[Editor’s note: This is a guest post from Neil Roberts. He is the CEO of Harmoney, a new p2p lending platform based in New Zealand that is launching soon. Harmoney believes in Liberating Lending, executing locally whilst building global competency. They are led by serial financial services entrepreneurs, with several successful start-ups and exits that have created shareholder wealth in excess of $1bn. They will be attending and speaking at LendIt 2014 next week in San Francisco.]
Peer to Peer Lending Does Not Exist In USA
Well, not quite.
True p2p lending would be impossible to do within the securities law in the USA. To be legally compliant p2p lending would require a prospectus from the borrower and another prospectus from the p2p lending platform for every single note issued.
Both Lending Club and Prosper have worked very hard to achieve a compliant business that gets close to peer to peer lending. Both companies have done an amazing job, but still have to meet the costs and restriction of a regime that offers them little in return.
P2P Lending Legitimized World First Legislation by The Kiwis!
A courageous New Zealand (NZ) government seized a “once in a generation securities law overhaul” to legislate specifically for Crowdfunding and Peer to Peer Lending – the legislation came into effect earlier this month, on the 1st April 2014.
Some things haven’t changed. The banks will continue to operate under their banking license. The banking license will still provide access to inherent leverage and funding at levels and costs that effectively lock out competitors from the cozy “banking club.”
Almost a Level Playing Field!
The difference is that peer to peer platforms will have their own license and their own set of legislation designed for them. Simply put, p2p platforms will not need the banks to operate effectively. Cheap cash and leverage are no longer the ultimate competitive threat.
My view: the big banks don’t stand a chance, period! Too protected for too long, there isn’t the stomach for wholesale change. In fact, their operating model is designed to be slow, cumbersome and expensive. Protection has run so high that the banks don’t even realize it.
There is one key strategy that could save the banks – acquisitions. I am not surprised that Westpac in Australia and Barclays through their South African subsidiary have hurried to buy into peer to peer lending as the regulatory environment starts to get some clarity.
More Compliance & Bureaucracy will not Stop Fraud or Bankruptcy
The NZ government has been courageous, not stupid. As empowering as the legislation has been it also comes with strict requirements that protect investors and ensure bank-like standards across any licensed peer to peer platform.
Furthermore, NZ’s version of the SEC – Financial Markets Authority (FMA) has the power to amend the regulations, grant and revoke licenses and to set standards of compliance.
The FMA has created a new category for P2P platforms called a “licensed intermediary.” License holders must ensure the following:
- Must act as a fair and neutral broker between lenders and borrowers
- Platform processes must be orderly and transparent
- Risks must be clearly disclosed to investors
- Must have robust mechanisms for establishing the identity and creditworthiness of borrowers
Our license application is a lengthy document covering several hundred pages. The FMA requires detailed documents on the management team’s prior experience, the platform’s operational infrastructure, the company’s financial resources and, finally, governance and oversight committees.
We are pleased to see the FMA set such high licensing standards; it is in the best interest of the public, yet we have already seen one applicant complain about the complexity in the press. That’s just the point! Having such a thorough and robust licensing process will foster public trust in platforms.
We commend both the Government and FMA for their commitment to promoting innovation and competition in the capital markets.