How P2P Finance Models Work: Risks, Controls and Regulatory Barriers
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How P2P Finance Models Work: Risks, Controls and Regulatory Barriers

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A presentation to the Peer-to-Peer Finance Policy Summit in London, 7 December 2012

A presentation to the Peer-to-Peer Finance Policy Summit in London, 7 December 2012

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    How P2P Finance Models Work: Risks, Controls and Regulatory Barriers How P2P Finance Models Work: Risks, Controls and Regulatory Barriers Presentation Transcript

    • PEER-TO-PEER FINANCE POLICY SUMMIT 2012 How P2P Finance Models Work: Risks, Controls And Regulatory Barriers Simon Deane-Johns 7 December 2012 Keystone Law
    • Peer-to-Peer Finance Policy Summit 7 December 2012 Types of P2P Finance Crowd- investing Debentures Crowd- Crowd- investing investing Other (e.g. Equities invoices) Crowdfunding P2P Payments (e.g. Foreign Donations/rewards exchange) Crowdfunding P2P lending charities/social Consumers/SMEs Microfinance
    • Peer-to-Peer Finance Policy Summit 7 December 2012 How P2P Finance Works Transaction Flow Offer/acceptance => Loan agreement Lender Borrower Share/debenture Offer/acceptance => Investment agreement Investor Entrepreneur Platform Operator platform agreement platform agreement Lender/Investor’s Platform Operator’s Borrower/Entrepreneur’s Bank Bank (Seg Account) Bank
    • Peer-to-Peer Finance Policy Summit 7 December 2012 How P2P Finance Works Funds Flow Loan agreement Lender Borrower Share/debenture Investment agreement Transfer request Investor Entrepreneur Transfer request Platform Operator platform agreement platform agreement Funds Transfer Disburse Loan/Investment Funds Transfer Repayment/dividend Lender/Investor’s Platform Operator’s Borrower/Entrepreneur’s Bank Bank (Seg Account) Bank
    • Peer-to-Peer Finance Policy Summit 7 December 2012 Common Features • Platform operator is 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 ordinary people – Aids diversification of small investment amounts; – Finance from many in small amounts at outset –> no need to securitise; • Data centralised to aid risk assessment, performance analysis, collections, enforcement • Transparency and funds segregation removes ‘moral hazard’
    • Peer-to-Peer Finance Policy Summit 7 December 2012 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
    • Peer-to-Peer Finance Policy Summit 7 December 2012 Common 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 available
    • Peer-to-Peer Finance Policy Summit 7 December 2012 Regulatory Barriers • Confusion as to whether you can lawfully participate on platforms; • Tiny differences have seismic implications in permission or licence needed; • Regulatory ‘creep’: uncertainty/ risk aversion leads to unnecessary complexity; • Regulatory overlap/conflict (e.g. FSMA/MiFID, Prospectus Directive/Co’s Act); • Different ‘business test’ criteria for different activities; • Unclear when participants might be acting in the course of a business; • Different rules for ‘promoting’ vs ‘offering’ a security; • Unregulated operators may still face rules on public offers and promotions; • Regulators can only look inside the regulated markets to foster competition; • Regulation (coupled with perverse tax incentives) discourages diversifying beyond regulated cash/investment products, limiting innovation and competition.