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P2P Lending Regulation

<article>
<section>
<h2>P2P Lending License 2021</h2>
<p>If you invest in loans, you might have noticed that several P2P lending marketplaces have applied for an investment brokerage license.</p>
<p>We have done extensive research and gathered all the essential information. Hence, you get a better idea of how the upcoming P2P lending regulation in Europe is going to impact your investments.</p>
<p>Note that the exact details are still being determined by the regulator, so most platforms have not released that much information about the upcoming regulation.</p>
<p>We have reached out to several companies that operate in the P2P lending industry and combined all the information we have gathered into this extensive guide.</p>
<div class="alert-box">
<h3>No Legal Advice</h3>
<p>Note that the information in this article is the result of our research at the time of publication and it doesn't replace legal advice. Please consult a licensed lawyer before you act upon any information on this website.</p>
</div>
<div class="tips-box">
<h3>Licenses</h3>
<p>In this article, we are discussing two licenses for companies operating in the peer-to-peer lending industry. Note that this is no official information and the requirements for both licenses have not been publicly revealed yet.</p>
<ol>
<li>European Crowdfunding Service Providers License for Crowdfunding Platforms</li>
<li>Investment Brokerage Firm License for P2P Lending Marketplaces</li>
</ol>
</div>
<h2>European Crowdfunding Service Providers License</h2>
<p>Before we get into details, let&rsquo;s first introduce you to the European Crowdfunding Service Providers License (ECSP).</p>
<p>The ECSP license consists of <strong>two levels</strong> - the national level and the European level.</p>
<blockquote cite="https://www.consilium.europa.eu/en/press/press-releases/2020/07/20/capital-markets-union-council-adopts-new-rules-for-crowdfunding-platforms/">This license aims to remove barriers for crowdfunding platforms to provide their services cross-border by harmonizing the minimum requirements when operating in their home market and other EU countries. It will also increase legal certainty through common investor protection rules. - <a href="https://www.consilium.europa.eu/en/press/press-releases/2020/07/20/capital-markets-union-council-adopts-new-rules-for-crowdfunding-platforms/" target="_blank" rel="noopener noreferrer">Source</a></blockquote>
<p><mark>Crowdfunding operators are platforms where a group of investors funds loans directly from the borrower. There are no loan originators involved within this business model. </mark></p>
<h3>National Level</h3>
<p>The national level is a framework every country can adopt. This local legislature needs to match the ECSP (European level) requirements.</p>
<p>Crowdfunding platforms applying for this license need to send monthly reports to the local regulator. In Latvia, it&rsquo;s the FCMC, which is the <a href="https://www.fktk.lv/en/" target="_blank" rel="noopener noreferrer">Financial Capital Market</a></p>
<p>The FCMC is also the public authority that is granting the ECSP on local markets. Crowdfunding platforms need to pass all the requirements by the FCMC.</p>
<p>Crowdfunding sites will need to ask for approval when changing their business model or any other management or operational changes that might impact you, the investor.</p>
<h3>European Level</h3>
<p>At the second European level, an ECSP European license will serve as a regulatory tool that merges national legislative frameworks aligned to the EU agenda.</p>
<p>The second level of the ECSP hasn't been entered into force yet. It has passed the first reading and should be approved in 2021 on the <a href="https://ec.europa.eu/info/business-economy-euro/growth-and-investment/financing-investment/crowdfunding_en" target="_blank" rel="noopener noreferrer">EU level.</a></p>
<p>As soon as the bill is passed and transformed into a regulation, each member state will allocate an authority responsible for issuing ECSP licenses.</p>
<h4>Licensing Process</h4>
<p>Currently, there are two different ways to become a licensed crowdfunding player.</p>
<p>If you are a P2P lending platform that lends directly to borrowers or companies, you can apply for a national crowdfunding license in every country where you operate.</p>
<p>This is what <a href="../../en/review/estateguru">EstateGuru</a> has done. The real estate P2B platform has acquired licenses in all markets it operates, making it the most compliant platform in Europe.</p>
<p><strong>Here is an overview of EstateGuru&rsquo;s licenses:</strong></p>
<div class="checklist-box">
<ul>
<li>UK - P2P license (received in 2019)</li>
<li>Lithuania - Crowdfunding license (received in 2019)</li>
<li>Finland - Crowdfunding license (received in 2020)</li>
<li>Germany - &ldquo;Fronting Service&rdquo; solution with a partner who has a banking license. (official launch in 2020)</li>
<li>Estonia &amp; Latvia - no license needed</li>
</ul>
</div>
<button class="redirect external_link_button promo" value="estateguru">Earn Interest on EstateGuru</button></section>
<section>
<h2>Investment Firm Brokerage License</h2>
<p>The Investment Firm Brokerage License will regulate companies that operate as P2P lending marketplaces. You will no longer invest in claims against borrowers from various loan originators but into financial instruments.</p>
<p><mark>P2P lending marketplaces are operators that enable investors to invest in claims against borrowers from various loan originators.</mark></p>
<p>Procedures such as the issuance of financial instruments higher than &euro;8M, need to be approved by the ESMA (European Securities and Markets Authority). The ESMA stands above the local regulator (FCMC) - the Financial Capital Market Commission.</p>
<p><mark>More extensive operations will also be regulated by the Markets in Financial Instruments Directive (<a href="https://www.esma.europa.eu/policy-rules/mifid-ii-and-mifir" target="_blank" rel="noopener noreferrer">MiFID II</a>).</mark></p>
<div class="tips-box">
<h3>Requirements to obtain the license</h3>
<ol>
<li>Minimum Equity = &euro;125,000</li>
<li>Qualification Check of the Management and Shareholders (AML)</li>
<li>New staff: AML Officer, Compliance Officer, Internal Auditor</li>
