What Is the Investment Issue? Lending marketplaces, commonly called peer-to-peer lending platforms, are a significant recent fintech innovation. We represent both lending platforms and loan investors in whole loan purchase programs, as well as commercial banks, investment banks and borrowers in the. several UK marketplace lenders, banks and investment managers. Deloitte also developed a UK 'MPL opportunity- assessment model', comparing the lending. CRYPTO MARKET PREDICTION 2019
RG Marketplace lending providers need to consider how they have set up their platform, the different entities involved in operating the platform and the activities they engage in, who needs to hold a credit licence and what authorisations those persons will need. For example, if: the marketplace lending provider enters into the loan contracts with borrowers as trustee for the investors, it will be the credit provider and will need a credit licence with an authorisation to 'engage in credit activities as a credit provider' the marketplace lending platform is structured as a registered managed investment scheme and uses a custodian to enter the loan contracts as trustee for the investors, the custodian will be the credit provider.
In this case, the custodian will need a credit licence with an authorisation to 'engage in credit activities as a credit provider', and the marketplace lending provider may also need a credit licence with an authorisation to 'engage in credit activities other than as a credit provider', and the marketplace lending platform facilitates loans that are entered directly between the investors and the borrowers, the investors will be the credit providers and may need to hold a credit licence to engage in those activities.
The marketplace lending provider would need a credit licence with an authorisation to 'engage in credit activities other than as a credit provider' Credit licensees need to comply with responsible lending requirements set out in Chapter 3 of the National Credit Act. These requirements apply before a credit licensee enters a loan with a consumer or assists a consumer to apply for a loan. We have provided guidance on the circumstances in which the responsible lending obligations will apply and what those obligations involve in Regulatory Guide Credit licensing: Responsible lending conduct RG In general, the responsible lending obligations involve making inquiries that will enable the credit licensee to: understand the particular consumer's financial situation, and their requirements and objectives for the loan verify the information about the consumer's financial situation, and use that information to assess whether the loan would be unsuitable for the consumer.
If a custodian is the credit provider for loans entered through a marketplace lending platform, and the marketplace lending provider is the person who assists consumers to enter those loans, both the custodian and marketplace lending provider will have their own responsible lending obligations and liabilities if the obligations are not met. While in practice the marketplace lending provider may perform the inquiries, verifications and assessments for the custodian as its agent, the custodian will still be responsible for fulfilling these obligations.
In addition to the assessment obligations, there are requirements to provide disclosure documents to consumers at various stages of the process of obtaining credit. We have provided information on the broader range of responsible lending disclosure obligations in RG and Information Sheet Responsible lending disclosure obligations - Overview for credit licensees and representatives INFO Note: On 25 September , the Government announced proposed reforms to the responsible lending obligations contained in Chapter 3 of the National Credit Act.
The proposed reforms will amend the obligations that apply before entry into a credit product or the provision of credit assistance. National Credit Code requirements The National Credit Code provides a consumer protection framework for consumer loans, and includes: upfront and ongoing disclosure requirements caps on the cost of loans requirements when ending and enforcing a loan, including collection activities advertising requirements, including requirements about using comparison rates in advertising, and requirements for dealing with borrowers whose circumstances have changed and who are now unable to meet their repayment obligations because of hardship.
These obligations apply to all credit providers who provide consumer loans, including credit providers who are exempt from holding a credit licence. Marketplace lending using other business structures While we have outlined the obligations relevant to the operation of a managed investment scheme, we note that other business structures may be used by marketplace lending providers.
These structures may attract other obligations under the Corporations Act, for example: Where debentures are issued to retail investors, a prospectus may need to be issued see Chapter 6D of the Corporations Act and, Chapter 2L of the Corporations Act will apply. Where the loans are debentures issued by borrowers, and the platform facilitates offers being made to investors to acquire these debentures, the product provider may be operating a financial market as defined in section A of the Corporations Act.
This generally includes a facility through which offers to acquire or sell financial products are regularly made. In these circumstances, an Australian market licence or exemption will generally be required for more information on when an Australian market licence is required, including the meaning of relevant terms such as 'regularly': see Regulatory Guide Financial markets: Domestic and overseas operators RG Where the marketplace lending provider issues securities other than debentures with an economic exposure based on particular lending arrangements, a prospectus may be required: see Chapter 6D of the Corporations Act.
Marketplace lending providers will need to ensure that they understand and comply with the obligations relevant to their particular business structure. Applications for relief In particular circumstances a marketplace lending provider may be able to demonstrate that it would be unreasonably burdensome to comply with a requirement under the Corporations Act or National Credit Act and Code.
