Rules stymie lending plan
Peer-to-peer lending hopefuls are facing a fight against regulations that could limit the size of their loans and prevent them from expanding into mortgage lending.
New Zealand is unusual in not yet having legalised peer-to-peer (P2P) lending, where businesses provide what is in essence a matchmaking service, bringing together people who want to lend their money for a profit and people who want to borrow it.
In some countries, such as the United States and the United Kingdom, where bank deposit rates are very low, P2P lending has grown rapidly.
But proposals for regulating the nascent industry in New Zealand, where several P2P lenders are ready to launch, would limit the size of loans to $50,000, while limiting the amount any person could lend to $10,000 a year.
Online startup Nexx, which hopes to become one of the first P2P lenders, strongly argues against the caps proposed by by the Ministry of Business, Innovation and Employment, which also appears to regard P2P lending as unsecured, says founder Ben Milsom.
"I'm not sure why they're looking down that road," he says. "No other jurisdiction has those limits, except in some states in the US.
"We'll be submitting strongly on those points. If there's pushback, then I think we'll argue for a tiered option that allows for some kind of investor accreditation or self-certification that they're OK to exceed those $10,000 limits."
The "pessimistic" timeline for regulations to be in place so that P2P lenders like Nexx and Lendit can begin facilitating loans is the first quarter of 2014, he says.
That is too long and requires Nexx's investors to be very patient, although they have indicated their continued support at Nexx's annual meeting just before Christmas.
Milsom is not alone in that view. John Walley, chief executive of the New Zealand Manufacturers and Exporters Association, is also founder of the Lendit P2P service, which was shut down after its launch in 2009.
Walley is frustrated that things are moving so slowly, and does not rule out launching again, now that the Government has indicated the likely substance of P2P regulations.
He attributes the slowness to several things, including the national psyche.
"There is still a (small "c") conservative comfort in New Zealand which says, ‘Things are not wonderful, but they are not that bad. Do we really need to stir things up?' "
P2P lending has the potential to put downwards pressure on the cost of personal and car loans, he says, adding that the banks are making far too much money.
The idea that ordinary people could begin making loans through online loan facilitators such as Nexx and Lendit, which would take a margin for their services, is not a new one.
Around the world, it has been growing in power, particularly in countries where bank lending has slowed, leaving a gap in the market, but the ministry's proposals appear to view P2P lending as something that should be kept small, in part because of the risk of lenders losing money.
The common P2P model is that lenders shop on an online platform for prospective borrowers, who have been identity and credit checked by the P2P business, which is also responsible for collecting loan repayments.
The ministry says many P2P lending services are provided primarily, or exclusively, to facilitate the making of small, personal loans.
"If this is the focus of the exemption for licensed person-to-person lending services, there may be a case for a relatively small cap on the size of loans - for example, $50,000 or less over a 12-month period," it says.
"This would be expected to significantly reduce the degree of regulation that needs to be imposed on licensees and directly or indirectly on borrowers, compared to if a much larger cap is adopted."
To be the offerer of a full-blown P2P lending platform, a business would need to be licensed as an "intermediary" under the Financial Markets Conduct Bill, which could be passed in the next couple of months.
The reason for licensing is to be able to ensure quality controls, which can be used to exclude or later remove flawed operators from the market.
The ministry believes regulations should require P2P intermediaries to:
- Operate in a fair, orderly and transparent way.
- Have robust mechanisms for establishing the identity and credit-worthiness of borrowers.
- Have and disclose client agreements.
- Use segregated trust accounts.
- Limit the size of loans to each borrower and the amount that can be lent by each lender.
- Have a contingency plan for the repayment of lenders in the event the provider ceases operating.
The ministry says regulations should not stifle innovation, something that makes both Milsom and Walley chuckle, given the grind to launch and the costly wait they have experienced.
However, the ministry warns that there is a very real risk that lenders will find it hard to distinguish between P2P operators and will end up losing money.
- © Fairfax NZ News