Crowdfunding sdj oct 2014

E-finance: P2P Lending and Crowd-investment

SCL Annual Conference

Simon Deane-Johns

Consultant Solicitor

October 2014

Origins Types, scale Problem with traditional models Similar Platforms, Different Instruments Regulatory Mismatch

Agenda

1995 Peer-to-peer auctions (US)

1999

P2P retail payments (US) (UK)

2003 P2P donations (“crowdfunding”) to avoid US securities laws

2005

P2P lending (UK)

2010 P2P business lending (UK)

‘Crowdfunding’ – Origins

‘Crowdfunding’ – Origins

2011 P2P investing (‘Crowd-investing’) (UK)

2012 P2P Finance EU Policy Summit

Types of Crowdfunding, By Regulatory Heat

Crowdfunding charities/social

Crowdfunding Donations/rewards

P2P lending Consumers/SMEs

Crowd-investing

Other (e.g. invoices)

Microfinance Emerging market

SMEs

Crowd-investing Debentures Crowd-

investing Equities

P2P Payments (e.g. Foreign

exchange)

Source: Collins, L., Swart, R., Zhang, B. “The Rise of Future Finance”, Nesta, December 2013 http://www.nesta.org.uk/publications/rise-future-finance

http://www.nesta.org.uk/publications/rise-future-finance






Source: Collins, L., Swart, R., Zhang, B. “The Rise of Future Finance”, Nesta, December 2013

Lender/Investor’s Bank

Savings Bank Fund’s Bank

Borrower/Entrepreneur’s Bank

Saver

Investor Issuer

Borrower

Bank/Fund

Tran

sfer

requ

est

Savings, investment Bank or Fund’s Loan/Investment

Saving/investing terms Loan/investment terms

Traditional Retail Finance Services Model

…What You Don’t See What You See…

Interest/dividend/capital Interest/dividend/capital

Transaction Flow


Platform Operator’s Bank (Seg. Account)

Borrower/Entrepreneur’s Bank

Lender

Investor Issuer

Borrower

Platform Operator platform agreement platform agreement

Crowdfunding – Similar Platforms

Transaction Flow



Borrower/Issuer’s Bank

Lender

Investor Issuer

Borrower

Platform Operator

Offer/acceptance => Loan agreement

Offer/acceptance => Investment agreement

Share/debenture

Crowdfunding – Different Instruments

Funds Flow



Borrower/Issuer’s Bank

Lender

Investor Issuer

Borrower

Platform Operator

Tran

sfer

requ

est

Loan/investment Disburse Loan/Investment

Interest/dividend/capital

Transfer request

platform agreement platform agreement

Crowdfunding – Similar Platforms

Interest/dividend/capital

• Platform operator not a party to instruments – Agreed between participants, not issued by product provider – Lenders/investors control how proceeds are used, not product provider; – Margin stays with the participants, not provider/multiple intermediaries;

• Segregates participants’ funds rather than treating them as own assets

• Centralised, online system => efficient risk assessment/pricing,

performance analysis, enforcement => lower cost => lower fees

• Low minimum commitment – Accessible to retail customers (may be subject to questionnaire and/or cap); – Aids diversification of small investment amounts; – Finance from many in small amounts at outset –> no need to securitise;

Crowdfunding vs Traditional Financial Services

P2P lending: • Rules for lenders (COBS) • Rules for loans/borrowers

(CONC) • capital requirements; • loans to be managed after

platform failure;

Crowd-investment: • only retail clients who are:

– HNW/sophisticated or – won’t invest >10% of ‘net

investible portfolio’ and get advice or pass ‘appropriateness test’

• Types of permission (arranging, custody, UCIS…) and capital

FCA Regulation Doesn’t Reflect Similarities

Similarities: • FCA Principles (fairness), management systems/controls, AML • Safeguarding client money (some outsource); • Complaints handling; • FCA reporting requirements • Record-keeping requirements

Twitter: sdjohns Blawg: The Fine Print (http://sdj-thefineprint.blogspot.co.uk) Blog: Pragmatist (http://sdj-pragmatist.blogspot.co.uk/)

Email: [email protected]

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Crowdfunding sdj oct 2014

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