Guidance on how to make an application for relief, and information that should be included in an application is set out in Regulatory Guide 51 Applications for relief RG 51 and other relevant regulatory guides such as Regulatory Guide Funds management: Discretionary powers RG Some examples of relief that we have granted to marketplace lending providers is set out below: relief from the withdrawal requirements section GA 4 and Part 5C. This relief was granted in circumstances where each member had a separate portfolio that comprised a separate class of interest.
For additional information see Report Overview of decisions on relief applications June to September REP relief from the requirement to seek registration of a separate managed investment scheme for each loan entered into through the lending platform, and relief from the requirement to treat the underlying assets of a provision fund operated in connection with the lending platform as scheme property of the scheme. Disclosure obligations If retail investors will be acquiring an interest in a managed investment scheme, a Product Disclosure Statement PDS will need to be prepared by a marketplace lending provider and provided to investors: see Part 7.
Marketplace lending providers must ensure that the PDS complies with the content requirements of the Corporations Act. Marketplace lending providers may also have ongoing disclosure obligations to retail clients under the Corporations Act. These include: ongoing disclosure of material changes and significant events to retail investors section B or the continuous disclosure obligations in sections — Marketplace lending providers should assess whether their ongoing disclosure obligations require them to provide investors with ongoing information about the status of the loans and any source of protection for investor losses to assist investors to understand their investment.
Even if it is not required in certain circumstances, you may wish to consider providing this information as a matter of good practice provision of periodic statements to retail investors section D , and confirming transactions section F. Advertising of marketplace lending products We recognise that advertising content and delivery have an important role in attracting investors and promoting a marketplace lending product's benefits and features.
It is important that 'promoters' ensure that advertising material is clear, accurate and balanced. A promoter includes the product issuer and credit provider and can be a third party such as a financial adviser, credit service provider, distributor or agent. We note that promoters of financial products, financial advice services, and credit products and services, have a legal obligation to not make false or misleading statements or engage in misleading or deceptive conduct in relation to these products and services.
This includes the promotion of marketplace lending products and services. Regulatory Guide Advertising financial products and services including credit: Good practice guidance RG contains good practice guidance to help promoters understand their legal obligations. RG is relevant to advertising material that is communicated through any medium and in any form. In the case of marketplace lending products, this can include: magazines and newspapers the internet e.
It is also important that investors are encouraged to seek further information about the product — in particular, by reading the PDS before deciding to invest. Under the Corporations Act, if the product is promoted to retail investors, the content of advertising or other promotional material must indicate that a PDS is available, where it can be found, and that the investor should consider the PDS in making decisions about acquiring the product section A.
Specific advertising concerns Promoters of marketplace lending products should, when considering their obligations in relation to advertising, ensure that the content and delivery of advertising and other promotional material fairly represents the product, for example: If the advertising implies it is giving an overall summary of the key features of the product, it does not merely focus on the benefits of the product e. Comparisons with other products are clearly explained.
Comparisons with dissimilar products that falsely imply similarity, and use of terminology that could create a false and misleading impression about the product are avoided. Any reference to ratings of borrowers' creditworthiness does not create a false and misleading impression that they are similar to ratings issued by traditional credit rating agencies.
For this reason, alphanumeric ratings that are similar to those used by traditional credit rating agencies e. AAA and BBB should not be used to describe the creditworthiness of borrowers in the context of marketplace lending. To the extent that marketplace lending promoters wish to describe the creditworthiness of borrowers quantitatively, any quantitative description should be accompanied by qualitative information to explain what the quantitative descriptor means.
While marketplace lending offers borrowers an alternative to borrowing money from other sources, such as a bank, it would not be appropriate for any comparison to be made between marketplace lending products offered to investors with products offered to consumers of banking products, such as saving accounts and term deposits. Words such as 'savings', 'saver' or other terms used in relation to banking products should be avoided in advertising or disclosure for marketplace lending products.
In comparing interest rates or returns that investors may earn by investing in marketplace lending, it is important the comparisons do not create an impression that the product's returns are comparable to term deposits or other banking products. Investors should understand upfront the role they have in selecting the particular borrower that they are matched to, particularly, in circumstances where the platform facilitates the selection of the borrower which may be consumer or a business.
Registration of security Marketplace lending providers may facilitate secured loans. In such cases, providers would be expected to take all reasonable steps to register and protect any security interests, including registration on the Personal Property Securities Register or, if appropriate, the Torrens Title Register.
Failing to correctly register the security may be inconsistent with the marketplace lending provider's duties as a responsible entity. We consider that marketing loans as secured loans when they are not, or marketing the loans as secured when the security has been incorrectly registered or it has negligible value, would be misleading. Good practice examples Marketplace lending products are a relatively new product in Australia.
