Peer-to-peer lending and crowdfunding – increasingly significant funding sources that can provide established companies and start-ups with an alternative to traditional bank lending – have come to play a vital role in supporting UK businesses.
They have gained particular popularity in the SME and start-up sectors, where more mainstream funding options still remain either unavailable or highly limited.
In fact, recent research has forecast the UK’s alternative finance market to be worth £1.6bn by the end of this year.
In April however, the market went through a landmark change, when responsibility for regulating it was transferred from the Office for Fair Trading (OFT) to the Financial Conduct Authority (FCA).
The reason this is such a significant event is that with the introduction of the new regime has come a raft of new requirements that didn’t previously apply to peer-to-peer or crowdfunding platforms.
These new requirements, which apply to existing lenders as well as those newly established, can be summarised in three main areas.
1. Lenders must provide the FCA with a raft of detailed information covering business plans, personnel and customer data.
2. They need to demonstrate that they have capital holdings at a level appropriate to back their overall level of lending, and usually no less than £20,000 right from the outset.
3. Controls must be in place to safeguard investors and customers’ money in the event of a business failure.
Permission to trade
Funding provided by the UK’s alternative finance market goes to businesses to create jobs and growth, but it risks being cut off, or at the very least restricted, because many lenders or crowdfunders are either unaware of the changes or unsure what to do to continue operating legally.
With the switchover comes a commitment by the FCA to be much more proactive than its predecessor in policing the conduct of alternative lending platforms, so providers who have not by now registered with the FCA and been given ‘interim permisssion’ have lost their consumer credit licence. Obviously this prevents them from continuing to trade without committing a criminal offence, and could have a fatal impact on their reputation in the market.
In addition, the new regulations impose a large number of business-conduct obligations with which many businesses operating in this area will be unfamiliar. It is likely that many businesses – even those that have obtained interim permission – are inadvertently falling foul of these new requirements.
It is worth noting that the requirements now apply more widely – not just to crowdfunders or peer-to-peer lenders, but to all consumer credit businesses, including credit brokers, payday lenders and those providing finance for goods in a shop or in the home.
It is therefore vital for those offering alternative finance to act quickly. P2P lenders and crowd-funders must apply for authorisation and it’s important for lenders to be aware of the timescales involved.
Our information indicates that the FCA can take up to six months to process requests to trade as P2P lenders or crowd-funders and grant authorisation, so these organisations really need to take action now and seek advice on the most efficient way to do so.
Despite this, many lenders remain unaware that the switchover has even taken place.
Cost increases for lenders and businesses
The process of putting together an application for a new consumer credit licence under the FCA is onerous. It can often involve significant amendments to fundamental company policies, for example the financial options or investment windows offered or the processes and controls used to assess customers’ suitability for relevant products.
This can entail a great deal of work, both internally and by expert consultants, as terms and conditions and policy documents need to be amended, and employees require training on the changes.
There are two possible outcomes here for lenders. Either they fail to go through the process properly and risk losing their licence and incurring a significant fine, or they take the time to implement the required changes and see their running costs rocket.
For consumers, this means the risk of either losing their backing or, more likely, paying higher fees to cover the increased costs.
Many of the peer-to-peer lending and crowdfunding platforms that have become established fixtures in the alternative-finance landscape began as microbusinesses.
Post regulation, the garage start-up lender has become a thing of the past, as the minimal capital requirement and administrative burden puts up a barrier to entry for those without significant capital backing from the outset.
With new, disruptive players priced out of the market, established businesses will face much reduced competition. The result for consumers? Less choice and likely higher costs.
So why the change?
Regulation of certain aspects of consumer credit, and therefore of peer-to-peer lending, has been a hot-button issue in the UK since the onset of the financial crisis and the government’s drive to add checks and balances to stabilise the market and give some consumer protection is largely laudable.
However, where P2P and crowdfunding differs is that, being online and based on open competition, the market is largely self-policing. Any platform that does not provide an excellent service, or lets its customers down, will quickly find its customers heading elsewhere.
By compromising the possibility of very low running costs for platforms and the competitiveness of the market in which they operate, these heavy-handed new rules risk throwing out the baby with the bathwater. Ultimately, alternative lending has become a vital source of finance for business and the economy can’t afford for this to be jeopardised.
It’s vital that lenders act fast to ensure they are compliant in order to safeguard their business and the important service they provide to their customers.
Chris Moss, is a corporate and commercial partner at law firm, JMW
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