Peer-to-Peer

Finance Association (P2PFA)

response to US Treasury RFI on Expanding Access
to Credit through Online Marketplace Lending
Introduction to the P2PFA
The P2PFA is a membership body, founded in 2011, which represents over 90% of the UK
crowdfunding and platform lending market. Our members offer peer-to-peer lending to consumers
and businesses, and invoice finance funding for small businesses. P2PFA members have provided
over 3.15bn ($4.96bn) of loans in the UK to date. The P2PFA promotes high standards of business
conduct through its rules and operating principles.

Approach to response
The P2PFA is responding to this RFI on behalf of our members. We focus on questions where we see
material value in sharing our experience from the UK.

Q1: There are many different models for online marketplace lending
including platform lenders (also referred to as peer-to-peer),
balance sheet lenders, and bank-affiliated lenders. In what ways
should policymakers be thinking about market segmentation; and in
what ways do different models raise different policy or regulatory
concerns?
The P2PFA cannot comment on the different lending models in the US. We will comment at a high
level on the UK regulations.
Peer-to-Peer lending in the UK has its own regulatory regime, and is regulated in a very different way
to balance sheet lenders to recognise the fundamentally different risks posed to consumers. For
example, peer-to-peer lenders have relatively modest capital requirements, as they do not take
balance sheet risk. Instead, the risk of failure is mitigated by requiring platforms to have backup
servicing provisions in place, which serves a similar function as capital requirement, in ensuring that
investors continue to receive loan repayments should a platform fail (see Q8).
UK peer-to-peer lending regulation is focused on protecting consumers, as opposed to Small and
Medium Enterprises (SMEs), so where regulation applies to platform lenders it focuses on the
retail consumers in the transaction (whether lenders or borrowers). Indeed, much SME lending is
unregulated in the UK. See Q11 for more detail.
Equity crowdfunding in the UK is been regulated differently to platform lending due to the different
risks to consumers. Platform lenders are able to offer stable, predictable returns, whereas equity
crowdfunding cannot give a clear indication of returns or timeframes.

Q2: According to a survey by the National Small Business Association, 85 percent

of small businesses purchase supplies online, 83 percent manage bank accounts
online, 82 percent maintain their own website, 72 percent pay bills online, and 41
percent use tablets for their businesses. Small businesses are also increasingly
using online bookkeeping and operations management tools. As such, there is
now an unprecedented amount of online data available on the activities of these
small businesses. What role are electronic data sources playing in enabling
marketplace lending? For instance, how do they affect traditionally manual
processes or evaluation of identity, fraud, and credit risk for lenders?
In response to this question, we identify the two differences between the US & UK that make
evaluation of identity, fraud and credit risk easier in the UK:
Companies House
In the UK there is a central register of all companies (Companies House). This is a quasi-
governmental organisation, which requires all incorporated companies to register and file
abbreviated financials and list associated directors annually. This facilitates identity and fraud
detection as it is possible to link directors applying for a loan with the company in question. Credit
reference agencies aggregate the data to improve assessment of credit risk for lenders. The US
government may wish to consider ways to create a comparable data source, whether it is a central
register, or by linking existing registers.
CIFAS
CIFAS is a central fraud register, to which all members who get information on fraud are obliged to
report on fraud. In this way, there is a register which collects all fraud information in one place.
While we understand there are a number of tools and resources available in the US to help with
fraud detection, creating a unified database of relevant information along a similar model may make
fraud detection easier.

Q3: How are online marketplace lenders designing their business models and
products for different borrower segments, such as small business and consumer
borrowers, subprime borrowers, borrowers who are unscoreable or have no or
thin files depending on borrower needs? (E.g., new small businesses, mature
small businesses, consumers seeking to consolidate existing debt, consumers
seeking to take out new credit and other segmentations)
P2PFA members do not extend credit in this way.