As such, it is important and in the interests of marketplace lending providers to ensure that investors understand marketplace lending products and the relevant risks. As a matter of good practice marketplace lending providers may wish to consider one or more of the following strategies to assist investors in understanding marketplace lending products and relevant risks: refer investors to the marketplace lending information available on our Moneysmart website provide investors with an appropriately designed risk warning statement.
Testing of the risk warning statement may help to ensure its effectiveness provide investors with an optional 'knowledge test for investors' to assess their understanding of the product before they invest provide the following information on the website: information about the policies and procedures for managing the selection of borrowers and ongoing monitoring of loans policies without disclosing commercially-sensitive information , and aggregated information about the loan book such as interest rates, loan amounts, term of the loans and whether loans are secured or unsecured.
We also encourage marketplace lending providers to read the information in Report Cyber resilience: Health check REP on managing online fraud and other cyber risks. A P2P loan is usually based on creditworthiness, and it must be repaid with interest over a set loan term. Previously, the peer-to-peer lending industry was lightly regulated. As a novel idea, P2P loans were largely exempt from the regulations and consumer protection laws that applied to personal loans issued by banks and credit unions.
However, that has changed. The U. This imposed a significant burden on lenders in terms of reporting and registration. For many, it became too difficult to implement, and many P2P lenders closed. Of the P2P lenders that continued to operate, most have moved away from working with individual investors and instead only utilize institutional investors.
P2P lenders typically have lower credit requirements than traditional lenders, so you can qualify for a loan even if you have less-than-perfect credit. With consumer P2P loans, interest rates can reach If you have an emergency need for money, an organization called the International Association of Jewish Free Loans could be a better place to turn than payday loans. Are P2P Loans Safe? For borrowers, P2P loans are quite safe. Platforms that offer P2P loans act as intermediaries between investors and borrowers.
However, that puts most of the risk on investors, rather than borrowers. Whether a peer-to-peer loan affects your credit score depends on the lender. Most P2P lenders have minimum credit score requirements and perform hard credit inquiries , and each inquiry can cause your score to drop.
One exception is crypto-backed P2P loans. These loans are secured by collateral and can be issued without credit checks, so there are no credit inquiries that can affect your credit.
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The existing execution or data analytics infrastructure for fixed income strategies e. Existing order management systems cannot handle execution in this asset class, because the origination platforms are not yet integrated with these systems and do not use FIX protocol or any other widely recognized standard for trading. Consequently, managers have several challenges scaling their investments within the asset class. There are three main challenges that institutional investors continue to experience and attempt to find solutions for: Accessing comprehensive data for loan analysis across origination platforms Finding and accessing marketplace lending origination platforms Developing a robust operational infrastructure to monitor, value, and benchmark investments.
Accessing Comprehensive Data for Loan Analysis Across Origination Platforms Many institutional investors review multiple origination platforms for different marketplace loans in order to better diversify their investments. However, it is quite challenging to efficiently access and analyze loan tapes across multiple origination platforms.
The loan tapes are typically provided in Excel and have different data points and sometime different calculations for the same data points e. As one can imagine, trying to combine and standardize hundreds of different data points from multiple Excel files is challenging without the appropriate infrastructure and technology. Investors would prefer to have a system that can easily aggregate the historical loan information in a unified format to allow investment teams to easily filter and analyze historical loan information.
Finding and Accessing Marketplace Lending Origination Platforms The current demand far outweighs the available supply of marketplace loans. Most investors do not have the resources to efficiently source the supply needed to scale their investments within marketplace lending. With hundreds of marketplace lending platforms in the U. Investors are finding that they cannot utilize their current technology and operational infrastructure to manage their existing strategies for marketplace loans.
As previously discussed, the traditional execution or order management systems currently do not provide execution services, portfolio management, risk analytics and comprehensive reporting systems on marketplace loans. As a result, investors will need to implement additional technology and operational infrastructure in order to support the full lifecycle of processing these loans. Portfolio management tools are critical for any asset class, including marketplace lending instruments.
Investors must track and value the hundreds and thousands of loans that they will have across multiple lending platforms. This requires the ability to easily aggregate and standardize data across multiple origination platforms. Additionally, institutional allocators will require independent third parties to calculate and value the portfolios in order to ensure that accurate management fees and performance fees are being charged by the funds. Marketplace lending investors must be able to benchmark their investments and show performance attribution in order to demonstrate whether and how alpha is generated in their portfolios.
Determining the appropriate benchmarks and analyzing attribution in marketplace lending loans is a difficult task that requires sophisticated technology given the many different calculations that must be performed. To determine the appropriate benchmarks, investors must analyze the vintage, grade, terms and portfolio weightings of the loans, and in order to calculate these different variables, investors must have access to extensive historical data and analytic tools.
