Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) (Amendment) Order 2018
That the draft Order laid before the House on 21 December 2017 be approved.
My Lords, the order amends existing regulations to clarify an outstanding regulatory issue for the peer-to-peer lending industry. Peer-to-peer lending is not what happens at the Bishops’ Bar, but a thriving business activity which I will describe in a moment.
Specifically, the order, drafted in consultation with the Financial Conduct Authority and the Prudential Regulation Authority, will set out when a business borrowing via a peer-to-peer lending platform would need to have a deposit-taking licence to do so.
Peer-to-peer lending is a relatively new financial service, with the world’s first peer-to-peer loan originating in the UK in 2005. This nascent industry has experienced rapid growth and at the industry’s request, the Government legislated to bring running a peer-to-peer lending platform into the scope of financial services regulation. Running a peer-to-peer platform is a discrete activity and not, for example, another type of asset management service. It allows investors, including consumers, to lend money directly to businesses or other consumers via the peer-to-peer platform.
The Government therefore introduced bespoke legislation regulating peer-to-peer lending where it interacts with consumers. This means that all P2P platforms used by consumers need to be authorised by the FCA and comply with financial, organisational and conduct requirements. These requirements include rules regarding separation of client money, business conduct such as fair treatment of customers, financial promotions and creditworthiness and affordability assessments.
This approach to regulation has allowed the industry to thrive, and £3.5 billion was lent via peer-to-peer platforms in 2016. In 2016, peer-to-peer lending to businesses grew 36% compared with the previous year, and was the equivalent of 15% of all new loans by UK banks to microenterprises in 2016. These impressive statistics demonstrate the Government’s commitment to fostering a diverse and competitive financial services sector which delivers quality services at efficient prices.
There is a degree of risk in members of the public making deposits, as they may not necessarily have the same degree of financial literacy as professional lenders. As a result, regulation surrounds businesses accepting deposits from the public. Under current legislation, conditions set out that if a business wishes to accept deposits from the public in order to wholly or materially finance their activities, such as a bank, they must be authorised and regulated by the FCA and the PRA. This could be termed “accepting deposits by way of business”. The regulatory permission for accepting deposits by way of business is known colloquially as a banking licence.
Currently when a business borrows money via a peer-to-peer platform, the legislation could be read as saying that businesses are technically accepting deposits from the public “by way of business” and therefore require a banking licence. In reality, it is not the case that the core business of these borrowers is accepting deposits. If it were, they would, for example, be operating like a bank and require FCA and PRA oversight.
However, for the vast majority of commercial borrowers, borrowing via peer-to-peer platforms is simply a way of financing their business—for example capital expenditure. In the existing legislation as inherited by this new industry, there exists uncertainty as to whether those who are not accepting deposits as their core business would still need to be regulated.
It remains the case that peer-to-peer platforms used by consumers should be regulated, but some peer-to-peer platforms are therefore unsure as to whether businesses borrowing via their platform would require a banking licence. The practicalities of obtaining and then maintaining a banking licence just to borrow via a peer-to-peer platform would be burdensome for both the borrower and the platform, increasing costs and making it unviable as an efficient source of finance.
The order therefore provides clarity for peer-to-peer platforms and their business borrowers regarding the regulatory framework. It does this in a number of ways, specifically by making clear that where a peer-to-peer borrower is using deposits solely to finance their other business activity, they should not need a banking licence, and by ensuring that regulated financial institutions still need a banking licence to accept funds from the public, regardless of whether they do so via peer-to-peer or other means.
The order is required to provide certainty to peer-to-peer lending platforms and the businesses which fund their growth and other costs through this means. The certainty provided by the order will ensure that no undue burdens are placed on the sector or businesses because of legislation which predates the invention of this financial service. I beg to move.
