Prepare yourself for an exploratory jaunt into the regulatory thicket.
A handful of private peer-to-peer investors – generally a sharper, more discerning bunch than they are often given credit for – have raised concerns over the permissions (or rather, differing permissions) held by a number of peer-to-peer lending platforms.
Peer-to-peer platforms that launched prior to April last year have up to now operated under interim permissions from the FCA – with full licensing expected to be finalized by October 2015. Any debt-based platform that has targeted or is targeting a launch post-April 2014 falls under the newly regulated activity of “operating an electronic system in relation to lending” – aka. article 36H.
The regulated permissions of most alternative finance providers may be freely perused via the FCA’s website. A small amount of searching reveals that the blend of permissions held by each platform is very different. Some display “Consumer credit business”, others “Debt administration” and of course the majority hold a “Peer to peer lending” permission. There are, however, a few platforms that do not.
It is these missing permissions that have left some lenders feeling vexed. A few examples of platforms that seemingly do not possess a specific P2P permit are LendInvest and MarketInvoice. There are a number of earlier-stage outfits in the same situation, but let’s focus on the established players for now.
“Should I be worried?” is the question that’s bugging a number of the sector’s more observant investors. The answer is no.
LendInvest does not hold a peer-to-peer lending license for the simple reason that the platform is not operating in the market described by the 36H form. The real estate-focused platform does not facilitate direct transactions between investors and borrowers (aka. the definition of 36H). Instead, every loan originated via the platform is in the first instance funded by Montello – and then sold part-by-part onto LendInvest’s private investors.
Indeed, it might reasonably be suggested that there are a number of platforms operating under interim P2P permissions that are not actually engaged in the activities outlined by form 36H. Perhaps the advent of full licensing later this year will prompt such operators to apply for a kind of regulated activity other than peer-to-peer lending.
That’s all well and good. But why then does LendInvest describe itself thusly?
“LendInvest is the world's largest peer-to-peer marketplace for real estate mortgages.”
Invoice finance is not yet a regulated activity in the way that peer-to-peer lending (/”loan-based crowdfunding”) is. In the absence of such a regime, MarketInvoice joined the P2PFA in order to demonstrate that the platform adheres to the representative body’s strict set of standards – standards that are in fact more stringent that those outlined by the FCA.
I reached out to LendInvest’s Christian Faes for an insight into permissions. Mr. Faes explained, in expert fashion, that “peer-to-peer” is not a phrase that appears anywhere in FCA regulation. The official regulatory term for what many of us know as peer-to-peer lending is “loan-based crowdfunding”. There is in fact no official definition of what peer-to-peer lending is – and thus LendInvest is completely free to brand itself as a P2P lender. The platform would not, however, market itself as a loan-based crowdfunder. Mr. Faes also made the point that LendInvest unquestionably facilitates lending between peers – even if the platform’s model is slightly divergent from the norm.
Additionally, the LendInvest boss stressed that his team has worked extremely closely with the FCA over the past year or so. The regulator is perfectly aware of the style in which the platform portrays itself – and has never seen fit to raise concerns. For the sake of clarity, I have provided a quote below from LendInvest – which neatly describes the platform’s model and offers some thoughts on the subject of permissions:
"LendInvest operates under a different model to many/most other peer-to-peer platforms. As such, it operates under a different FCA permission to many of the other platforms. The main difference is that LendInvest fully funds all of its loans in the first instance. That is, when a borrower applies for a loan through LendInvest, LendInvest underwrites the loan and then funds the loan to the borrower. It is only after the loan has been provided to the borrower that the loan is placed on the platform, for investors to invest in the loan.
LendInvest believes that this is a superior model because it gives borrowers the comfort that the loan will be funded, when it commits to fund a loan; and it gives investors the comfort that they will start earning a return on their investment from the day that they decide to invest in the loan. There are also various other advantages, such as taxation treatment etc. Having said this, there aren't two single peer-to-peer platforms in the market that operate the exact same model - every platform has a different model, and hence, differing FCA permissions.
LendInvest is a member of the Peer-to-Peer Finance Association (P2PFA), which includes the main/leading P2P platforms in the UK. Some of these platforms have the FCA's defined 36H defined permission, and some do not (not only LendInvest)."
Having spoken with an FCA representative – about permissions in general rather than about LendInvest or MarketInvoice specifically – I was able to gauge the regulator’s stance on this matter. The FCA indicated that it has been working very closely with the various platforms in order to ensure that the right kinds of permissions are applied for. The regulator noted that this remains, relatively speaking, a very nascent space and that its rules are still in the process of formulation. The important thing, from the FCA’s perspective, is that all platforms continue to be clear, fair and not misleading. I personally am persuaded that LendInvest is fulfilling these criteria.
Lee Birkett – Founder and MD of eMoneyUnion – outlined his stance on the matter:
“The term "Peer to Peer Platform" being used on a regulatory website, advertising or promotion, in my opinion, would require the firm to have the FCA "Peer to Peer Lending" permissions. Attracting private lenders' cash to lend via a platform without these permissions, in my opinion is simply a commercial lending activity and should be clearly promoted as such.”
But if investors needn’t worry and the regulator isn’t worried – why did I bother writing this article? The interesting point, for me, is that investors were worried in the first place. The story here is that perhaps this kind of regulatory minutia needs to be more clearly conveyed to the more sophisticated among peer-to-peer investors. Hopefully this article goes some way towards achieving that.