Q4: Is marketplace lending expanding access to credit to historically

underserved market segments?
Platform lending is expanding access to credit to historically underserved market segments in the
UK, especially for SMEs. Nesta, an independent research organisation, has looked into the extent to
which platform lending has increased access to finance for SME & consumers in the UK1:

79% of SME borrowers had applied for a bank loan before trying platform lending
Only 22% had been offered a bank loan
33% thought it was unlikely or very unlikely that they would have been able to secure
funding elsewhere
Only 44% thought they would have been likely or very likely to secure funding from other
sources
Consumers who access platform lending in the UK often do have access to finance
elsewhere, although 15% of borrowers do state that access is very important

Q5: Describe the customer acquisition process for online marketplace

lenders. What kinds of marketing channels are used to reach new
customers? What kinds of partnerships do online marketplace
lenders have with traditional financial institutions, community
development financial institutions (CDFIs), or other types of
businesses to reach new customers?
One key partnership for a number of our members is with the UK government. The government has
committed to lend almost 500M to SMEs through the British Business Bank, the governments
enterprise investment bank. This has been a significant boost for the industry, by both increasing
liquidity and strengthening reputations. See Q9 for more details.

Q6: How are borrowers assessed for their creditworthiness and

repayment ability? How accurate are these models in predicting
credit risk? How does the assessment of small business borrowers
differ from consumer borrowers? Does the borrowers stated use of
proceeds affect underwriting for the loan?
Each platform in the UK has their own credit assessment processes, with different models. The
P2PFA cannot comment on specifics.
The models are highly accurate, as platforms have been able to keep bad debt in line with
expectations. Industry average loan default rates are below 3%pa. The P2PFA publishes data on bad
debt for all of its member platforms, in line with our core principle of transparency. Please see two
example tables below:

1

Nesta, Understanding Alternative Finance, November 2014:

https://www.nesta.org.uk/sites/default/files/understanding-alternative-finance-2014.pdf

Ratesetter:

Funding Circle:

Please see here for more info

Q7: Describe whether and how marketplace lending relies on services

or relationships provided by traditional lending institutions or
insured depository institutions. What steps have been taken toward
regulatory compliance with the new lending model by the various
industry participants throughout the lending process? What issues
are raised with online marketplace lending across state lines?
We cannot comment on services and relationships of our members. However all UK platforms
depend on traditional banking system for money transfers and collections.

All platform lending platforms in the UK are in the processes of applying for full authorisation by the
Financial Conduct Authority (FCA) and as such are going through an in-depth compliance process.
See an overview of these regulations here.

Q8: Describe how marketplace lenders manage operational practices

such as loan servicing, fraud detection, credit reporting, and
collections. How are these practices handled differently than by
traditional lending institutions? What, if anything, do marketplace
lenders outsource to third party service providers? Are there
provisions for back-up services?
We cannot comment on the detail of how lenders manage their operational practices, but we
require member platforms manage operations in line with and to standards at least as high as
traditional financial institutions (e.g. banks).
One of the requirements of UK regulations is for platforms to have comprehensive arrangements in
place to continue the servicing and collections of loans and to manage repayments if the platform
fails. Platforms approach this in different ways. Some have agreements with other platforms, others
have an agreement with a back-up service provider who will step in to manage the run-down.
Importantly, as platform lenders do not take balance sheet risk, there are limited prudential
requirements in the UK (the cash balance must be sufficient to hand over to the back-up servicer).
The back-up servicer acts in place of prudential requirements to ensure that consumers do not lose
their money if a platform fails.
Below is the FCAs overview of its opinion on back-up services:
We are introducing a rule to require firms running loan-based crowdfunding platforms to take
reasonable steps to have arrangements in place to ensure loan agreements facilitated on the
platform will continue to be managed and administered in accordance with the contract terms, if the
firm ceases to carry on the regulated activity in relation to lending. In order to create a proportionate
framework that balances regulatory costs against benefits, we are not at this time setting
prescriptive requirements for the arrangements that firms must introduce. Instead, we expect firms
to design systems and controls that are appropriate to the needs of their business model and
consumers. We agree with respondents who noted that these arrangements must be robust and we
expect firms to take particular care in their design. As some noted, even with these arrangements in
place, it is impossible to remove all risk and there is still the possibility of consumer detriment if
arrangements fail to work as expected. We expect these risks to be made clear to investors. We do
not consider it desirable to try to remove all risk, however: it would be prohibitively expensive and
probably impossible to do so.4

