1Allens is an independent partnership operating in alliance with Linklaters LLP.

Peer-to-Peer Lending – A disruptive

marketplace lending phenomenon

Credit Law Conference

Gavin Smith

Partner, Allens

7 October 2015

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Overview

What is P2P

Lending

State of the

market

Regulatory framework

Case studies

Peering ahead

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What is P2P Lending?

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What is Peer-to-Peer lending?

A mechanism to connect people or businesses who want to borrow

money with investors who want to lend money, without going

through a traditional financial intermediary such as a bank or

financial institution.

In what sense disruptive…?

• lower cost to borrower

• lower operating costs

• expanded market

• lower spec?

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State of the Market

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Peer-to-Peer – State of the Market

United States

Market worth US$14bn by end of 2014

Up 128%

Key players: LendingClub, Prosper

Lending Club - $4.97bn market cap

United Kingdom

market worth £3.15bn, 2015 (Q2)

key players: Funding Circle, Zopa, RateSetter

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Peer-to-Peer – State of the market

Australia – still comparatively small

market approx AU $20m

key players: SocietyOne, RateSetter

But new players all the time

Morgan Stanley

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Peer-to-Peer: Global market projections

“The [global] market could reach $150 billion

or higher by 2025.”

- PwC, February 2015

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Peer-to-Peer: Australian market projections

By 2020 we could see …

- Morgan Stanley Blue Paper, 'Global Marketplace Lending: Disruptive Innovation in Financials' (May 19, 2015)

Lending to consumers:

$10.4bn

Lending to small businesses:

$11.4 bn

Total P2P lending: $22bn

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Regulatory Framework

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Regulatory Framework

• Registered MIS (Chapters 5C and 7 of Corporations Act)

• Unregistered MIS (Chapter 7)

Managed Investment Schemes

• AFSL holder or authorised representative of AFSL holder

• Net tangible assets requirements

Australian Financial Services

Licence (AFSL)

• Offering credit arrangement to consumers

• NCCPA 2009 (Cth)ACL

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Regulatory Framework Cont’d

• Anti-Money Laundering and Counter Terrorism Financing Act 2006 (Cth)

• AML/CTF RulesKYC

• Part IIIA of the Privacy Act

• Comprehensive Credit Reporting?Credit Reporting

• Collection and use of personal information generallyPrivacy

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Peer-to-Peer – Challenges for ASIC

• Or ‘marketplace lending’ as ASIC prefers to call it

• Regulatory approaches

Internal working group comprising of licensing and stakeholders

Innovation Hub – helping start-ups and businesses to navigate

regulatory system

Publishing industry and consumer guidance

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Case Studies

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Case Study – Society One

Source: SocietyOne Submission to the Financial Services Inquiry

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Society One

Unregistered MIS. Wholesale,

sophisticated investors only – no

retail investors

Holds own ACL

Authorised representative of

Ironbark Asset Management – does not hold own AFSL

Investor chooses “grades” of loan to

invest in, not individual borrowers

or loans

Default risk managed by fractionalising investment funds

across multiple loans. 40 investors per loan.

Minimum investment: $25,000

Loans - $5,000 minimum to $35,000

maximum Livestock speciality –

secured loans

Average gross yield for investors: 11.5%

before defaults and impairments (8 – 10%

after)

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Case Study - RateSetter

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Ratesetter

Registered MIS with detailed PDS. Retail investors as well as wholesale investors.

Holds own ACL and AFSL

Investor chooses to lend into a particular lending “market” – 1 month or 1/3/5 years

Investments could be matched to a single

loan or small number of loans, depending on how rates are matched

Default risk managed by operation of the

Ratesetter “Provision Fund”

Minimum investment: $10

Loans - $2,001 minimum to $35,000

maximum

Strategic equity investment from Carsales.com -

channel for lending products

3 year market yield for investors: 8.5% before

any defaults

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Peering ahead - the

international context

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The international context

US

Consumer credit regimes –

Dood_Frank Act; Truth in Lending Act

Lending and funding – SEC registration of

“platform notes”

UK

FCA review of crowdfunding regulations;

concluded no need for regulatory

change

FCA scrutiny over advertising terms –

“savings”, “guaranteed”

NZ

Specific P2P lending services licences under

Financial Markets Authority

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Questions and discussion

@AllensLegal // @GSmith_Allens