Legal and Regulatory Issues Monica Gogna Ropes & Gray @uktisa ISAs and P2P Loans: Legal and Regulatory Issues Monica Gogna, Partner LLP
Introduction Today s topics: Overview of the background to UK peerto-peer (P2P) regulation Status of authorisation of UK P2P firms Overview of UK ISA and P2P regulation Update on European regulatory developments in the area Background to P2P Regulation From 1 April 2014, operating a loan-based online peerto-peer platform became a regulated activity (under Article 36H of the Regulated Activity Order 2001 (the RAO)) Final rules on P2P regulation were published by the FCA in a March 2014 Policy Statement Investment-based crowdfunding was already regulated by the FCA (platforms may be caught, for example, by Article 25 of the RAO (arranging deals in investments)) Loans not specified investments under the RAO operating a loan-based online P2P platform was therefore not a regulated activity before 1 April 2014
Background to P2P Regulation Regulation of P2P loans by the FCA occurred at the same time as the regulation of consumer credit transferred from the Office of Fair Trading (OFT) to the FCA Article 36H(1) of the RAO states: operating an electronic system which enables the operator ( A ) to facilitate persons ( B and C ) becoming the lender and borrower under an Article 36H agreement is a specified kind of activity. Article 36H(4) of the RAO defines an article 36H agreement this is, broadly, an agreement to lend credit that is not a consumer credit agreement Background to P2P Regulation Authorisation & Interim Permission Firms holding an appropriate OFT licence and operating loan-based P2P loan platforms in March 2014 were able to apply for an interim permission to continue conducting the activity Firms entering the market after April 2014 must secure full authorisation from the FCA before they can operate an loan-based P2P platform The FCA s high-level rules took effect from 1 April 2014 for interim permission firms. More detailed conduct rules applied to such firms from 1 October 2014 Firms entering the market after 1 April 2014 are subject to all the rules from the date they become authorised
Background to P2P Regulation Authorisation & Interim Permission Full FCA authorisation process: Timing: 6-12 months Fee: 1,500 (if an application is straightforward) Must complete application pack, which includes the following: core details form regulatory business plan scope of permission notice (Article 36H of the RAO and any other relevant permissions (such as arranging deals in investment (Article 25 of the RAO))) controllers form application to perform controlled functions Assignment of case officer and general authorisation process currently very delayed, due to FCA workload (!) Background to P2P Regulation Authorisation & Interim Permission FCA also encourages firms seeking full authorisation for operating an online P2P platform to have the following: Adequate non-financial resources (i.e. the management board has adequate knowledge and experience of financial regulation) Adequate financial resources (i.e. not looking at future fundraising to reach the requirement) A website that is either up-and-running or at a suitably advanced stage to demonstrate how the firm will operate should it be authorised An understanding of the requirements for FCA authorisation and the permission profile for which the firm wishes to apply
Status of authorisation of P2P firms 50 firms operating loan-based P2P platforms in March 2014 applied to the FCA for interim permissions Current status of FCA authorisation derives from a February 2015 FCA review of the crowdfunding regulatory regime. This highlighted the following: FCA had authorised one loan-based P2P platform, which entered the market after 1 April 2014 FCA was reviewing 8 applications for full authorisation With 3 interim permissions firms leaving the market, number of firms operating in the sector, or seeking to enter it, increased from 50 in April 2014 to 56 by the end of 2014 Zopa, Funding Circle, RateSetter all have interim consumer credit permissions (none are yet fully FCAauthorised) ISA Regulations and P2P Loans Consolidated ISA Regulations 1998 lay out framework of ISA legal regime The ISA (Amendment No. 2) Regulations 2016 (the Amendment Order ), published on 8 December 2015, established a new Innovative Finance ISA (and brought this ISA within the legal remit of the consolidated ISA Regulations 1998), with effect from 6 April 2016 The Amendment Order amended Regulations 4, 8A, and 14 of the ISA Regulations The effect of the amendments is that the Innovative Finance ISA (the P2P ISA) is a separate, third type of ISA (in addition to stocks and shares and cash ISAs)
ISA Regulations and P2P Loans Regulation 8A of the consolidated ISA Regulations: Details the qualifying investments of the Innovative Finance ISA Principal qualifying investments of an Innovative Finance ISA is defined as payments by a borrower made under an article 36H agreement where the following conditions are met: a) The payment is a payment of interest or capital or both b) The article 36H agreement requires such payment to be made directly to the account manager c) The article 36H agreement is made on genuine commercial terms d) The article 36H agreement is not part of a scheme or arrangement one of the main purposes of which is the avoidance of tax Regulation 8A(2)(b) includes payments by an assignee for the right to exercise the rights of the lender under an article 36H agreement as another qualifying investment of an Innovative Finance ISA, provided that conditions (c) and (d) above are met ISA Regulations and P2P Loans Regulation 14 of the consolidated ISA Regulations: Amendment Order amends Regulation 14(2)(b)(i) of the consolidated ISA Regulations Effect of amendment is that an account manager of an Innovative Finance ISA may be a firm regulated under Article 36H of the RAO (a firm with an interim FCA permission, or one that is fully authorised, to operate as an online P2P platform) P2P platforms such as Zopa, Funding Circle and RateSetter may now act as an account manager of an Innovative Finance ISA under the ISA Regulations 1998
P2P Loans and Europe Regulation The European Commission is exploring the potential and risks of crowdfunding in order to identify whether there is value added in European level policy in this field (the Commission s work on this began in June 2013) The latest step was a European Crowdfunding Stakeholders Forum held on 17 February 2016 Future path of European regulation of P2P lending is still unclear European Commission s publication Crowdfunding: Mapping EU markets and events study (September 2015) shows that there are 510 crowdfunding platforms operating in the EU. The UK had the largest number of platforms, accounting for over a quarter of the EU total, with 143 platforms P2P Loans and Europe Regulation European Commission s initiatives relating to crowdfunding relates to three kinds of crowdfunding: Equity crowdfunding Rewards-based crowdfunding P2P lending Latest European Commission Stakeholders Forum provided an update on market mapping and market developments A new European Commission report is due to be published in spring 2016
Your questions Your Speaker Monica Gogna, Partner Investment Management Email: monica.gogna@ropesgray.com Direct Dial: + 44 (0) 20 3201 1630
ISAs and P2P Loans: Legal and Regulatory Issues Monica Gogna, Partner LLP