ASIC RELEASE GUIDENCE ON MARKETPLACE LENDING
ASIC has issued an information sheet (INFO 213) to provide guidance on the regulatory requirements that apply to peer-to-peer lending programs that necessitate the adoption of a managed investment scheme business model.
Interestingly this advice was issued on the same day (21 March 2016) that the Treasurer released the statement on “Backing Australian Fintech” which included amongst other initiatives, a new regulatory sandbox to make it easier for innovators to test and bring to market new products. ASIC’s INFO 213 perfectly highlights some of the regulatory challenges faced by new entrants into the Fintech space.
MARKETPLACE LENDING PRODUCTS - WHAT’S REQUIRED TO LEGALLY OPERATE ONE?
Marketplace lending products provide an innovative financial services medium which connects investors and borrowers without the need to go through a traditional financial institution. However, the structure of marketplace lending products creates several obligations which must be complied with by the financial services provider if it is to operate legally.
WHAT IS MARKETPLACE LENDING?
Marketplace lending (or peer-to-peer lending) describes a financial arrangement where investors use an online platform to invest money which is lent to borrowers. Generally the online platform acts as a forum for borrowers to make loan requests. Investors using the platform can review the loan requests and select those they want to invest in. In some cases, platforms automatically match investors with loan requests which meet specific criteria such as desired interest rates and loan terms.
Those who invest in marketplace lending products are generally purchasing a managed investment product. The investment is managed by the operator of the website (the marketplace lending provider), who acts as the financial service provider.
THE NEED TO HOLD A LICENCE
Marketplace lending providers will generally be required to hold an Australian financial services licence. This imposes certain obligations upon the licensee, which includes having adequate risk management systems and resources to manage conflicts of interest. Licensees must also hold net tangible assets of at least $150,000 when a custodian is appointed to hold scheme property.
If the marketplace lending product includes consumer loans, the credit provider will be required to hold an Australian credit licence. This carries with it the obligation to comply with the National Credit Protection Act 2009 and the National Credit Code.
Who constitutes the credit provider of a loan issued through a marketplace lending product will be determined by the structure of the marketplace lending provider. For example:
if the marketplace lending provider acts as trustee for investors when entering into loan contracts with borrowers, then the provider will require a credit licence which authorises them to ‘engage in credit activities as a credit provider’;
if the marketplace lending provider uses a custodian to enter into loan contracts with borrowers as trustee for the investors, then the custodian will be the credit provider and will require a credit licence; or
if the marketplace lending platform (the website) facilitates loans entered into between investors and borrowers directly, then the investors will be the credit providers and will require a credit licence.
REGISTRATION OF THE SCHEME WITH ASIC
A marketplace lending provider which uses a managed investment scheme structure to offer products must register the scheme with ASIC. As the entity responsible for the registered scheme, the marketplace lending provider will be required to comply with the obligations contained in Chapter 5C of the Corporations Act 2001 (Cth). This requires, among other things, the scheme to have a constitution and compliance plan, and to ensure that the scheme’s withdrawal arrangements comply with the requirements for a liquid or illiquid scheme.
ASIC has recently considered that marketplace lending providers will generally require a tailored Australian financial services licence authorisation in order to operate a registered scheme. ASIC noted that the relevant Australian financial services licence, scheme constitution, scheme compliance plan, and the application for registration of a managed investment scheme should clearly outline that the scheme’s purpose is to facilitate marketplace lending and include a summary description of the scheme’s structure.
Registration of the marketplace lending product is not required if the managed investment scheme is only available to investors who are wholesale clients. However, marketplace service providers will still be required to hold an Australian financial services licence which covers any financial services activities undertaken by the managed investment scheme.
Marketplace lending providers are required to provide investors with a Product Disclosure Statement if the investor is acquiring an interest in the managed investment scheme. ASIC has noted that some of the matters to be addressed in the Product Disclosure Statement include, among other things:
the business structure of the platform and how loans are offered;
the criteria used to determine how investors are matched to borrowers, including how interest rates are set;
how and when the creditworthiness of borrowers is assessed; and
a breakdown of all fees and costs charged to either investors or borrowers.
Marketplace lending providers will also have to comply with their ongoing disclosure obligations owed to investors. This includes providing periodic statements to retail investors and informing investors of any material change or significant event which occurs.
Marketplace lending providers can apply to ASIC seeking relief from a requirement under financial services or corporations law. Whether relief is granted is at ASIC’s discretion. It will generally be necessary for the provider to establish that it would be unreasonably burdensome to comply with the requirement.
Forms of relief previously granted by ASIC include:
relief from the requirement to register each loan application entered into through a lending platform which operates under a managed investment scheme;
relief from the requirement to facilitate withdrawal of cash by members of the scheme while the scheme was illiquid; and
relief from the requirement to treat underlying assets of a provision fund operated in connection with a marketplace lending platform as property of the scheme.
In addition to the regulatory environment supervised by ASIC, peer-to-peer lenders will also need to be mindful of their obligations that arise from:
The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) administered by Austrac; and
The Privacy Act 1988 (Cth) administered by the Office of the Australian Information Commissioner.
The regulatory environment for financial services is complex and challenging. This is recognised by the Government which is now working with ASIC and other regulators to develop a “regulatory sandbox” for FinTech start ups.
Whilst this approach may lend itself to areas such as crowd funding, given the consumer protection demands of the National Credit Code (applying from a small loan made by payday lenders all the way through to residential property investment loans) we believe such an approach will be far more challenging when applied to peer-to-peer consumer lending.