FCA Policy Statement PS14/4, Feedback to CP13/13, March 2014

Q9: What roles, if any, can the federal government play to facilitate
positive innovation in lending, such as making it easier for borrowers
to share their own government-held data with lenders? What are the
competitive advantages and, if any, disadvantages for non-banks and
banks to participate in and grow in this market segment? How can
policymakers address any disadvantages for each? How might
changes in the credit environment affect online marketplace lenders?
There are three key areas in which the UK government has supported platform lenders in the UK,
and the P2PFA would suggest that the federal government in the US could support in similar ways:
1. Bespoke regime: ensuring that platform (peer to peer) lending is carved out and identified
as a specific legally defined financial services activity subject to its own bespoke, risk based
and proportionate regulatory regime
2. Awareness: initiatives by the government, such as the British Business Bank (see below),
have increased awareness of and trust in platform lending
3. Level playing field: overseeing regulations to ensure that platform lenders operate on a level
playing field with traditional finance providers
Specifically, the government has introduced, or is in process of introducing, several key initiatives:

Credit data sharing

Bespoke regulatory regime
Allowing investors to offset bad debts against interest earnings for tax purposes
Government lending to SMEs via platforms
Referral of SMEs who are rejected by banks
Tax-free savings for consumers by including platform lending in the Individual Savings
Accounts (ISA) and extending interest free savings via a personal savings allowance

Credit data availability

The UK government put pressure on banks and credit ratings agencies to allow platform lenders to
have access to a full range of credit data reported by the banks. This allows platform lenders to make
credit assessments with the same level of data as banks, and allows them to offer loans to more
SMEs and consumers.

Regulating the industry

From the founding of the P2PFA, we pushed for the FCA to regulate platform lending. Platform
lending has now been regulated since April 2014 with an interim regime pending full authorisations
early next year.. Regulation of the industry is important to protect consumers, as well as to protect
the reputation of a fast growing new industry. Formal regulation has built on self regulation by the
P2PFA and has helped added credibility to the sector. Regulation in the UK is currently focused on
protecting retail consumers, rather than SMEs. This means that for SME lending, it is the retail
investors (themselves, consumers) who are protected, whereas it is the retail investors and
borrowers who are protected for consumer platform lending Please see Q11 for a full overview of
the benefits and challenges of regulation.
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Allowing investors to offset bad debts against earnings for tax purposes
When platform lending started in the UK, the tax rules had not been designed to take account of the
workings of platform lending. This meant that investors were taxed income tax on all earnings, and
losses were not offsettable against gains5. This significantly reduces the return for an investor (see
below). We understand that the same rule applies in the US, and may be an area which the federal
government would wish to review.
The P2PFA worked with Her Majestys Treasury (HMT) to update this, and as of April 2015,
investors are able to offset their losses against their earnings for tax purposes. This makes platform
lending significantly more efficient from a tax perspective and on a par with tax arrangements for
banks.

Detail on challenges of losses not being offsettable against gains

Oxera, an independent research company, produced a paper to examine this tax position and
concluded that it was biased against P2P platforms:

The tax distortion from not being able to offset losses against earnings means investors
were more likely to invest money via banks or investment funds, where losses are
ultimately offsettable
Investing in a P2P platform is less competitive, and puts P2P platforms at a disadvantage
to banks, not because the underlying economic efficiencyis worse, but purely because
of the difference in the tax treatment

The below chart outlines average investor returns for a Funding Circle investor6 without, and with
tax offsettability.

Impact on Borrowers:

The impact of the above tax inefficiency had two impacts on the borrower:

5
6

Losses were only offsettable against capital gains

Funding Circle is a founding member of the P2PFA

The tax inefficiency means that lenders require a greater yield on P2P
investments to reach the same net return, thereby increasing rates for
borrowers
Alternatively, investors will avoid P2P platforms due to the inefficiencies,
thereby reducing the pool of money available for SMEs to borrow

The tax relief would therefore result in the reversal of the above issues. Primarily, it would mean
more money is available to lend to SMEs and consumers at lower rates.

The government has committed to lend almost 500M to SMEs via

marketplace lending platforms
In response to the contraction of lending to SMEs in the wake of the financial crisis, the government
created the Funding for Lending Scheme which was designed to incentivise banks to lend to SMEs.
This did not increase lending to SMEs in the short-term, so the government looked for new avenues
to encourage lending to SMEs.
Since 2013 the government has also committed almost 500M to lend to SMEs via alternative
finance platforms. This brings platform lenders competitive position more in line with traditional
finance providers and, more importantly, has created additional funding for SMEs. The government
is also making a good return on its investment.

Referral of SMEs who are rejected by banks

The government has now mandated that any major bank that rejects an SME loan application must
refer the SME to an alternative finance provider. A new framework is being put in place to
implement this. This should help SMEs access finance where the bank cannot help them.