<li>Establishing special-purpose ventures which will issue financial instruments</li>
<li>Description of all company's procedures including balance sheet, audited financial statements, description of internal policies, organizational structure, business plan for the next three years, strategies to avoid insider trading and market manipulation, conflict of interest policy</li>
<li>Monthly reporting to the regulator including information about investors, loan originators, borrowers, new staff member, changes in the management, changes in procedures (certain changes are subject to approval)</li>
</ol>
</div>
<h3>Changes to the Business Model for P2P Lending Marketplaces</h3>
<p>P2P marketplaces will be required to create Special Purpose Ventures (SPV), which will act as the issuer of financial instruments that you will be able to invest into on individual platforms.</p>
<p>The SPV will be owned by the platform and act as another instance between the loan originators and the P2P platform.</p>
<p>This change in the business model is still yet to be determined by the regulator.</p>
<h3>Who is applying for this license?</h3>
<p>Here&rsquo;s a list of P2P marketplaces that are applying for the ECSP license on the European level (Investment Brokerage Firm License in Latvia).</p>
<div class="tips-box">
<ol>
<li><a href="../../en/review/estateguru">PeerBerry</a></li>
<li><a href="../../en/review/debitum-network">Debitum</a></li>
<li><a href="../../en/review/viainvest">VIAINVEST</a></li>
<li><a href="../../en/review/mintos">Mintos</a></li>
<li><a href="../../en/review/twino">TWINO</a></li>
</ol>
</div>
<h3>What are the requirements to keep the license?</h3>
<div class="checklist-box">
<ul>
<li>Maintain minimal equity ratio</li>
<li>Work within the limits of the law</li>
<li>Monthly reports to the regulator FCMC - information about investors, loan originators, borrowers, new staff members, changes in the management, changes in procedures (many changes need to be approved by the FCMC)</li>
</ul>
</div>
<h3>When do the companies expect to receive the license?</h3>
<p>Currently, the regulators haven't introduced a deadline for the license to be granted. Some P2P lending marketplaces expect to receive the license before the end of Q2 2021.</p>
<div class="checklist-box">
<h3>How will this license impact the safety of investor&rsquo;s money?</h3>
<ul>
<li>Stricter AML / KYC process (more information needed)</li>
<li>The P2P lending marketplace will be controlled by a regulator - according to the law of Latvia</li>
<li>The P2P lending marketplace will be subject to stricter protection rules under the EU financial industry legislation MiFID II and the Republic of Latvia</li>
<li>Every marketplace will access the knowledge of the investors. If the investor passes this test, he or she will be titled as a "professional investor.&rdquo;</li>
</ul>
</div>
<p>According to Latvian law, there are two types of private investors: <mark>professional and non-professional</mark>.</p>
<p>This is accessed by the "knowledge test," that every investor needs to pass to be accepted on the platform.</p>
<p><mark>If the investor did not pass the test, they would be titled as non-professional, and the platform would need to cover his or her financial losses from P2P lending.</mark></p>
<p>When the investor passes the test, they will be titled as a professional investor, and this way, the platform won't be liable for any losses.</p>
<p><strong>We can expect that in the future, only investors who pass the test will be allowed to invest in P2P loans.</strong></p>
<h3>What changes are the platforms currently implementing?</h3>
<div class="checklist-box">
<ul>
<li><strong>Key Investor Information Sheet:</strong> prospect explaining P2P lending as an asset class</li>
<li><strong>Max. investment amount:</strong> &euro;50k on Viventor, to be determined on Debitum, not presented by PeerBerry (investors who want to invest higher amounts will be required to submit additional documents)</li>
</ul>
</div>
<h3>What is required to comply with the AML policies?</h3>
<p>The AML policy will apply to the <strong>platform and its partners</strong> (loan originators and issuers).</p>
<div class="tips-box">
<ol>
<li>KYC (Know your customer)</li>
<li>Detection of UBO (ultimate beneficial owner - where's the money coming from)</li>
<li>PEP (Politically Exposed Person) and sanction checklist</li>
</ol>
</div>
<p><mark>The regulator is still determining the rest.</mark></p>
</section>
<section>
<h2>What does this mean for the investor?</h2>
<ul>
<li>Reduced risk for investors that the platform is a scam. To a certain extent, it will also reduce the <a href="../../en/is-peer-to-peer-lending-safe">risk of loan originators being fraudulent</a>.</li>
<li>The platform is controlled and regulated by a public authority - monthly check-ups (no more changing terms and conditions prior to approval from the regulator)</li>
<li>If the platform defaults, your funds might be protected up to 90% or up to &euro;20,000 (Latvian investment protection law) - this is still unclear as according to the latest information, it's not valid in the scenario of an insolvency.</li>
<li>More investors will join P2P lending as this will become regulated by authorities.</li>
<li>More investors will mean fewer opportunities, which will likely result in a reduction of returns.</li>
</ul>
<p>The P2P lending license will reduce the risk that the <a href="../../en/p2p-lending-scam">P2P lending platform is a scam</a>. The P2P platforms are required to report to the regulator monthly, which minimizes the platform risk as the P2P lending site won&rsquo;t be able to impose certain changes without the regulator&rsquo;s approval.</p>
</section>
<section class="info-box">
<h3>Keep Your Money Safe!</h3>
<p>With our ✅ <button class="redirect externaltext" value="checklist">Due Diligence Checklist</button> workbook, you will be able to spot red flags 🚩 and protect your investment on any P2P lending platform.</p>
<img src="https://p2pgallery.s3.eu-central-1.amazonaws.com/d_list.webp" border="0" alt="checklist" loading="lazy">
<p class="question">Protect Your Money!</p>
<button class="redirect external_link_button promo" value="checklist">Get Your Checklist</button></section>
</article>

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