The Peer to Peer lending (P2P) style of lending has been in operation for years abroad, particularly in the US, UK, India, and Europe. P2P and Business to Business (B2B) primarily use funding from sources other than traditional credit providers or banks to fund credit. Crowd funding is similar, in that funds are raised through non-traditional sources.
These models are sometimes referred to as ‘marketplace lending’ as the open market determines the price of the credit, rather than a closed one-sided traditional credit provider.
The Peer-to-Peer Finance Association (P2PFA) in the UK estimates that the P2P industry lent £1.2B in 2014 in the UK alone. The industry is substantially larger in the US. Throughout 2014, Australia saw a range of P2P operators and alternative finance source providers open their doors to the Australian market.
P2P model in Australia – consumer lending
In Australia, any consumer lending conducted in connection with a business is regulated under the National Consumer Credit Protection Act. As such, the same model used offshore is not possible, otherwise all investors would need to hold their own Australian Credit Licence. Due to the regulatory burden of credit licensing, this is not a practical solution.
Australian P2P platforms have dealt with this by still offering ‘P2P’ credit, however, funds do not come directly from the investors. Instead, the P2P platform accumulates investor funds in a Managed Investment Scheme (MIS), and on lends the funds through the platform’s Australian Credit Licence.
Complexities with this model
A Managed Investment Scheme is considered a ‘financial product’ under the Corporations Act. Therefore, to operate an MIS, the operator must hold a valid Australian Financial Services Licence. P2P platforms can either run their own MIS or enter into an arrangement with an existing MIS provider to operate an MIS on their behalf.
Having to operate an MIS creates an additional layer of compliance complexity and cost on top of the standard credit compliance overheads.
Are these complexities necessary?
Primary objectives of the Australian Securities and Investment Commission (ASIC) include protecting investors, and maintaining trust and confidence in the financial services industry. Consumer lending has the potential to create a harmful situation to individual consumers, and so the government established a strict licensing regime.
At the back end of an Australian P2P model, a rigorous regulatory regime is critical to protect investors for a number of reasons, such as:
- in a P2P model, the lending risk is moved away from the credit licensee and onto the MIS investor;
- market failure could scare off future investment altogether;
- retail investors could experience detrimental impact lasting a lifetime (remember the Storm Financial incident); and
- whenever a failure has historically occurred, the public demands answers from the regulator.
Financial System Inquiry
The recent Financial Systems Inquiry report stated that ASIC has been working with P2P lenders to develop appropriate regulation. Many existing P2Ps considered that regulation is not a barrier to entry, rather a mechanism for ensuring new entrants are competent. This is essential for investor protection, and can help develop a well-managed, innovative industry. (The Treasury 2014c, pp. 4–48).