Tax-free savings by including marketplace lending in the Individual Savings

Accounts (ISA)
In the UK, individuals can save up to 15,240 per year in tax free accounts (ISAs). The assets that can
be chosen for ISAs are tightly controlled to ensure ordinary savers invest in appropriate assets. As of
April 2017, peer-to-peer loans will be included in the ISA wrapper, so investments in platform
lenders can be tax free. This puts platform lending platforms products more closely in line with
banks and other investment providers. The ISA market is 49B per year, so this change should bring
a significant increase in investment through platform lenders, and thereby increase the supply of
capital available for SME and consumer loans.

Challenges
Both industry and regulators have learned some lessons from the introduction of regulation, which
we suggest the US Treasury should be aware of. These are areas where the industry could have
received more support from the UK government
1. Support in understanding the regulations
When the regulations were launched, many platforms were small and had limited experience of
regulation. Compliance is always costly, and can have a significant impact on small platforms. The
FCA could have helped this process by outlining clearly which specific regulations applied to platform
lending platforms.

2. Contact at the FCA

In the process of understanding regulations, and during the process of applying for authorisation, it
would have been helpful to have an authoritative single point of contact at the FCA to whom
platforms could ask questions about the regulations and authorisation process.
3. Faster resolution of unforeseen consequences of regulation
Given platform lending was integrated into existing regulation, it was inevitable that there would be
some unintended impacts from regulations. Small changes can have a significant impact on small
businesses. Therefore, where there are unintended impacts, it is important to resolve them quickly.

Q10: Under the different models of marketplace lending, to what

extent, if any, should platform or peer-to-peer lenders be required
to have skin in the game for the loans they originate or underwrite
in order to align interests with investors who have acquired debt of
the marketplace lenders through the platforms? Under the different
models, is there pooling of loans that raise issues of alignment with
investors in the lenders debt obligations? How would the concept of
risk retention apply in a non-securitization context for the different
entities in the distribution chain, including those in which there is no
pooling of loans? Should this concept of risk retention be the same
for other types of syndicated or participated loans?

This first point to note is that in the UK there are no risk retention rules regarding holding loans for
a period, as the loan contracts are direct between borrower and investor. I.e. the investor lends
directly to a borrower, without a platform in between (the platform provides the introduction and
credit assessment) as opposed to the US where the platforms originate the loans, and then pass on
to investors. For this reason there is no risk retention requirement.
In addition, platforms are not required to have skin in the game. With no skin in the game the
platform lenders incentives are perfectly aligned with investors and borrowers. The incentive for
the platforms is then to bring as much flow through the platform as possible (thereby increasing
access to finance for SMEs and consumers). To do this they must find the rate to charge which brings
the highest number of both investors and borrowers to the platform. Borrowers will come to the
platform only if the rate is competitive and investors will come only if they earn a good return. By
contrast, if platforms were forced to lend their own money, to have skin in the game, their
incentives would be more closely aligned with investors than borrowers, as there would be an
incentive to increase rates to improve the platforms return. Without skin in the game, the platform
lender is most able to act in the interests of both borrowers and lenders. We consider that the
transparency of loan performance, through publication of loans books, is as good as skin in the
game as it ensures that lenders know how well the platform is accessing risk.

In order to demonstrate and maintain this alignment of incentives the P2PFA now requires its
member platforms to maintain greater levels of transparency. As discussed above, all P2PFA
member platforms disclose bad debt rates on their website. In addition, platforms release a range of
data every quarter to the P2PFA:

Total cumulative lending

Quarterly net lending
Number of investors & borrowers
Detail on bad debt (non-performing loans, capital losses, actual arrears, expected defaults,
actual defaults)
A monthly list of all loans issued to borrowers, with specific information (e.g. size, rate, risk,
payment status, industry, geography etc.)

All this data can be found on the P2PFA website: http://p2pfa.info/data

This data allows borrowers and investors to make informed investment decisions based on the
performance of the platform. In this way, again, transparency and disclosure direct how platforms
protect the interest of consumers.

