A presentation to the Peer-to-Peer Finance Policy Summit in London, 7 December 2012

1. PEER-TO-PEER FINANCE POLICY SUMMIT 2012
How P2P Finance Models Work:
Risks, Controls And Regulatory Barriers
Simon Deane-Johns 7 December 2012
Keystone Law

2. Peer-to-Peer Finance Policy Summit 7 December 2012
Types of P2P Finance
Crowd-
investing
Debentures Crowd-
Crowd- investing
investing Other (e.g.
Equities invoices)
Crowdfunding P2P Payments
(e.g. Foreign
Donations/rewards
exchange)
Crowdfunding P2P lending
charities/social Consumers/SMEs
Microfinance

3. Peer-to-Peer Finance Policy Summit 7 December 2012
How P2P Finance Works
Transaction Flow
Offer/acceptance => Loan agreement
Lender Borrower
Share/debenture
Offer/acceptance => Investment agreement
Investor Entrepreneur
Platform Operator
platform agreement platform agreement
Lender/Investor’s Platform Operator’s Borrower/Entrepreneur’s
Bank Bank (Seg Account) Bank

4. Peer-to-Peer Finance Policy Summit 7 December 2012
How P2P Finance Works
Funds Flow
Loan agreement
Lender Borrower
Share/debenture
Investment agreement
Transfer request
Investor Entrepreneur
Transfer request
Platform Operator
platform agreement platform agreement
Funds Transfer Disburse Loan/Investment
Funds Transfer Repayment/dividend
Lender/Investor’s Platform Operator’s Borrower/Entrepreneur’s
Bank Bank (Seg Account) Bank

5. Peer-to-Peer Finance Policy Summit 7 December 2012
Common Features
• Platform operator is not a party to instrument agreed between participants
– Segregates participants’ funds rather than treating them as own assets;
– Margin stays with the participants;
• Online only –> low cost –> lower fees
• Low minimum commitment
– accessible to ordinary people
– Aids diversification of small investment amounts;
– Finance from many in small amounts at outset –> no need to securitise;
• Data centralised to aid risk assessment, performance analysis, collections,
enforcement
• Transparency and funds segregation removes ‘moral hazard’

6. Peer-to-Peer Finance Policy Summit 7 December 2012
Standard Operational Risks
• Lack of adequate internal controls, governance
– Financial mismanagement, operator insolvency;
– Internal fraud;
– lack of system integrity/availability;
– lack of business continuity;
– failure to manage/respond appropriately to customer complaints;
– Unclear, unfair or misleading promotions/communications.
• Basic credit or investment risk
• Money laundering, external Fraud

7. Peer-to-Peer Finance Policy Summit 7 December 2012
Common Operational Controls
• Senior management systems and controls;
• Minimum working capital;
• Segregation of participants’ funds;
• Clear, fair and not misleading service terms/communications/promotions;
• Secure and reliable IT systems;
• Fair complaints handling;
• Orderly administration if platform ceases to operate;
• Appropriate risk assessment, AML and anti-fraud measures
• Extra measures appropriate to specific instruments available

8. Peer-to-Peer Finance Policy Summit 7 December 2012
Regulatory Barriers
• Confusion as to whether you can lawfully participate on platforms;
• Tiny differences have seismic implications in permission or licence needed;
• Regulatory ‘creep’: uncertainty/ risk aversion leads to unnecessary complexity;
• Regulatory overlap/conflict (e.g. FSMA/MiFID, Prospectus Directive/Co’s Act);
• Different ‘business test’ criteria for different activities;
• Unclear when participants might be acting in the course of a business;
• Different rules for ‘promoting’ vs ‘offering’ a security;
• Unregulated operators may still face rules on public offers and promotions;
• Regulators can only look inside the regulated markets to foster competition;
• Regulation (coupled with perverse tax incentives) discourages diversifying beyond
regulated cash/investment products, limiting innovation and competition.