P2P Lending

This article is provided for informational purposes only and does not constitute legal advice.

BY FRANCESCA FERRANDO

(Francesca is currently in traineeship with David Zahra & Associates Advocates. She is currently reading law at the University of Malta and her main interests are corporate and commercial law).

As the internet developed into such a valuable tool it was only logical that the next natural step would be to exploit the modern effectiveness of the internet also in the field of debt financing.

Peer-to-Peer lending (P2PL) is the process by which individuals lend money to other individuals (peers) and in turn bypass traditional financial intermediaries such as banks or other similar financial institutions.

A primary example of such a platform is Zopa which is both the world’s oldest and Europe’s largest P2PL service.  It offers better rates than major banks and has seen over £633m raised by way of debt-financing.

There are currently no regimes at a European level which regulate P2PL platforms, and therefore most countries have relied on national laws to control this new financial device.

In 2013 the European Commission carried out a wide public consultation, however it is not yet proposing any legislation on the subject.

The growth of P2PL led to a spin-off known as crowdfunding.  This scheme allows individuals to post their ideas online, ranging from movie ideas to new inventions; individuals who are willing to invest will then view such posts and are able to invest in the idea of their choice.  Crowdfunding has boomed in the past few years and this may be mainly linked to the current economic state.  Small businesses and start-up companies have been struggling to acquire loans ever since the economic recession hit as they are perceived to be too risky by traditional financial institutions.

The European Commission found, through the above-mentioned research, that “Crowdfunding is an important source of finance to some half-a-million European projects each year that otherwise may not obtain the necessary funds to be realised”.

As explained above, the European Union has left it to the individual Member States to legislate for P2P lending.  One of the best legislative frameworks is found under UK Law.  Standard for peer-to-peer lending are set out by the Financial Conduct Authority.  One of the downfalls is that this sector is not protected by the Financial Services Compensation Scheme, however each member company is bound to implement the appropriate safeguards in case of bankruptcy.

Unfortunately, Maltese law does not appear to have readily adapted to this rapidly developing platform.  Although P2PL could potentially fall under the Financial Institutions Act, 1994 and the Investment Services Act, 1994, in terms of regulation, there remains no direct references in either statute. This is mainly due to the fact that these laws were drafted prior to the emergence of peer-to-peer lending and crowdfunding.

As the law currently stands, a P2P lending platform would not itself appear to require a license under Maltese law. However a P2P platform might facilitate regular and habitual lending in a way that, according to current legislation, would expose users to a licence requirement.

This impinges on the feasibility or otherwise of operating a P2P lending platform in Malta.

It would be therefore wise to look into the implementation of applicable provisions for this sector and provide the groundwork necessary to exploit its current popularity for the betterment of our national economy.