Q11: Marketplace lending potentially offers significant benefits and

value to borrowers, but what harms might online marketplace
lending also present to consumers and small businesses? What
privacy considerations, cybersecurity threats, consumer protection
concerns, and other related risks might arise out of online
marketplace lending? Do existing statutory and regulatory regimes
adequately address these issues in the context of online marketplace
lending?
There are, of course, real risks to consumers when consumers money is involved. There is always a
risk that firms will take advantage of consumers through a lack of clarity or transparency. Given this
risk, the P2PFA has imposed self regulation through its Rules and Operating Principles (See Appendix
I) and also argued since launch that the industry should be formally regulated. However, if regulation
stifles innovation it will restrict the growth of the industry, and therefore will be detrimental to both
SMEs and the consumers who are to be protected. The FCA is required to recognise these conflicting
needs by virtue of their statutory objectives which include:
1. Securing an appropriate degree of protection for consumers, and
2. Promoting effective competition in the interests of consumers
The regime introduced by FCA in the UK finds a good balance, and this has been reflected in
continued strong growth in the industry.
At a high level, the rules that apply to platform lenders are principle based, as opposed to rule
based. Key principles such as treating customers fairly and being fair, clear and not misleading
(see Appendix II for full list). These principles are supported by some specific rules. However, where
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specific rules are not clear, the principles apply. This ensures adequate protection for consumers,
without placing unnecessary and unintended burdens on platforms.
In addition, the FCA sets IT systems and controls standards, and data protection standards in order
to ensure systems will not fail and consumer data is protected.
Examples of rules that can inhibit growth
The P2PFA believes that the rules introduced by the FCA are fair and proportionate, which has
allowed alternative SME & consumer lending to grow quickly. However, some statutory rules in
other EU countries do not adequately address risks to consumers as they go too far and thereby
restrict the growth of an industry that has a positive impact on consumers and the economy as a
whole. These failures are most clearly seen as the UK represents ~85% EU platform lending.
Below, we outline three restrictions from some European markets and their impacts on platform
lending:
1. Investor limits reduce the funds available to lend to SMEs. Instead, platforms should make
consumers aware of the risks, so they choose how much to invest themselves. Indeed, in
some cases, lending more can reduce risk by creating a diversified portfolio;
2. Barring institutional investors from lending to SMEs via platforms significantly reduces the
funding available to SMEs;
3. Disclosure requirements: in some states platforms must collect information that is
unnecessary for the credit assessment and is difficult for SMEs to provide, thereby
discouraging SMEs from applying

Q12: What factors do investors consider when: (i) investing in notes

funding loans being made through online marketplace lenders, (ii)
doing business with particular entities, or (iii) determining the
characteristics of the notes investors are willing to purchase? What
are the operational arrangements? What are the various methods
through which investors may finance online platform assets, including
purchase of securities, and what are the advantages and
disadvantages of using them? Who are the end investors? How
prevalent is the use of financial leverage for investors? How is
leverage typically obtained and deployed?

UK investors make loans directly to borrowers via direct contracts without an intermediary step ie
there is no concept of notes. This is a very clean solution. Leverage may be obtained by the
investor holders of loan contracts, rather than the platforms themselves. This is not prevalent, but
has started to occur on some platforms where assets are deemed to be of high quality.

11

Q13: What is the current availability of secondary liquidity for loan

assets originated in this manner? What are the advantages and
disadvantages of an active secondary market? Describe the efforts to
develop such a market, including any hurdles (regulatory or
otherwise). Is this market likely to grow and what advantages and
disadvantages might a larger securitization market, including
derivatives and benchmarks, present?
There are several options to provide liquidity to investors.
1. Maturity liquidity: investors loan portfolios are re-sold to other investors at a pre-agreed
point
2. Fast returns: an investors portfolio is re-listed on the investor marketplace at any point as
chosen by the investor
3. Secondary market: a secondary market on which investors sell individual loans to other
investors
Secondary liquidity is beneficial to investors, but it should not be a requirement (other than at
maturity). We believe, in support of the FCAs approach, that protection of consumers should be
based on adequate and clear communication, which allows investors to make the investment
decision themselves. Platforms must therefore make clear to investors the level of secondary
liquidity available. Any required secondary liquidity is likely to lead to negative outcomes for
consumers, who may have to discount their investments significantly to benefit from guaranteed
liquidity.
HMT has also stated that secondary liquidity (in the form of a secondary market, or otherwise) can
provide liquidity to investors, but should not be a requirement.
Imposing a requirement to operate a secondary market, or any requirement on the provider to
guarantee the sale of a loan at market value, risks placing disproportionate costs on platforms -
particularly new platforms - and is unlikely to be effective in ensuring consumers can liquidate
without facing potentially significant losses. The government has therefore decided not to require the
existence of a secondary market.7

Q14: What are other key trends and issues that policymakers should
be monitoring as this market continues to develop?
Platform credit performance vs expectation set is a key measure for the industry.

