How regulated should Marketplace lending be?

Marketplace lending has proved to be hugely popular in recent years with industry experts pegging it to become a $1 trillion industry by 2025. In United Kingdom, the industry...

Vidur Jain 14th November 2014

Marketplace lending has proved to be hugely popular in recent years with industry experts pegging it to become a $1 trillion industry by 2025. In United Kingdom, the industry saw over £480 million in loan volumes in 2013. As this phenomenon continues, investors as well as borrowers need to identify the best options to match their individual requirements. Apart from expected returns and costs, risk and security of capital also play a significant role in their decision making process.



Business man drawing social network structureRegulation in marketplace lending has generated a debate with one side claiming that too early or aggressive regulation may stifle the innovation necessary to fill market gaps. But, on the other side, there is a growing concern that if not monitored, it can become the next subprime lending crisis. Also, during an economic downturn investors may retreat to safer, lower yielding investments, which could have an adverse effect on many existing platforms as they see lower loan volumes.



The regulators are desperately trying to keep pace with developments in marketplace lending, the Financial Conduct Authority (FCA), the regulatory body in the UK, has gone to great lengths to develop and implement rules specific to the risks in the marketplace lending. The FCA reviewed the emerging industry and proposed regulations in view of investor protection and economic growth. New platforms now need approval from the FCA to ensure that they are compliant. FCA regulations for Marketplace lending include  :

I. Minimum Capital Requirements – FCA requires platforms to maintain a minimum amount of capital to ensure it can withstand financial shocks. The financial resources that each P2P platform is required to maintain is:



  • 0.2% of the first 50 million pounds of total loans issued and outstanding


  • 0.15% of the next 200 million pounds of total loans issued and outstanding


  • 0.1% of the next 250 million pounds of total loans issued and outstanding, and


  • 0.05% and any remaining balance of loans issued and outstanding


II. Client Money Rules – Platforms will have to hold any client money that hasn’t yet been lent out separately to other funds, and in the event of insolvency this cash must be returned to the lenders.



III. Successor Loan Servicing – Platforms must have a robust back-up plan for loan agreements to continue if they cease to operate.



IV. Cancellation Rights – Platforms must allow investors to cancel their investments under certain conditions and within certain timeframes.



V. Disclosure Requirements – Platforms must provide accurate and readily accessible information to their customers.



VI. Dispute Resolution Provisions – Investors will have access to the Financial Ombudsman Service in case of a complaint that the lender has failed to resolve.



VII. Ongoing Reporting – Platforms will have to adhere to regular reporting requirements such as disclosing their prudential and financial position, client money positions, and investor complaints, among other items.



At Cloud Lending, we provide our clients with a cloud-based technology solution that can easily adapt to changing regulatory scenarios. Our robust reporting and agile process ensures that the platform adheres to regulatory guidelines and policies.



Marketplace lending is likely to grow, disrupting traditional ways of lending to individuals and small businesses, while creating both opportunities and risks for policymakers and regulators. Armed with technology and innovation, new entrants are improving access, time needed for the delivery of capital, and the overall borrower experience. The regulatory challenge is to ensure that these new marketplaces have sufficient oversight to prevent abuse along with the freedom to innovate and grow.



For more information on FCA regulations, click here

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