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Peer to Peer Lending Regulation

Franklin Carneiro da Silva| Updated May 16th, 2022

Proper regulation of European P2P lending companies has been quite challenging throughout the history of the industry, dating all the way back to the launching of Zopa in 2005. In fact, on more than one occasion, the European Commission has publicly stated that improper regulation has been a hindrance to growth for the entire European P2P lending industry. Let’s explore the regulatory framework of P2P lending today in Europe, US and UK.

P2P Lending Regulation in Europe

In an attempt to rectify this issue of Peer to Peer Lending regulation, the European Commission outlined a proposal to regulate crowdfunding service providers. The proposed regulation was officially released for public consumption on 8 March 2018. Before we discuss the specifics of the regulation, it’s worth noting that the European Commission separates crowdfunding into four main categories:

  • Lending-based crowdfunding
  • Equity-based crowdfunding
  • Reward-based crowdfunding
  • Donation-based crowdfunding

The European Commission is focused on lending-based crowdfunding (i.e. P2P lending) and equity-based crowdfunding.

A few years ago, the regulation of P2P lenders throughout Europe was primarily based on national legislation. Consequently, there was no uniform regulation that covered all European P2P platforms. Instead, the regulation was a mixture of fragmented and conflicting regulatory regimes depending on the country of operation.

Adding to the confusion is the fact that crowdfunding business models are constantly evolving, thus creating a wider variety of products and services. These new products and services are often subject to different pieces of EU legislation. Of course, this simply creates more regulatory confusion.

The 2018 proposed regulation by the European Commission would create a unified regulatory framework that would cover all European P2P lending companies. Specifically, the two main objectives of the Commission are to:

  • Make it easier for crowdfunding platforms to operate across the EU
  • Increase investors’ trust by strengthening the integrity of the platforms

On 20 January 2020, the legislative bodies of the EU announced that a political agreement had been reached in regard to a new regulatory framework for crowdfunding. The new crowdfunding legislation is known as the Regulation on European Crowdfunding Service Providers for Business (ECSP). The initial proposed regulation from 2018 called for the European Securities and Markets Authority to supervise all EU Crowdfunding Service Providers.

However, the new ECSP legislation states that each EU CSP will be authorized and supervised by national authorities in the member state in which they are established. In an effort to enhance liquidity and provide P2P customers with choices, the new legislation will allow all P2P lenders to passport their services across the entire EU.

To ensure investor protection, each investor will be provided with a key information investment sheet (KIIS) prepared by the project owner. The KIIS will be required for each crowdfunding offer. The information contained in the investment sheet will outline the specific details of the instruments being sold and the risk involved.

The new ECSP regulation is subject to final technical amendments. Upon completion of any amendments, the regulation will be adopted by the European Parliament and the Council of the European Union. The new regulation is expected to be fully adopted in 2020.

P2P Lending Regulation in the UK

In regard to the UK, P2P lending is regulated by the Financial Conduct Authority (FCA) dating back to 2014. Regulating the P2P industry in the UK has been a much smoother process in comparison to P2P regulation in the European Union. Why? Because it’s much easier to regulate a single country versus several countries in the European Union. The vast majority of industry experts have praised the FCA for its regulation of P2P lenders.

P2P Lending Regulation in the US

Peer-to-peer lenders in the United States are regulated by the Securities and Exchange Commission (SEC). The regulation began in 2008. According to several academic papers and research reports written by industry experts, the SEC has performed remarkably well at regulating P2P lenders and the entire crowdfunding industry. The working relationship between the SEC and P2P lenders has been quite successful. Quite often, regulators will adopt an anti-business agenda that stifles innovation and reduces growth within the industry. The SEC has taken a “hands-off” approach regarding crowdfunding regulation. This probably explains why the United States is the leader in P2P loan volume.