APPENDIX
Appendix I: P2PFA Operating Principles
Introduction

7

HMT, Response to ISA consultation, July 2015

12

1.

These Operating Principles set out the standards of business conduct that apply to all
members of the P2PFA. They align with, and in some areas supplement, the current
FCA requirements for loan-based crowdfunding (peer-to-peer lending).

2.

These Operating Principles are subject to review by the P2PFA Board from time-totime.

High-Level Principles
3.

P2PFA members must comply with the following high-level principles in all their
undertakings:
a)
b)
c)
d)
e)
f)

operate their business with technical and professional competence;

run their business with integrity;
transact with customers in an honest and fair way;
be transparent about how their platform works;
promote and maintain high standards of business practice; and
commit to provide good value financial service products to retail consumers

Specific Operating Principles

Clarity and Transparency
4.

All marketing and promotional material must be clear, balanced, fair and not
misleading and set out both the risks and benefits of peer-to-peer lending. Platforms
must not claim that investors returns are guaranteed8.

5.

Platforms should set out in a clear and balanced way the information that enables
customers and prospective customers, whether lenders or borrowers, to make an
informed decision1.

6.

P2PFA members are required to publish the following information on publically

available pages of their website (apart from 6(c) which platforms may make available
to registered customers or members only):
a) Bad debt rates: Platforms must disclose their definition of bad debt and the last
five years credit performance as set out in the following table, unless an
exception due to the operating model is agreed:
2011

2012

2013

2014

2015

Actual arrears as % of outstanding

balances
Total amount of payments more than 45 days late but not defaulted, as a percentage
of all outstanding balances from loans made in a calendar year.
Actual lifetime bad debt rate
Total bad debt (defaults less actual recoveries) over the lifetime of the loans as a

8

Relevant FCA Rules; Conduct of Business (COBS) Source book: Rule 4.2.1 and Consumer Credit (CONC) source book: 3.3.

13

percentage of amount lent in a calendar year (NB this is not an annualised number).
Estimated lifetime bad debt rate
Estimated lifetime bad debt rate (defaults less recoveries) as a percentage of amount
lent in a calendar year.

b) Returns performance: Platforms must disclose their methodology for

calculating returns and show the last five years historic returns (in line FCA
Financial Promotions9) as set out in the following table, unless an exception due
to the operating model is agreed:
2011

Origination year
2012
2013
2014

2015

Amount lent ()
Actual annual return to date of loans in
origination year (%, after fees and bad
debts)
Estimated annual return at origination
(%, after fees and bad debts)
Realised %10 (principal repaid
excluding bad debts)

For platforms with a fund to cover bad debts the following additional fields to be
added:
Origination year
2011
2012
2013
2014
2015
Actual annual investor return to date
(%, after fees and bad debt fund
compensation)
Bad debt fund usage (%, bad debts in
year as a % of fund raised in year)

c)

Full loanbook availability: Platforms should publish full data on their loanbook.
This is a loan by loan view of the portfolio of loans originated through the platform
and must include but not be limited to: loan ID, borrower ID (or linked loans), date
accepted, loan amount, gross rate, term, security, use of funds (inc lending for
money lenders), sector, country, status (e.g. late, bad debt), repayment type (e.g.
fully amortising). Loans shown in the loanbook should be for loan contracts that
the platforms lenders are directly lending to (as opposed to loans that a borrower
(money lender) may make and held as security). The loanbook data must be
updated at least monthly and consistent with the other data requirements.

COBS 4.6.2.

10

Realised % is not applicable for short-term lenders where average duration < 90 days.

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Platform information for lenders and prospective lenders should include:

(a)

expected returns net of fees and defaults and the circumstance under which
this rate is achievable;

(b)

details of any fees and charges that may be payable;

(c)

a clear warning that capital is at risk and that there is no FSCS cover;

(d)

where lender money will be lent in general terms (e.g consumer loans, SME
loans, property loans, UK/non UK loans, or if mixed how the loan book is
constituted);

(e)

how money is treated after a lender transfers it to the platform;

(f)

how any automatic function works such as auto-lend/auto-bid/auto-reinvest

(g)

the typical time taken to lend out money and the ease and process for
withdrawing money;

(h)

the operation of any provision fund and the risks involved;

(i)

the proportion of individual consumer funds deployed in the loan book (i.e
money thats not from institutions or platforms own money);

(j)

an overview of the checks the platform performs on borrowers and a clear

explanation of how risk rates are calculated;

(k)

any conflict of interest in any of the loans and how conflicts of interest are
managed;

(l)

any minimum level of investment and whether non UK lenders are accepted;
and

(m)

the applicable tax treatment.

