P2P to be regulated. Next stop, a change to the regulations on the treatment of peer to peer losses.

letter for MPs

Last week’s news that peer to peer lending is about to be regulated by the FCA was met with pretty unanimous support from the industry, with both borrowers and lenders and the peer to peer lending platform owners themselves all agreeing that regulating peer to business lending is likely to boost rather than stifle peer to peer finance in the UK.

So that’s one battle won – or at least the first round, no doubt there is a whole host of further debate to come regarding exactly what shape the new regulation takes…

In the meantime, however, there’s an existing regulation that peer to peer lenders want changed – and that’s the treatment of losses.

Whereas banks and other financial institutions are able to off-set bad debt against interest earner, peer to peer lenders are not under current HMRC rules.

This is not only unfair but fundamentally compounds the impact of any peer to peer losses.   P2Pmoney.co.uk has helpfully crafted a suggested letter that anyone who agrees that the current state of affairs is wrong can cut and paste and send on to their local MP.

You can find the letter here on the www.p2pmoney.co.uk website.

A framework for European Crowdfunding

front page of the Framework for European Crowdfunding report

Despite the fact that peer to business lending and all types of crowdlending / crowdfunding are niche products dwarfed by mainstream banking, last year Europe raised €300 million through various types of crowd funding – which adds up to about a third of the world market.  As at the end of 2011, 200 crowdfunding platforms were open for business throughout Europe and their number is forecast to grow by 50% by the end of 2012.

At least, that’s according to the report, A Framework for European Crowdfunding.

Before we get any further, I should make clear that the report covers the various different types of crowd funding / crowdlending including debt based funding typically associated with peer to business lending – available in the UK via FundingKnight, Funding Circle and Thin Cats.

Infact, the report manages to list 12 different types of crowd funding, which it in turn groups into four basic types:

Donation – A contribution made without tangible reward

Reward – A purchase contract for a product or service

Lending – a credit contract or loan where credit is repaid plus interest and fees

Equity – Shareholding contracts, shares, equity-like instruments or revenue sharing in the project/business, potential up-side at exit

According to Matthias Klaes, professor of commerce at Keele university and the author of the report’s foreword, these vairations on a them are linked by a common thread:

“Crowdfunding may take many forms.  But it is clear from their survey that we are witness to the rise of a new kind of investor, a new kind of entrepreneur, and a new kind of intermediary, who are all coming together in novel ways of channelling funds to innovative projects and SMEs.”

A three pronged plan of attack

venn diagram showing 3 pillars of crowd funding framework

The report calls for a three pronged approach to help oversee the future of crowdfunding in Europe:

First pillar = Regulation

“Crowdfunding intermediaries should establish criteria for all types of consumer protection, including security of information, financial control and transparency and fraud prevention.

Second pillar = Education

“For crowdfunding to flourish, we believe a pan-European educational forum is necessary to educate stakeholders, funders and entrepreneurs on the benefits of the industry and the different business models of crowd funding.”

Third pillar = Research

“The industry should drive academic and third part research…. Crowdfunding operators should should provide data sets to further industry research; the industry needs to find a transparent and open approach.  Public reporting and research will drive competition and innovation within the industry.”

Why get involved in crowdfunding?

It also shares some interesting thoughts on what motivates people to start crowdfunding.  As the digram bellows (reproduced from the report) shows, that motivation differs according to the type of crowdfunding model.

Whilst P2P Lending attracts people motivated by financial return and a more efficient way of lending and borrowing money, other types are more likely to have altruistic appeal.

different motivations behind crowd funding

Broadly, though, motivation (for lenders/investors) can be split into three:

Social return – Funders have an intrinsic motivation to help a particular project succeed.

Material return – Funders receive a product or service in return for their investment but pre-sales crowdfunding means that the investor pays the project in advance to create working capital to actually bring the product to market.

Financial return – A funder invests via a loan or equity based model and collects interest or dividend payments.

Whatever your motivation, the report makes a great introduction to crowdfunding in Europe, covering further categories such as policy discussion, European regulation and legislation and how to implement an operational framework for European crowdfunding.

You can download the full report, A Framework For European Crowdfunding here

Business loans needs safeguards and restrictions too…. before it’s too late

restricted area sign

The BBC reported yesterday that payday lenders have “agreed to prevent a build-up of unmanageable debts by struggling customers.”

The changes will mean that lenders will “freeze charges and interest for borrowers in difficulty, no later than 60 days after they stop making payments.  Borrowers would also have their charges frozen as soon as they managed to agree an acceptable repayment plan.”

The new measures should be in place by 25th July according to the trade bodies involved.

The move will, no doubt, offer some relief to the increasingly large body of people concerned about the payday loan industry and FundingKnight welcomes it.  The payday lenders involved rightly point out that their new commitment goes beyond statutory regulation and gives new rights to customers.

That didn’t, however, stop Business Minister, Norman Lamb, suggesting people exercise caution:

Payday loans should only ever be used as a short-term financial stop-gap, not as a long-term solution to financial difficulties”

The worry is that, unless positive action is taken to improve the state of funding for business, small businesses will be the next in line to take out a high cost, short term business loan.

We wrote yesterday about the latest BOE figures which reveal that business funding is in dire need of improvement.  The popularity of payday loans only serves to underline the need for fast action and a considered approach to regulation.

