Just as the internet disrupted areas like retail so the lending space is shifting as platforms bring together lenders and borrowers.
The rise of marketplace lending has been rapid, taking a share of European personal and company finance, particularly in the start-up and SME arenas. From a standing start a decade ago, the market has grown significantly, with the amount raised increasing by 112 percent between 2013 and 2014, according to Crowdsurfer Dashboard. This is spread across the 77 platforms identified in Europe by Crowdsurfer, which between them had raised well over €3 billion by 2015.
The growth of this form of alternative finance is something the European Commission is keen to encourage as bank lending becomes difficult to secure in many nations. The issue, therefore, is how can it create the right environment for MPLs to flourish, particularly as the EC attempts to encourage further cross-border MPL activity?
It is a difficult question to answer, particularly as there is much disagreement at both policy level and on the ground as to how best to achieve this. The European Parliament last year stated that the Capital Markets Union should create a regulatory environment that boosts cross-border access for firms looking for credit and promotes “non-bank financing models, including crowdfunding and peer-to-peer lending”.
The resulting EC report, however, concluded that a European regulatory framework was not the solution, although it will continue to monitor developments.
With Europe-wide regulation effectively ruled out for now, those on the ground are coming up with their own solutions as to how to lend across borders within the EU. “There is no desire by the EC to harmonise regulation across Europe,” says Lucy Vernall, general counsel at UK-based Funding Circle. “It would, in any case, be difficult to achieve because there are such different regimes across different states – in Germany and Austria, for example, you need a banking licence to lend.”
The Netherlands has a dual system, says Anne Hakvoort, partner at FG Lawyers. “One for consumer lending, regulated by the Authority for Financial Markets, and one for institutional capital, which is regulated by the Dutch Central Bank. For those platforms dealing with consumers, there is a dispensation requirement, rather than a licence, for example. And if you are operating a platform that offers tradeable loans, such as bonds or debentures, you fall under the Mifid regime.
Yet many MPLs here are trying to avoid that as the capital requirements under Mifid are too onerous for a small business, so they have to find ways of making loans transferable rather than tradeable if they want to offer investors some kind of exit route.”
In the UK, the Financial Conduct Authority, in conjunction with the Treasury, established rules specifically for peer-to-peer lending platforms in 2014, although it recently conducted a consultation on the current regime to review its effectiveness.
With such a patchwork of different regimes in place, the environment for cross-border lending by MPLs is complex to say the least. “Some states are choosing to amend existing regimes, others are putting in place new regimes, while some haven’t yet moved to regulate MPLs,” says Hakvoort. “It means operating on a cross-border basis is a challenge, as you have to obtain licences or permissions in each country you wish to conduct business.”
CAPITAL WITHOUT BORDERS
How to mobilise capital across European borders is also a subject for debate. Hakvoort says many would like to see some kind of Europe-wide initiative. “Trying to navigate different regimes is costly and onerous, especially given that MPLs are small businesses,” she says. “If the Capital Markets Union is to be a reality, there needs to be some guidance as to how individual states should deal with MPLs.”
Vernall would like to see specific regulation in each country, rather than adaptation of existing regimes. “Many countries are in the early stages of this and so the ideal would be, as has happened in the UK, that specific regimes are put in place,” she says. “Spain is doing this and for MPLs, it makes it much easier to deal with because the regulation is designed for the way we operate.”
However, she too believes a Europe-wide approach would be helpful. “The best position would be for there to be high-level EU standards that would enable the development of regulation in individual countries.”
Oliver Schimek, co-CEO of CrossLend, takes a different stance. “Direct regulation doesn’t work on an EU-wide basis, as there are often very different interpretations of how it should be applied in different member states,” he says. “If you opt for guidance instead, there is room for even more variation in interpretation between the different countries.”
Nevertheless, the current situation is proving workable for many to provide cross-border lending products. Funding Circle has a London Stock Exchange-listed vehicle, pooling retail and institutional investor capital to provide exposure to direct lending across the US, UK, Germany, Spain and The Netherlands.
Estonia-based Bondora also operates across a number of European countries.
“We have structured the business so we have two separate arms, a consumer one and an institutional one,” says Pärtel Tomberg, the firm’s founder and CEO. “In some ways the situation we have currently is not too bad and players can take advantage of legal arbitrage. So, for example, it can be easier to launch a platform in Spain currently if you are based in the UK than if you are based domestically.
“What we have now is an advantage for those that have learned to live with the situation – we’ve been around since 2007. Yet, given that we have pan-European ambitions, it would be preferable to have a single framework or model that applies to consumers and one for institutions, both of which could be passportable.”
Schimek says his firm, which provides the opportunity to securitise single loans through a Luxembourg-based platform, has found a way to work around the cross-border issue. “We are not hiding or finding loopholes,” he says. “Securitisation allows us to be regulated and provides for passporting rights.”
And while the firm was originally established to originate its own loans, it is now offering third-party originators the ability to use the platform to securitise loans into bonds.
Even in the absence of Europe-wide regulatory initiatives, it seems that different MPLs will devise their own solutions to cross-border lending and the complexities that can be thrown up under the current regimes.
EDUCATING THE REGULATORS
If there’s one thing most MPLs agree on, it’s that they need to spend time ensuring policymakers and regulators understand how the sector operates. One particular issue is terminology.
“Should MPL be part of ‘crowdfunding’?” asks Hakvoort. “First of all, these platforms are providing loans and, secondly, there is an increasingly large amount of institutional money going in, so the ‘crowd’ element of the name is a bit misleading.”
Vernall agrees. “We’d like the regulators to move away from the term ‘crowdfunding’,” she says. “There is a large difference between providing debt and equity capital.”
Schimek adds that while the EC is listening to the industry – it is arranging meetings with MPLs on a regular basis – it still has work to do. “The EC understands the need to place risk outside of banks and enhance alternative lending sources to increase available finance,” he says. “Yet it is not quite up to speed yet with what fintech is and how it works. MPLs need to work hard on educating the EC.”