If any of these do not apply to the circumstances of the platform it will explain and
provide such information as is relevant and material to a lenders informed decision
about whether to invest.
8

Information for borrowers should be equivalent to that required by FCA regulation and
in particular include;
(a)

details of any specific fees and charges and interest rate payable;

(b)

information on whether the loan can be repaid early and if so on what terms;

If any of these do not apply to the circumstances of the platform it will explain and
provide such information as appears relevant and material to a borrowers informed
decision about whether to borrow.
9

Publically available platform information must include:

(a)

details of the full complaints procedure;

(b)

details of the senior management team;

(c)

the legal form of the business, location of head office and date of launch;

(d)

details of the arrangements in place in case of business failure; and

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(e)

any material changes to their business which impacts customers.

Risk management by the platform.

10

Platforms must demonstrate compliance with regulatory requirements or, if

unregulated, should adopt similar arrangements that effect equivalent consumer
protection.

11

Credit risk management. Members shall operate a prudent and robust policy to
manage credit risk and undertake sufficient assessment to satisfy themselves that
those who borrow can properly afford to do so. The objective should be to ensure
default rates remain broadly within published estimates. Each member should be able
to explain their credit risk management approach coherently to a customer. Soft
credit risk searches should be performed on prospective consumer borrowers11.

12

Anti-money laundering and fraud prevention. Members must comply with

applicable anti-money laundering regulations and such other anti-fraud measures as it
reasonably considers appropriate and in line with best practice, such as membership
of a fraud prevention service. Non-FCA regulated platforms should ensure their
AML/Fraud prevention systems are independently audited each year12.

13

Client money management. Members shall segregate their customers funds from
members own funds and company assets, in a segregated bank account, which is
designated to show that it is an account held for the purpose of safeguarding
customers funds and used only for holding those funds (Segregated Account) in
accordance with applicable FCA client assets and money requirements or equivalent.
This segregated bank account should be audited annually by the companys external
auditors13.

14

IT systems and controls. Members must ensure that their overall information
technology (IT) strategies and systems are secure, reliable and proportionate to the
nature, scale and complexity of their business and are sufficiently robust and fit for
purpose. Members should operate systems that minimise the risk of IT failures or data
theft14.

15

Records and documents management. Members should retain appropriate records

for regulatory reporting purposes, responsible management of the business and fair
treatment of customers. Members must safeguard and protect the privacy of customer
information in line with data protection requirements15.

11

Relevant FCA Rule; Senior management arrangements, systems & controls (SYSC) sourcebook: Rule 7.1 Risk control.
Relevant FCA Rules; SYSC 3.2.6 Systems and controls in relation to compliance, financial crime and money laundering
and SYSC 6.3.1 Financial crime.
13
Relevant FCA rule: Client assets (CASS) sourcebook: Rule 7.13 Segregation of client money.
14
Relevant FCA Rule; SYSC 3.1.1 Systems and Controls.
15
Relevant FCA Rules; SYSC 9.1 General rules on record keeping and Conduct of Business (COBS) sourcebook 9.5 record
keeping and retention period for suitability records.
12

16

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Bad debt recovery. Bad debt recovery should be undertaken in accordance with
acceptable industry wide standards of responsible business practice.

17

Orderly wind-down. Members must make arrangements to ensure the orderly

administration of the business and run-off of its customers contracts in the event the
member or the members platform ceases to operate. Such arrangements should be in
line with regulatory requirements16 and either a suitably-governed entity established by
the firm to run down the loanbook or a reputable third party that has;
- sufficient manpower to administer the contracts in run off;
- a suitable collection and payment process for repayments;
- a suitable disbursement process for net proceeds due to lenders;
- the ability for customers to communicate with the operator;
- maintenance of requisite licence approvals;
- compliance with applicable law, regulations; and
- allowance for office and sundry expenses.

Governance and Controls

18

The governance of member businesses should comply with established principles of

corporate governance in a proportionate way17.

