December 7th, 2012
Economic recovery is being hampered by the failure of our financial system to enable the efficient flow of savings to people and businesses who need capital.1 Banks have become even less willing and able to lend to the productive economy since the 2008 crisis. Insufficient competition in the markets for consumer and business finance is eroding our long term financial security. Failure to finance entrepreneurial activity today will only prolong the period of low growth. It is therefore vital that we encourage new entrants, innovation and competition in these markets.2
The most successful new alternatives to retail bank finance are online marketplaces which facilitate small‐scale, direct finance transactions between individuals and businesses, cutting out the ‘middle‐man’ and reducing costs to the real economy.3 But the operators of these platforms find it difficult to launch and flourish because existing EU and UK regulation does not fit the new models. In particular, regulations aimed at lending and investing unreasonably limit customer access and make platforms unnecessarily complex.
In these circumstances, it is unrealistic to assume new business models will thrive without regulatory change to make it easier to launch peer-to‐peer finance platforms and reassure potential savers, investors, borrowers and entrepreneurs that these marketplaces are a responsible and legitimate means of fundraising.
As a result, various industry participants have been calling for clear and proportionate regulation of their platforms for some time, 4 and some operators have agreed self‐regulation to control the most common operational risks.5
Yet the authorities have so far declined to make any changes to the existing regulatory framework.
Accordingly, a broad industry summit 6 has been arranged to provide a forum for further analysis of proposals to introduce a distinct, proportionately regulated activity of operating a direct finance platform” for loans and investments.7
1 In the UK alone, it is estimated, in government documents, that small businesses face a funding gap of up to £59bn over the next 5 years, within an overall finance gap of up to £190bn for UK business sector as a whole: “Boosting Finance Options For Business”, Department for Business Innovation and Skills (“BIS”).
2 “Boosting Finance Options For Business”, BIS; “Towards a Common Financial Language”, a speech by A.G. Haldane, Executive Director, Financial Stability, Bank of England; “Make Business your Business: Supporting the Start‐up and development of Small Business”, Lord Young.
3‘Crowdfunding’ describes person‐to‐person donations and rewards. ‘Peer‐to‐peer lending’ facilitates simple loans. ‘Crowdinvesting’ enables investments in shares and other instruments, including debentures and trade invoices. ‘Social investment’ enables funding for charitable or public sector projects.
4 “Briefing Paper on Proposed Amendments to the Financial Services Bill”, Keystone Law; “Crowd Funding Report” UK Interactive Entertainment Association; “Boosting Finance Options For Business”, BIS; “Ten Reforms To Grow The Social Investment Market”,
Bates Wells & Braithwaite. “Proposals for Crowdfunding Amendments to the Prospectus Directive”, Crowdfunding France.
5 These include segregation of customer funds, anti‐money laundering and fraud controls, fair complaints handling and provision for the orderly administration funding instruments in the event that an operator ceases to do business: see
6 “Peer‐to‐Peer Finance Policy Summit”, London, 7 December 2012
7 This would be similar to the carve‐out of retail payments from the banking monopoly under the Payment Services Directive and the Electronic Money Directive. The new regulated activity should exempt donations‐based and not‐for‐profit platforms. As a
distinct activity, it should be exempt from other potentially overlapping activities, such as operating a collective investment scheme or investment fund. Any other rules that are to apply should be expressly referred to or incorporated. The regulations should recognise the lower risks associated with loans to creditworthy personal or business borrowers compared to investment instruments (shares and bonds/debentures) but there should be no need for ‘suitability’ or ‘appropriateness’ tests for investments below a reasonable threshold. The rules should harmonise the approach to financial promotions via platforms and the social media. There should be a single ‘public offers’ regime for investment instruments. Participants dealing through a direct finance platform should be treated as acting in a personal capacity, not acting in the course of a business, since the
platform operator itself can implement any compliance requirements. It should be permissible for a lender or investor to sell or transfer instruments in order to withdraw funds from the platform.