Financial Conduct Authority (FCA) Chief Executive Andrew Bailey gave a Parliament Treasury Committee a crash course on Crowdfunding 101 this past June. The letter by Bailey was recently posted on the Treasury Committee website, along with a statement from Andrew Tyrie MP, Chairman of the Committee, who questioned “government subsidies”;
“On the basis of this correspondence, the risks associated with crowdfunding platforms appear to be restricted to those using the platforms to lend or invest. Government policies to promote the crowdfunding sector may have the right intention – to increase competition in the SME lending market – but government tax incentives, in effect government subsidies, may be encouraging some consumers into the use of inappropriate products. The FCA needs to be alert to these risks. The Government may need to reconsider these tax incentives.”
Tyrie’s vague comment regarding inappropriate products is a concerning phrase.
In a concise letter addressed to Tyrie, Bailey walked the Committee through the basics of debt (P2P lending) and equity crowdfunding. At the time of the writing, Bailey was CEO of the Prudential Regulation Authority (PRA). Bailey’s polite missive was in response to letters that Tyrie had forwarded to both Bailey and Tracey McDermott, then acting FCA Chief, back in June.
Tyrie commented this past June;
“The Committee is concerned to ensure that the FCA is paying due attention to the risks – and the opportunities – afforded by the growth of peer-to-peer lending and related markets. With this is mind, I have written today to Tracey McDermott to ask for an explanation of FCA policy. Government policy – letting peer-to-peer investments form part of an ISA allowance, for instance – represents a form of official support for investments that may be inherently higher risk. Peer-to-peer loans are estimated to have totalled £4.4 billion in the final quarter of 2015 – up from close to zero five years ago.”
Bailey, speaking from his position at PRA, explained to Tyrie;
“In the banks judgement, the crowdfunding sector is currently too small to be systemically important to the UK financial system.”
Bailey stated if the rapid rate of growth continues this could change, and the Bank will continue to monitor the sector, but he pretty much told Tyrie the sector is simply too small right now to create any systemic risk. A polite way of saying: back off.
This dialogue is of interest because the UK is in the midst of a regulatory review of both P2P and investment-based crowdfunding. The current internet finance regulatory ecosystem in the UK is recognized as the best in the world and the envy of many. But creating a robust and vibrant Fintech sector means established financial firms are being challenged – unlike anything they have experienced ever before. One strategy to knee-cap the competition is to enlist the assistance of willing politicians. While there is no indication this is the case with this Parliamentary Committee – it is food for thought.
Gillian Roche-Saunders, a partner at the law firm of Bates, Wells & Braithwaite in London, recently told Crowdfund Insider she has no doubt there is a lot of lobbying going on regarding the regulation of alternative finance. She said, ” there is a lot of political pressure at play.”
Last month, Christine Farnish, Chair of the P2PFA, sent her own letter to Bailey. The document was in response to testimony delivered by Bailey to the Parliament Treasury Committee. At that time, Farnish defended the peer to peer lending industry;
“[peer to peer lending platforms] exist solely because they create value to consumers on both sides of the platform: investors are able to earn fair predictable risk-adjusted net returns that can outperform other investment products, whilst borrowers can access fast and flexible finance.”
Regarding regulation and transparency, Farnish clarified;
“the peer-to-peer lending sector has embraced a level of transparency which is unrivalled in financial services…”
There is also an element of irony here. Internet finance is broadly recognized for its high degree of transparency. Old finance is known for its obfuscation and arcane operations – the source of too many systemic problems (how soon we forget the saga of LTCM). Many in the alternative finance sector believe Fintech is empowering finance to come out from the shadow banking past and is better labeled as sunlight banking. It remains a truism that the best form of regulation is transparency.
All the while, new forms of finance are providing access to capital to the underbanked. Creating jobs and funding innovation – vital to economic growth. Smaller investors are being introduced to new asset classes which may provide better risk-adjusted returns.
So where does this all go? As Roche-Saunders explained a few days back, it was clear that traditional finance sees “P2P encroaching on their space.” Yet she was confident in the abilities of the FCA to draw the line at a point where competition is enabled, and alternative finance can thrive. The FCA review process is accepting comments now with a deadline of September 8th.
As for Tyrie, a word for the wise. If there is anything that a government should ever incentivize it is entrepreneurship and innovation. Undermine those two pillars of society at the country’s peril.