19

Members should designate senior managers who have accountability for managing
key risk areas and ensure the fair treatment of customers18.

20

Each member should have at least one director that they are prepared to nominate to
the Financial Conduct Authority as the member's Approved Person19.

21

Members should not unduly discriminate between any category of lender and, in
particular, should not operate in any way that disadvantages retail investors.
Members should be clear and transparent if certain loans are not available to individual
consumers e.g higher risk loans20.

22

Members may lend their own money on their platform, provided that any conflict of
interest is effectively managed21.

23

Members should not borrow or raise funds through their p2p lending websites or
platforms. Shareholders and employees can lend and borrow on an arm's length
commercial basis.

16

Relevant FCA rules; Supervision (SUP) sourcebook: SUP 6 Annex 4 Additional guidance for a firm winding down (running
off) its business.
17

Relevant FCA rule; FCA principle 3 Management and control.

Relevant FCA rules: Conduct of Business (COBS) sourcebook: Rule 4.2.1 and consumer credit (CONC) sourcebook 3.3.
19
Relevant FCA rules: FCA Principle 3 and SYSC 2.1. Appointment of responsibility.
20
Relevant FCA rules: FCA principle 8 Conflicts of interest and Principle 6 Treating customers fairly.
21
Relevant FCA rule: FCA Principle 8 Conflicts of interest.
18

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Members will maintain capital reserves equivalent to those specified by regulation and
audited annually by a reputable firm of accountants22.

25

Members should have a clear complaints handling policy that seeks to resolve
customer complaints or expressions of dissatisfaction about the members activities in
a fair and timely way. Members must inform its customers about its complaints policy
and legal right to refer a complaint to the Financial Ombudsman Service23.

Providing data to the P2PFA

26

Quarterly lending data must be submitted to the P2PFA secretariat by the 10th of the
month after the end of the quarter. The table below sets out the required data:
Term

27

Definition

Cumulative lending

Total amount lent to individuals/firms since platform

was established at end of period

Outstanding loan book

Total amount of principal at end of period.

New lending

Amount originated in period

Capital repaid

Capital repaid in the period

Net Lending

New lending- Capital repaid

Number of current lenders

Number of lenders that have more than 1 lent out

at end of quarter

Number of current
borrowers

Number of borrowers with a loan as at the end of

the quarter

Members should provide confidential data to the P2PFA secretariat on customer

complaints by number, type and outcome on a quarterly basis.

Waivers and Disclaimer

28

A firm may seek a waiver from any of the specific operating principles, but the member
will need to demonstrate that their alternative approach is consistent with the high level
principles. Waivers are subject to the approval of the independent directors and will be
published unless the independent directors agree otherwise.

These Operating Principles were updated June 2015 and are not intended to confer a
benefit on any third party and no person other than a party may enforce the terms of these
Operating Principles by virtue of the Contracts (Rights of Third Parties) Act 1999 or any
other such law or regulation.

22
23

Relevant FCA rule: General Prudential (GENPRU) sourcebook: Rule 2.2 Capital resource.
Relevant FCA rule: Dispute resolution: complaints (DISP) sourcebook: Rule 1.3.1 Complaints handling rules.

18


Appendix II: FCA Principles
1 Integrity

A firm must conduct its business with integrity.

2 Skill, care and diligence

A firm must conduct its business with due skill, care and diligence.

3 Management and
control

A firm must take reasonable care to organise and control its affairs responsibly and
effectively, with adequate risk management systems.

4 Financial prudence

A firm must maintain adequate financial resources.

5 Market conduct

A firm must observe proper standards of market conduct.

6 Customers' interests

A firm must pay due regard to the interests of its customers and treat them fairly.

7 Communications with
clients

A firm must pay due regard to the information needs of its clients, and communicate
information to them in a way which is clear, fair and not misleading.

8 Conflicts of interest

A firm must manage conflicts of interest fairly, both between itself and its customers and
between a customer and another client.

9 Customers: relationships A firm must take reasonable care to ensure the suitability of its advice and discretionary
of trust
decisions for any customer who is entitled to rely upon its judgment.
10 Clients' assets

A firm must arrange adequate protection for clients' assets when it is responsible for
them.

11 Relations with
regulators

A firm must deal with its regulators in an open and cooperative way, and must disclose to
the appropriate regulator appropriately anything relating to the firm of which that
regulator would reasonably expect notice.1

19