The peer-to-peer (P2P) lending market has grown exponentially in recent years, thanks to technological advances and investors looking for alternatives within today’s low-yield environment. Due to the relatively young nature of the P2P market, the regulatory framework that lending companies operate in can be slightly tricky to understand.
To help boost your understanding, this article will discuss the regulation of the P2P lending industry within Europe in detail. We’ll touch on the key points to note and what this could mean for investors in the years ahead.
P2P Regulation Within Europe – Key Points to Note
Kicking off our discussion of European P2P regulation is one of the most fundamental points to note – that each European country had its own unique licensing requirements for platforms to operate legally. This proved costly for lending companies, as conditions can vary wildly depending on the jurisdiction. Furthermore, certain services offered in one country may not have been allowed in another – greatly complicating the lending process.
To help improve on this process, new crowdfunding rules came into place in late 2021. As noted by P2PFinanceNews, these rules look to harmonise the existing regulation present in all 27 member states of the EU. Ultimately, this boils down to allowing P2P lending platforms to apply for a ‘EU passport’, which comprises one overarching set of rules that applies to all countries. By obtaining this passport, lending companies can offer their services to investors across the EU – without having to deal with country-specific regulations.
This framework has been seen as a key milestone for the European P2P lending industry, as it’s designed to benefit all stakeholders. Financing should theoretically be easier to obtain for P2P platforms that hold an EU passport, whilst customers will also have a higher degree of investor protection. Furthermore, it will also broaden the opportunities for investors, as lending companies outside of their home country can be accessed more easily.
How Will Regulation Affect the Industry?
A grace period until November 2022 has been offered to countries where national rules existed, allowing them to continue to operate under the same structure before switching over later this year. These new regulations have also prompted a ‘race’ to be the first-mover within the sector, as P2P lending companies eager to attract a new demographic will likely push to implement the framework as quickly as possible.
Looking ahead, what else can we expect in terms of regulation within Europe? It’s hard to say at this point, as the true impact of this new regulation is yet to be seen. However, there is scope to improve the accessibility of P2P lending to retail investors, as this area of investing is still relatively ‘niche’ compared to traditional assets.
Another trend that we may see happening is UK-based lending platforms relocating to EU countries. Within the UK, P2P lending platforms are regulated by the Financial Conduct Authority (FCA), meaning that they operate under an entirely different structure to their European counterparts. Due to the announcement of the new harmonious framework, UK-based platforms may relocate to Europe in order to attract investors.
Taking everything into account, these regulatory changes are predominantly a good thing. Making P2P lending platforms ‘safer’ will ensure they are seen as a viable alternative to traditional lending options, which involve complicated onboarding processes. Furthermore, P2P lending could even present itself as a viable option for small businesses looking for funding, as business loans often require extensive work to facilitate.
How Does Regulation Affect Me As An Investor?
Given the information above, how does the P2P lending industry regulation affect investors? Ultimately, this regulation helps ‘clear out’ the lending companies that are unethical or scams. There have been instances where morally-corrupt lending firms have tricked investors out of money and then declared bankruptcy – which has impacted the broader reputation of the industry.
The new crowdfunding rules that took effect in late 2021 will also make it easier for investors to choose a safe platform to partner with. P2P lending platforms that hold a license to operate in all EU member states will immediately hold a greater degree of credibility compared to other platforms. This will have a knock-on effect in terms of reducing the number of non-compliant platforms – as the reduction in business over time will eventually cause these platforms to disappear.
There may also be other changes to the investment process. Pre-regulation P2P lending platforms did not need to obtain extensive information from investors during the sign-up phase. This will likely change going forward, as the EU license requires platforms to complete KYC checks and ensure that investors know the risks during the onboarding phase.
Finally, the smoother regulatory framework may remove some of the barriers to entry for would-be P2P lending platforms. The increased competition would likely have a trickle-down effect on investors, as platforms will be vying to offer the best user experience to attract people to their products. Exactly how this will take shape is yet to be seen – but it is an exciting time for all parties nonetheless!
European P2P Regulation – The Verdict
To summarise, this article has presented a brief overview of the regulatory framework for P2P lending companies within Europe. The intricacies of P2P lending can be tricky to understand – which is why we’ve distilled the information down to the critical points that can affect you as an investor.
Finally, if you’re interested in getting involved in the P2P market, why not check out our products here at LenderMarket? We offer a wide array of loan products to choose from, with a selection of terms and returns, ensuring there’s an option for every investor.