: @sdjohns
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