P2P Industry Introduction: 3 out of 7
Do you want to be the boss of your own financial situation and make money by being an investor? The goal of this series of articles is to introduce you to P2P lending & crowdinvesting and to help you decide if this asset class makes sense for your investment portfolio!
Exploring the P2P Lending Market was the previous post of the series.
With the nominal fall of returns from traditional saving products, the yield offered by many P2P platforms appears attractive to investors. Nevertheless, it is important to remember that P2P lending and crowdinvesting still have a long way to go before becoming an established financing model for businesses. As such, investing in P2P lending also comes with substantial risks that are hard to assess for investors.
A Fragmented Regulatory Reality
Regulation of crowdfunding in the EU is still primarily based on national legislation.
For example, in the Netherlands, fintech credit providers must apply for a specific license (and meet the associated stricter requirements) to facilitate credit to consumers. In Germany platforms are prohibited from engaging in lending without a banking license and related prudential oversight, leading the majority of P2P platforms to operate in the Baltic Region, where the regulatory framework is less strict.
Common EU Rules for Crowdfunding
According to the European Commission, the lack of common rules for crowdfunding is making it more difficult for P2P platforms to expand their services across borders, but at the same time is making it easier for less transparent and fraud promoting projects to avoid due diligence and control.
To address this issue, in March 2018 the European Commission presented a proposal for a regulation on crowdfunding service providers to increase the trust of investors and provide legal certainty as regards to the protection rules, a common investor protection regime and a simple template for disclosure of key characteristics of projects and financial products sold is part of the legislative proposal.
If European crowdfunding becomes more transparent and trustworthy, this could engage more people and money in crowdfunding.
How to increase Investor Protections further?
Based on the current proposal, there are some points that are still not addressed and are critical for investor protection, being the responsibility of individual investors to assess if these elements are provided by the P2P platforms they assess.
Disclosure of Overall Default Rate
It should be a requirement for P2P platforms to disclose the default rates of the projects offered on their platform. This should happen on a regular basis and be placed on a prominent place on the webpage.
Mandatory Knowledge Test
Every investor should be evaluated in order to assess basic necessary knowledge to take informed investment decisions.
Limit Maximum Investment Amounts
It is critical, in order to reduce exposure to risky investments and to enhance diversification of investments, that a maximum investment amount is defined for each crowdfunding project.
Minimum Due Diligence Requirements
Due diligence is essential to secure investor protection. It should, therefore, be obligatory for P2P platforms to conduct a minimum level of due diligence of the projects presented on their platforms.
Protection Against P2P Platform Insolvency
Like with all other businesses there is a risk that P2P platforms can go bankrupt. To make it possible for investors to assess the risk of platform insolvency, P2P platforms should be required to draw up and publish their business continuity plans. Also, arrangements must be put in to place to ensure that investors will not lose their investment in the case of a platform bankruptcy.
Even if current Regulations don’t provide investors with adequate protection, make sure to develop a personal due diligence process that will make you comfortable with your choices of P2P platforms.