My Lords, I may have been the first person in this House to use the phrase peer-to-peer lending, to the enormous amusement of Lord Peston, who misunderstood it as “pier to pier”, which, as he said, was impossible. It is now a widely accepted, very successful strategy. I am not sure if this is officially a conflict of interest, but I declare that one of my children is an employee of a peer-to-peer lending platform. Back in the old days—and certainly before my son was involved—my noble friend Lord Sharkey and I helped to construct the framework that sits behind the regulations. We obviously missed a trick in allowing this discrepancy to enter the regulation, and for that, I—also on behalf of my noble friend—apologise. I am very glad that the Government are clearing up this misconception.
My Lords, I came to the order in a state of almost complete ignorance, having never been involved in peer-to-peer activity in my life and not entirely understanding what it was. I did some research, and it seems that through peer-to-peer lending, the lender can get a better rate of return and the borrower has to pay less. I am reminded of the advice I would give anyone when it comes to financial affairs: “If it is too good to be true, it is too good to be true”. It is too good to be true in the sense that, in a peer-to-peer environment, one can lose one’s total investment and one is not covered by the FSCS guarantee.
I then did a bit more googling, and picked up an article from Which?, which stated:
“Two of the biggest peer-to-peer (P2P) lenders in the UK have been beset by problems over the past month, with RateSetter forced to make up a near £9m loan-deal gone sour and Zopa customers experiencing a severe cut in returns. So, is the market for peer-to-peer lending headed for trouble? RateSetter has announced that it had to intervene to protect investors from losing money in struggling wholesale loans. The company, which lent £664m last year, has now confirmed it has left a peer-to-peer lending trade body for breaching transparency rules”.
I say that because, with no experience, you have to turn to Google, but it does not look as though the peer-to-peer environment is entirely without problems.
I then read the order and the Explanatory Memorandum and it seemed to me in some way deregulatory. The last thing I naturally want when I read about this is for peer-to-peer lending to be deregulated. I then tried to understand the situation more carefully, and I concluded that peer-to-peer lending activity involves three parties: investors, platforms and borrowers. It is important to be absolutely clear what the order does to each of those groups. In my understanding, investors are in no way regulated and therefore the order has no impact on them, except where the investor is a company or firm involved in financial services.
My second question to myself, which I have partly answered, is: are the platforms regulated? As has already been said, they are. Perhaps the Minister would enlarge slightly on his brief reference to the regulation of the platforms. The key question is: is the regulation of platforms in any way impacted on by the order?
Finally, under the present regulations, are borrowers regulated? Clearly they are if they are in the financial services business, but if they are ordinary firms, are they in any way regulated? I think that that is what the order seeks to address. The final question that sums up everything is: is the SI in practice solely related to borrowers? Does it leave the protection of customers using the platform in its present regulated state?
I am grateful to both noble Lords who have spoken in this debate. I accept the mea culpa from the noble Baroness, Lady Kramer, although I assume that there was a Minister involved who also failed to spot this as the legislation went through. But it was generous of her to accept full responsibility for not spotting this lacuna.
In response to the noble Lord, Lord Tunnicliffe, this order is borrower facing; it does not affect the platform or the investor. The platform may be able to give greater assurance to borrowers that, because of this SI, the borrower need not worry about having to get a banking licence, but it is essentially, as I said, borrower facing.
On the issue of regulation by the FCA, like the noble Lord, I made a few inquiries about this, because, like him, I am new to this. There are roughly 60 P2P platforms active in the UK. Before the FCA’s regulatory regime was introduced, I understand that some platforms ceased trading and a couple of very small P2P platforms failed in the UK, but it is not known whether lenders lost any money as a result. But all this happened before the FCA’s regulatory regime. Since then, the FCA is keeping an eye on the industry. Occasionally, as with many other financial services firms, they have told platforms to take down a certain advertisement or amend a part of their business model. To be authorised in the first place, some firms have to make substantial changes to pass the FCA’s rigorous threshold conditions for advertising. But also there is a review, conducted by the FCA, going on at the moment, and I shall certainly feed the concerns of the noble Lord into that review, and into the wider P2P industry as a whole.
I think that I have answered all the questions that have been raised, and commend the order to the House.
Motion to Approve