How P2P Finance Models Work: Risks, Controls and Regulatory Barriers
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The document discusses peer-to-peer (P2P) finance, including how P2P models work, common risks, operational controls, and regulatory barriers. It describes that P2P platforms allow individuals to directly invest in or lend to others without platform operators taking on financial risk. Standard risks include lack of internal controls, credit/investment risk, and fraud. Common controls address governance, funds segregation, communications, and risk management. Regulatory barriers include confusion over permission needed, overlap between financial regulations, and rules discouraging competition and innovation beyond traditional products.
How P2P Finance Models Work: Risks, Controls and Regulatory Barriers
- 1. 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
- 2. 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
- 3. 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/Investors Platform Operators Borrower/Entrepreneurs Bank Bank (Seg Account) Bank
- 4. 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/Investors Platform Operators Borrower/Entrepreneurs Bank Bank (Seg Account) Bank
- 5. 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
- 6. 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
- 7. 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
- 8. 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/Cos 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.