The paper provides more detail on these key considerations for investors in marketplace lending assets, but I will provide a summary of the best practices here. Alpha vs. Beta Determination The first best practice is to determine whether a strategy is actively attempting to generate alpha or passively buying beta.
In order to generate alpha, investors must implement credit models to determine the best loans and then actively select those loans. Passive investors are not selecting specific loans and are effectively buying an index of loans, which is considered buying beta. Direct Platform vs. Securitization Investing The second best practice is to determine the appropriate method of investing in marketplace lending loans, whether it is purchasing the loans directly on the platforms or getting exposure through securitized bonds backed by marketplace lending assets.
There are different benefits to each method. Investing directly on the platforms allows for more transparency, higher level of portfolio customization and potentially higher yields and less volatility compared to investing in securitized bonds.
On the other hand, securitized bonds provides an easier way to purchase a portfolio of loans, the potential ability to short, and offers greater liquidity and lower cost to use leverage as compared to investing directly on the platforms.
Leverage Utilization The third best practice is to determine the leverage utilization. Investors must decide whether leverage will be used on the marketplace lending portfolio. If leverage is being used, investors must examine how much leverage and examine the cost of the leverage in order to ensure financing expenses are minimized. Investors will be able to better analyze and benchmark a portfolio of marketplace lending assets after understanding the leverage utilization.
Supply, Supply, Supply…Finding, Accessing and Acquiring The fourth best practice for investors is to understand the supply sources of marketplace loans. In order for investors to successfully invest in marketplace lending assets, they must be effective in finding, accessing and acquiring supply, which is currently very limited. In order to access supply, investors will be required to negotiate terms and documentation for rights to acquire the loans.
The process of acquiring or purchasing the loans is especially important for active strategies because it will require a robust order management system. Multi-platform Diversification The fifth best practice for investors is to diversify the origination platforms that they have exposure to. Diversification helps minimize counterparty risk by having exposure to multiple sub-asset classes across multiple platforms within marketplace lending. Counterparty risk within marketplace lending is the possibility of an origination platform becoming insolvent.
Portfolio Valuation The sixth best practice for investors is to properly value a portfolio. By opening the door to large segments of previously inaccessible borrowers, marketplace lending presents an obvious attraction to investors.
Its breadth of opportunities includes: Attractive investment returns that are not directly correlated to traditional stock and bond markets Access to an ever-growing number of financiers and platforms looking to enter or expand into different markets Alignment with an institutionally accepted, albeit less regulated, investment arena The function of P2P trading operates independently of stock exchanges, creating a buffer against market volatility.
This non-correlation makes marketplace lending an excellent channel for investment portfolio diversification and for finding attractive returns with relatively low to moderate risk. According to the platform Lendingclub. The simplicity of these platforms makes it easy for almost anyone to participate. In addition, hedge funds and registered closed-end fund managers have established programs with a proactive, bespoke approach to investing in the market.
These programs are attracting a number of high-net-worth individuals and institutional investors. As such, there are a few things savvy investment managers, and their investors, should consider to cultivate success and position themselves for attractive returns in this sphere.
These parties can provide the talent, resources and expertise to support specific operational needs and help foster security and peace of mind. Marketplace lending custodian: Holds fiduciary assets on behalf of the fund, which serves as an additional layer of protection for the investors. Custodians, as a whole, have been slow to enter the marketplace lending space. Their hesitancy is understandable given the conflicting interests P2P seemed to pose to the banking industry when it first came on the scene.
Now that the maturity and credibility of these platforms has been vetted over time, more custodians are finding ways to expand their services to support them. Administrators, on the other hand, have a long history of helping investment managers navigate marketplace lending. Over that time, the technology and services they offer have improved considerably.
In fact, there are many marketplace lending administrative offerings available today that were unheard of even two or three years ago. As a best practice, fund managers, along with experienced operational professionals, should look for an administrator that invests heavily in technology to ensure comprehensive and reliable service delivery.
Flexible portfolio position reporting is preferable so data can be aggregated and drilled down according to specific criteria for analysis. The best administrators will spend time learning what you need and craft customized solutions that make transparency paramount.
Enhanced technology increases transparency Because of a lack of better options, many managers and their administrators have come to rely on the marketplace lending platforms themselves to provide aggregation data — usually totals of principal and interest received, write-offs, adjustments, etc. These generalized statistics are helpful in a broad sense, but the lack of detail presents many limitations for full transparency and for fully understanding current, and potentially future, performance.
As the investor side of P2P lending becomes more institutionalized, managers are seeking more look-through into the lending platforms. To meet this need, some administrators have implemented technology only recently available to support independent tracking and analysis of each fractional loan interest. New technology also enables some administrators to offer loan data dissection that goes well beyond mere aggregate-level accounting.
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