By Gareth Vaughan
Licensing peer-to-peer lenders is a challenge for the Financial Markets Authority (FMA), but the regulations underpinning the sector shouldn't be reviewed until after the industry has been through a downturn, FMA chief executive Rob Everett says.
Speaking to interest.co.nz in a Double Shot interview, Everett said a key feature of the fledgling New Zealand peer-to-peer (P2P) landscape is the "sheer variety" of business models. NZ's licensed P2P lending industry was enabled by the Financial Markets Conduct Act, which came into force in 2014 and was described by the Government as a once in a generation shake-up of securities laws.
To date the FMA has licensed four P2P lenders - Harmoney, LendMe, Squirrel Money and Lending Crowd - who match borrowers with lenders via their websites.
"The real interesting thing for peer-to-peer for us is the sheer variety of business models. And the legislation was set up to allow that to happen. It obviously makes it a challenge to us to licence what are effectively a new business model (every time) so far and they're targeted at different customer segments. They've got different types of secured or non-secured (loans), different types of fee structures," said Everett.
"So it is a bit of a challenge but the legislation was designed to encourage that. So we think that's a good thing that there be lots of business models."
Everett said it was too soon to yet determine what will and won't work in P2P. Harmoney, focusing on the consumer lending market, launched in September 2014 and has thus far facilitated more than $200 million of lending.
"Harmoney got off to a flyer obviously but they have a particular business model which might not be replicated by a lot of the others," said Everett.
"So hard to know how much traction it's really going to get. And as I think I've always said, once we've been through a down cycle and their credit scoring models have come into question, we'll have a much better sense of what the sustainable level of retail involvement is in peer to peer lending as opposed to small business involvement."
'A tension that's built into any lending model'
A key issue the P2P sector is currently facing is the Commerce Commission probing whether fees charged by P2P lenders are covered by the fees provisions of the Credit Contracts & Consumer Finance Act (CCCFA). Against this backdrop Harmoney dumped its "platform fee" charged to borrowers, which ranged from 2% to 6% of the loan amount, based on the loan's risk grade, and moved to a one-off fee of $375. The move effectively means Harmoney is revamping its business model.
Of the other P2P lenders, all of whom only went live late last year, Squirrel Money and Lending Crowd launched with flat establishment/platform fees. However, LendMe has gone down the same path that Harmoney initially took, charging 2% to 7% of the loan amount, depending on the borrower's credit score. In December LendMe said it doesn't believe its fees fall within the CCCFA. This, LendMe says, is because it's an intermediary and doesn't actually lend money itself. Nonetheless LendMe said it was "assisting the Commerce Commission in reviewing our business model in light of the CCCFA."
Asked whether there had been an oversight around fees in the early days of the P2P licencing process, Everett said the FMA's mandate is to make sure fees being charged are properly disclosed and that they're easy to understand.
"A lot of the debate we have with the new business models is around the fee structure. Not so much what the levels of the fees are, but really does that make sense for someone, can they really understand it," Everett said.
"And obviously all of the P2P lending platforms are going to have to work out with their advisers how they fit against the CCCFA. Some are designing models that are more clearly outside, and some are designing models where they've acknowledged they're inside. So I think that's always going to be a tension that's built into any lending model."
Everett noted that in Harmoney's case it had "done a lot very quickly" suggesting perhaps some of the tensions reflect how quickly Harmoney wanted to get into the consumer lending market.
'Reluctant to do a review until we've been through a downturn'
NZ's P2P lending industry has been set up with much lighter regulation than competitors in the banking and non-bank deposit taker (finance companies, building societies and credit unions) sectors. Oversight's also lighter than in some overseas jurisdictions such as Australia where only "wholesale clients" and "sophisticated investors" can invest via P2P. In contrast in NZ, regular ma and pa retail investors are able to invest/lend via P2P platforms.
Asked if and when NZ's P2P sector might need stricter regulation, Everett said it was hard to tell at this stage.
"I think it's too early in the phase. And I would think based on conversations with MBIE (the Ministry of Business, Innovation & Employment) they've always had in mind doing a review of some of those features probably not for another year, maybe two years. And again without having gone through a distinct change in the credit cycle and the interest rate cycle, it is a little bit hard to see how those models will perform," said Everett.
"So I personally would be reluctant to do a review like that until you have been through that."
Meanwhile, Everett said he's interested to see whether P2P can "fill a perceived gap in New Zealand" being a lack of capital available for investment by small and medium sized businesses (SMEs). Lending Crowd and LendMe are both targeting the SME sector.
*This article was first published in our email for paying subscribers early on Friday morning. See here for more details and how to subscribe.