FundingKnight strongly believe that more must be done to support funding for UK independents and provide the business investment required for growth and we believe, just as strongly, that the best way to do this is within the safeguard of regulating peer to peer lending.

Action is needed now.  Our economy depends upon it.

Photo used under creative commons license

Peer to peer lending: Why FundingKnight is a mile away from payday loans

image of three lego knights

Peer to peer lending, or P2P Lending as it’s sometimes know can easily be confused with other types of business funding or alternative finance.  Today’s blog explains why the small business loans offered by peer to business lenders like FundingKnight are very different from payday loans.

The news that Wonga is to extend its services to small businesses has, understandably, been met with some concern.  www.thisismoney.co.uk reported the development saying:

As of today, a company boss can apply for a loan of up to £10,000 from Wonga for Business and receive the money as soon as 15 minutes later.

At FundingKnight we’re keen to see a growth in business loans.  A growth in business funding is essential to the future health of the British economy.

We don’t entirely agree with comments from Chuka Umunna, shadow Business Secretary, who said: “This is a damning indictment of our banks, and their failure to serve our businesses”. After all, banks are being forced to rebuild capital bases and it’s impossible to ‘have your cake and eat it’, but we do wholeheartedly agree with his later point that, “it is deeply worrying that our small and medium-sized businesses are driven into the hands of a company like Wonga to get access to the finance that they need.

It’s clear that British businesses need alternative sources of business funding.  We’re committed to helping the banks service the financial needs of small businesses, but we want to do so in a way that provides fair value for all.  We believe that peer to peer lending – or, in the case of FundingKnight, peer to business lending – improves things for both borrowers and lenders.  We’ll offer higher rate of interest than savers can typically find on the high street but we’ll offer competitive rates for business loans too.

The potential for extortionate interest rates is just one reason why we’ll campaign to see peer to peer lending regulated.  We want to ensure that all lenders and borrowers have adequate protection and benefit from the best – not the worst – that alternative finance has to offer.

EDIT: Thanks to @Zerocredit_UK for pointing out that although Wonga has been criticised for APRs of 4,000% on personal lending their business loans will be more competitively priced.  

From the Guardian:

“The high-cost lender Wonga is launching a business loans service, promising to make funds available within 15 minutes of an application.

Wonga was reluctant to quote a typical annual percentage rate, or APR, for loans, saying the measure was inappropriate as they could be taken out for as little as a week. The firm has been heavily criticised for lending to individuals at an APR of 4,214%, but claims business loans will be at rates starting at 17% APR.

Loans of £3,000 to £10,000 will be available for terms of between one and 52 weeks. The cost, including a variable application fee and interest, starts at 0.3% a week and the loans must be repaid in weekly instalments.”

(The Wonga business loans website did not quote typical rates at the time of writing, and a potential business borrower must apply before getting a quote.)

Photo used under creative commons licence

Peer to peer lending: An industry that wants to be regulated

the houses of parliament


Peer to peer funding is currently an un-regulated activity in the UK.  Today, FundingKnight CEO Graeme Marshall explains why people to business lenders like FundingKnight would welcome regulation.


In an age where the country has gone regulation-mad, it is unusual to find an industry crying out to be regulated. When this happens, the government should pay close attention, as the industry is usually right.

The founders of the UK’s largest P2P lenders joined forces to call for their sector to be regulated last autumn in response to “fears that “shoddy operators” could put consumers’ money at risk.  The founders have also established a self regulatory body that they hope will act as a ‘blueprint’ for regulators.”

By establishing the Peer to Peer Finance Association (P2PFA) as a self- regulating body to set standards for the industry, the leading firms engaged in P2P and P2B lending have made just the right early move. The Rules and Guidelines for their members both set standards for consumer protection and form a clear pathway to appropriate regulation for the industry.

Alongside setting rules to regulate themselves, the P2PFA has rightly called upon the government to introduce regulation to oversee Internet- based matched lending – the process in which many lenders ‘club together’ to jointly fund a loan to a borrower.

Although matched funding does not in itself require much capital, as the firms don’t actually do the lending themselves, the principles behind holding client money and assets, selling practices,  clear explanation of services and costs etc are otherwise no different from mainstream lending.

Effective regulation will reduce the risk that poor practice by marginal operators will bring financial harm to lenders and tarnish the reputation and growth of this exciting and much needed sector of the lending market.

Indeed, Giles Andrew, the founder of Zopa, has been lobbying the FSA and the Government for greater regulation for some time now.  He is also pushing for ISA status for peer to peer lending and hopes that the P2PFA will “provide impetus for regulators:

We want to provide comfort to consumers that the businesses conform to some public operating standards and provide a useful blueprint to shove in front of would be regulators.”

Back in 2004, I found myself in a similar position in equity release, when the government decided to regulate the main product (lifetime mortgages) but not the alternative product –  Home Reversions. At the time I was on the board of Safe Home Income Plans, the industry body for equity release, and chaired their home reversion product board. SHIP decided to campaign for regulation and, following a formal consultation we were successful in bringing the matter to the House of Commons for debate. MPs quite appropriately questioned the point of adding yet more legislation to the statute book. The response that “the industry had themselves asked for it” carried the day. Home Reversions have consequently been regulated since 2007.

We at FundingKnight wish the P2PFA every success in calling for appropriate regulations over arranging and marketing P2P lending.  We intend to be active in supporting their aims – and, in particular, campaigning for regulation.

Photo credit used under Creative Commons Licence