Is P2P Lending Going To Become More Safe? P2P Regulation Explained - YouTube

Welcome back to another video.

Today, we will be talking about the P2P lending regulation and whether it’s more safe to

invest on regulated P2P lending sites.

We will also be looking at the requirements for the Investment Brokerage License that

several P2P marketplaces applied for.

My name is Jakub from P2P Empire and if you are new to this channel and your goal is to

become a more educated P2P investor, consider subscribing and hit the like button to see

more content like this in the future.

So this video is basically a summary of the most important takeaways from our research

where we send a list of questions to several P2P players.

Note, that the regulation is still being developed and certain aspects need to be yet finalized

by the regulator.

So, first we will dive deeper into the Investment Firm Brokerage license before we will be talking

about the license for crowdfunding platforms like EstateGuru.

If you have been following the news in the P2P lending space, you know that several P2P

lending marketplaces applied for the Investment Firm Brokerage License in Latvia.

This license should improve the credibility of services that particular platforms provide.

5 P2P players applied for this license back in spring 2020.

Those platforms are Mintos, PeerBerry, Viainvest, Viventor and Debitum.

So far, none of the platforms manage to obtain the license and some of the P2P platforms

expect to get it before July 2021.

This isn’t necessarily the fault of the applicants but rather the slow implementation

by the regulator.

I would like to emphasize that the regulation is still in progress and much information

in this video has been verified by lawyers that are helping the platforms to get this

license.

So, the European Crowdfunding Service Provider License or ECSP consists of two levels, the

European level and the national level.

On the European level the rules are being set by the European Securities and Markets

Authority as well as Markets in Financial Instruments Directive.

Those laws are then forwarded to the national regulators like the Financial Capital Market

Commission in Latvia.

This authority is also the organisation who is giving out the Investment Brokerage License

that is basically the European Crowdfunding license on the national level.

So the goal of this license is to increase the protection of investors as well as increase

the quality and transparency of P2P lending platforms.

Here are some of the requirements that the platforms need to fulfill in order to get

the license.

The P2P marketplace needs to raise the minimum equity capital to €125,000.

According to our knowledge, the equity cannot be decreased after the platform has obtained

the license.

Also, the P2P player’s AML procedures are being verified by the regulator.

Within this audit, the shareholders as well as the management will be checked for AML

rules.

If you are new to P2P lending, AML stands for anti money laundering.

We have found out that even the lending companies on marketplaces will need to comply with all

the AML procedures.

In addition to this, P2P lending marketplaces will need to hire an AML Officer, Compliance

Officer as well as an Internal Auditor.

The exact AML and KYC rules are unknown, however, we know that the regulator is also checking

borrowers verification and client scoring procedures.

Every investor will need to fill out the KYC form - which stands for “know your client”

form, that includes information about the source of funds, investors’s experience

in investing and whether the investor is a politically exposed person.

Every investor will also be presented a Key Investor Information Sheet - which will be

a more detailed overview of the investment type and P2P lending as an asset class.

The AML stage is without a doubt the largest stage in the whole regulation process and

the exact list of requirements is not publicly available as marketplaces pay a lot of money

to their lawyers to make sure all the requirements are fulfilled.

What’s certainly worth mentioning is the change of the business model.

Right now, the business models of P2P marketplaces were quite straight forward.

The marketplace listed the loans from individual loan originators on the platform.

And you as an investor are going into a loan agreement with the lending company.

For every investment you make, you can view a custom loan agreement which you can find

in your investor’s account.

This setup should change as platforms will be creating a special purpose vehicle which

will act as the issuer of financial instruments that you will be able to invest into.

The SPV will be owned by the platform and act as another instance between the loan originators

and the P2P marketplace.

The exact details of this setup are still not publicly available, however, you can read

some additional information on Mintos, where the marketplace teased the issuance of Notes.

Another stage of the licensing process is the audit of internal procedures and policies.

Within this stage, the marketplace needs to submit information about the company’s procedures,

including the balance sheet, audited financial statements, description of internal policies,

information about the organizational structure, business plan for the next three years, business

continuity plan, strategies to avoid insider trading and market manipulation as well as

procedures to avoid conflict of interest.

Regulated platforms are also required to disclose default rates and potentially limit the maximum

investment amount of investors.

The exact rules for the investment limits are still being determined.

Many of those documents will be also required by the lending companies that list loans on

the marketplace.

The regulator will inspect every lending company before granting the license.

We have also found out that every loan originator needs to be separately approved by the regulator.

During the whole licensing process, the marketplaces are required to send monthly reports to the

regulators.

Those reports include information about the investors, loan originators, new employees,

borrowers, changes in the management and changes in procedures or terms and conditions.

Another important change for the investors’ is also the €20,000 protection scheme for

regulated platforms.

According to our sources, this protection fund is here to cover your investments of

up to €20,000 on P2P marketplaces that are regulated under the law of Latvia.

The exact details of how this fund is going to be financed are being currently negotiated.

As this data is not official yet, our source asked us to not disclose any further information

on this matter.

It’s also yet unknown in which exact scenario you will be refunded for your losses.

So those are the main takeaways on the regulation process for P2P marketplaces.

As you might know, there are some additional players in the industry that originate loans

that are backed by certain securities like a mortgage.

One of the most regulated players is certainly EstateGuru.

The platform familiarizes itself with the local laws in every country where they decide

to launch.

If there’s an crowdfunding license, EstateGuru is immediately applying for it.

The platform is currently licensed in Lithuania, by the Lithuanian Central Bank and in Finland

by the Financial Supervisory Authority.

In Estonia, EstateGuru is self-regulated and supervised by the Financial Supervisory Authority

of Estonia.

In Germany, the platform collaborates with a partner that has a banking license.

And in Spain as well as Latvia, there is no crowdfunding license, which means that EstateGuru

isn’t licensed but applies the same principles as in any regulated markets.

The transition time for the European Crowdfunding Service Provider license starts from the 10th

of November 2021.

So as soon as this license is out, EstateGuru is applying for it.

This will make the expansion in many other European countries easier.

So this has been a very detailed video about the current status of the P2P lending regulation

process in Europe.

Note that certain business models such as investing in rental deals or marketplace for

business loans don’t fall under the typical local crowdfunding license in every country.

That’s at least something that EvoEstate and Reinvest24 told us in the latest P2P talks.

Especially in the case of EvoEstate you should check the licenses of the project originators

as EvoEstate is just the middleman and not the originator of those deals who assess the

credit score and deal with the debt collection.

Now, you might be wondering whether investing on regulated platforms is more safe than investing

on unregulated platforms.

Well.

it certainly is.

As we have presented in this video, the P2P platforms are going through several stages

where they need to show that they are compliant with many rules and requirements.

The P2P lending license will certainly decrease the chance of scams and fraudulent players

in the industry.

On the flip side, platforms will collect more data about the investors and the sign-up process

will likely be more frustrating.

It’s also possible that due to the stricter implementation of AML rules, certain platforms

will no longer accept investors from certain countries.

As the investment risk on regulated platforms decreases, the demand from investors will

increase which can lower the interest rates.

That’s certainly something that you should keep in mind.

The decrease of interest rates can also be justified by the additional expenses for P2P

marketplaces.

It’s certainly going to be interesting to see which P2P players manage to acquire this

license.

If you appreciate the research behind this topic, leave a like and also feel free to

comment below, how the P2P lending license will influence your investment on individual

platforms.

That's it from me today.

Thanks for watching and I will catch you in the next video.