Technology
to a single customer and the number of platforms from which customers can borrow. “The intention is to protect customers,”says Hou. “It’s not that peer-to-peer is a bad business model. The general tone is that [the government wants the industry] to be complementary to the pure banking sector.” Hou believes this process will kickstart a process of consolidation. “The total outstanding credit is still growing but the number of platforms is shrinking because they don’t comply with the new regulation,” he says. “We will see volume start to accrue with the top 20 or 30 platforms.” Although a smaller and less diverse market may suggest less innovation, Hou is not so sure. “Right now, everyone is so focused on recruiting investors and borrowers. In my view, most of the peer-to-peer companies are currently spending most of their energy and attention on marketing. The remaining players may be able to think about better business models.”
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nlike China, the regulatory environment for alternative finance in Britain has evolved gradually. Originally overseen by the Office of Fair Trading, responsibility for the sector transferred to the FCA in April 2014. Firms already trading at that time were allowed to continue under interim permissions, pending full authorisation from the FCA. So far, the move towards becoming a fully regulated industry appears to have had little impact on the sector’s growth prospects, as new lenders continue to enter the market. Gillian Roche-Saunders, London-based head of compliance at law firm BWB, believes FCA authorisation could help the sector grow.“You’re seen as safer if you’re regulated by the FCA,” she says. There are also more concrete benefits. Lenders authorised by the
Peer-to-peer lenders were classified as technology companies in China, so no one was regulating them
WEI HOU Sanford C Bernstein
FCA will be allowed to offer an Innovative Finance ISA, providing tax-free interest on peer-to-peer loans, increasing the attractiveness of the sector to investors. Property lending platform Landbay was one of the first to receive FCA authorisation, a process that took 15 months. CEO John Goodall says securing ISA manager status was a big milestone, but he also points to other upsides.“A lot of our partners are FCA regulated and I think they get comfort from that.” Likewise, authorisation could open avenues to a new source of clients. “To my knowledge, independent financial advisers have not really looked at peer-to-peer in any serious depth,” he says. “Now that it is an authorised product, it makes it a little easier.” Despite providing some obvious benefits, there have already been suggestions that the move towards greater regulation has disproportionately affected some of the more innovative platforms. While a handful of firms have received authorisation, many are still waiting. Roche-Saunders says: “The FCA wants a firm to stay still while it’s judging whether the business plan is stable. That’s quite difficult in a market such as this. Everyone’s trying to innovate and grab the consumer’s imagination.”In her view, among
those still waiting, “a good chunk are the firms that have done more innovation”. Some of the more innovative solutions have also found themselves the subject of FCA scrutiny. To date, investments made via peer-to-peer platforms have not been covered by the Financial Services Compensation Scheme, which protects customers of other financial services firms. The industry’s response was to create provision funds, whereby platforms set aside a portion of their fees to compensate lenders in the event that borrowers default. The FCA has since raised concerns that these funds could “introduce risks to investors that are not adequately disclosed and may not be sufficiently understood”.
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espite this tension, at least some established peer-to-peer lenders are actively calling for regulatory measures to go further. The Peer-to-Peer Finance Association, a group of nine lenders that includes property-based platforms Landbay and LendInvest, believes more rules should be put in place to protect consumers. Goodall says: “We’ve always taken the view that two basic things are very important in peer-to-peer: people need to understand the risk, and be able to be compensated for that risk.” The FCA will consult this year on rule changes designed to provide “adequate investor protection while allowing for innovation and growth in the market”. For some lenders, these changes will provide the industry with validation. But it seems likely that something might also be lost. “I always think there is a cost to regulation,” says Roche-Saunders. “There’s no doubt you won’t be able to innovate and grow in an unfettered manner.”
CASE STUDY
How Airbnb became an unwelcome guest
Proptech firms have a history of running up against regulators – who frequently find themselves on the back foot as they struggle to cope with the pace of innovation. It should come as no surprise, therefore, that one of the most successful proptech firms has also proved one of the most troublesome to regulators. Airbnb, the online platform that allows individuals to rent 36
RICS.ORG/MODUS
out their homes to tourists, has transformed the holiday lettings market since launching in 2008. In the process, it has found itself at loggerheads with city authorities around the world. One of Airbnb’s greatest battles took place over hotel taxes. In many cities, tourist accommodation is supposed to be subject to tax which, at least at the outset, many Airbnb hosts neglected to pay.
After arguing for many years that it had no responsibility to ensure such taxes were paid, the company eventually backed down and now collects these on behalf of hosts in numerous cities. Such disputes have done nothing to dent the popularity of the service, despite its legality still frequently being called into question. In New York, the company’s largest
market, short-term lets are officially banned but enforcement action was rarely taken. That is, until February this year, when the city issued its first fines to illegal Airbnb hosts and promised a crackdown on illegal listings. For many companies, the threat would seem existential, but Airbnb has displayed a tendency to overcome such obstacles.