Tucked away just before Christmas at the end of 2013 were two big signs of the peer to peer finance industry imminent coming of age in 2014.
P2P finance was worth £1bn in 2013
The first was the groundbreaking benchmarking study of the size of peer to peer finance, published by Nesta, University of Cambridge and Berkeley University. They showed a still small, but rapidly growing sector in finance, with nearly £1bn that had been lent or invested via peer to peer lending and crowdfunding sites in the UK in 2013, an annual increase of 91%. An infographic from this report can be seen here.
Second was the closing of a critically important consultation on regulation of peer to peer finance from the Financial Conduct Authority (FCA) on December 19th. As advocates of proportionate regulation of peer to peer finance, the Finance Innovation Lab put in a response to the consultation, which we summarise below, if you would like to read the full Lab response you can download it from the link below. The FCA will publish its final Policy Statement and rules in February or March 2014.
Finance Lab warmly welcomed the decision to regulate peer to peer finance, which should contribute to bringing greater diversity of financial business models that maximise transparency, minimise intermediation and allow greater access to financial opportunity across income groups. The framework must also recognise the diversity of risks being offered in peer to peer finance and apply regulation proportionate to those risks. In particular the three broad sub sectors of peer to peer finance should receive different treatment from regulation.
P2P lending should be eligible for ISAs
The proposed framework for peer to peer lending is broadly set at the right level. In addition, we proposed that individuals should be able to place a proportion of their cash ISA into a regulated peer to peer lending product.
Keep the ‘crowd’ in crowdfunding
The proposed framework for crowdfunding equity needs some further clarification to ensure that it does not become a regulatory barrier to investment opportunities for ordinary savers. There should be a threshold to allow very small investments on a platform to be made without any requirement for an appropriateness test to be completed by the investor. Once total investment on a platform crossed this threshold, then a plain English appropriateness test should be required to ensure understanding of risk by the investor. There should be no regulatory barrier to viewing the financial promotions, as long as the platform complies with rules for how such promotions are described.
There should also be a differentiated regulatory framework for simple debt security products, such as retail bonds or debentures. These products are higher risk than conventional peer to peer lending, but not as high as start-up equity.
Finally, however the rules are drafted in 2014, it is very good news that they will be reviewed in 2016, when many more financial innovations will have come to market.