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A recent article written by Dr Avinash Persaud of Intelligence Capital caught my eye this morning in which he discussed the major issue of financial regulation and the difficulties facing SMEs in trying to raise finance through the traditional lending avenues. Persaud is a well-qualified source of knowledge: a former governor of the London School of Economics, a former member of the UN Commission on Financial Reform and a visiting scholar in both the European Central Bank and the International Monetary Fund, as well as the Chairman and former employee of a range of private, public and investment banks. The article is written for an Indian digital newspaper, but it certainly is written from a global outlook. It can be found here: http://www.livemint.com/Opinion/fQpaevJ8DX7KUpwBVdeXQK/Crowd-financing-is-not-banking.html

I have identified two important points from his article. Firstly, he is at pains to highlight the importance of facilitating finance to SMEs to drive economic growth, and he recognizes that banks cannot be expected to provide all of the finance. He recognizes that “a large part of the problem of financing development is not the absence of cash but an inability to mobilize it“. In my view, this is the result of the lending vacuum left in the wake of the Basel III rulings that ensure banks must have proportionately more capital in the bank when lending to small businesses than they would lending to more established businesses, tying up more of funds than banks would like. Dr Persaud recognizes the need to “use technology to match untraditional borrowers with untraditional lenders and provide opportunities for diversification and other forms of risk and information management.” Persaud fails to recognize that the bulk of the lending can come from institutions who will pledge alongside individuals on the same terms. Dynamic, flexible and secure Peer to Peer (P2P) crowdlending platforms that are properly regulated will fill the SME lending vacuum, facilitating finance from SMEs from a range of institutions and investors whose money would otherwise be unavailable to borrowers.

This leads me to the second main point: regulation. I think Dr Persaud is right to highlight the importance of differentiating lending platforms from traditional banks, a job that the regulators must do to ensure that prospective lenders know exactly what the risks are. The P2P industry itself wants FCA regulation for clarity as much as credibility. Regulation needs to be a long, drawn-out process to avoid simply bracketing it with banking regulation. Persaud reasons that “regulating crowd financing platforms as a bank and not an exchange would not only undermine the point of it, but would create systemic risks”. However, Persaud’s belief that P2P alternative finance platforms should drop “conventional” nomenclature is not necessarily the answer. I disagree with his statement that the banking terminology “Market Place lending” shouldn’t be used by alternative finance P2P lenders because that is exactly what is on offer to SMEs wishing to borrow money and individuals willing to lend.

In the words of Dr Persaud, “moving to the next level of social and economic development depends on these borrowers getting through”, which in turn depends on regulated Peer to Peer crowdlending platforms facilitating the finance from a range of savvy individual and institutional investors.

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Two weeks ago, I wrote about the new government’s pledge to purge £10bn of legal red tape by 2020 to benefit the nation’s businesses. I stated here my belief that whilst this is unquestionably a target worth aiming for, the efficacy of the initiative – spearheaded by the new business secretary Savid Javid – will likely be stymied by the actions of EU lawmakers. But in the past few days, some very interesting articles have been published detailing the EU’s response to long-standing allegations of meddling and the overregulation of markets, as well as the business response to the Conservative pledges.

On the whole, it seems that UK businesses have acknowledged the worth of the £10bn target but, as the FT reports, this is “tempered with a healthy dose of skepticism.” As was noted in the earlier blog, many thought the “bonfire of red tape” promised by the 2010 government failed to materialise, and have interpreted this as part of a larger trend of government inaction. The Director-General of the British Chambers of Commerce, for example, has warned that “every government [since Thatcher] has said they will cut or limit regulation and has signally failed to do it.” The views of such an eminent figure will undoubtedly be reflected more broadly across industry. And with the regulatory policy committee finding that net savings achieved through the coalition’s cutting of regulations from 2010 – 2015 were smaller than the costs imposed by new EU regulation in just 2013, they can clearly support this viewpoint too.

It should come as some relief to red tape skeptics then to hear that the EU has realised this cannot continue. Frans Timmermans, the Dutch Vice-President of the EU Commission, is the man that has been tasked by Jean-Claude Juncker with cutting down on the EU’s flabby regulatory framework. Seen by many political commentators as sympathetic to British concerns on regulation, Timmermans has now set out the EU’s “Better Regulation” programme which will implement the desired changes. So what exactly will this initiative entail? Some may be disappointed to hear that unlike the UK government the EU Commission has not put a quantitative target on the reforms, explaining somewhat loosely in a Q&A that it means “doing different things, and also doing them better.” But despite the lack of hard targets, it has been reported that Timmermans has ruled that only 23 laws will be proposed this year, down from a recent annual average of 130.

With David Cameron already crediting the Dutchman’s plans as a “significant step in the right direction”, we must hope that this news will be heeded by the nation’s Eurosceptic lobby.

Tag: regulation

Peer to Peer Lending Regulation: the benefit for SMEs

Are the EU listening on Red Tape?