Setting up a P2P lending platform - What do you need to do?

HK regulation of P2P lending platform

It is generally understood that the purpose of a P2P lending platform is to enable the platform operator to:

• source borrowers needing funding; and
• source investors who are prepared to provide such funding by way of loans.

There is no specific P2P lending regulatory regime in Hong Kong and the uncertainty caused by this vacuum is highlighted by:

• a notice by the Securities and Futures Commission (SFC) on crowd funding dated 7 May 2014, which is a warning by the SFC that there are many reasons why any type of crowd funding, including P2P lending, may not be lawful unless those involved are licensed for the various regulated activities that can be involved in crowd funding; and
• a notice by the SFC dated 5 September 2017 on initial coin offerings, which focused on crypto currencies but is another instance of the SFC warning that raising funding through fintech solutions can contravene a regulatory regime that cannot keep up with the rapid development of fintech.

So what are these potential regulatory issues and how can they be avoided?

Money lending and deposit-taking

The Money Lenders Ordinance (MLO) prohibits anyone from carrying on a money lending business without a money lenders licence, unless one or more of the exemptions applies. Certain secured loans are exempt, allowing a security structure to avoid the need for a MLO licence.

The Banking Ordinance (BO) prohibits anyone from accepting deposits without a necessary licence under the BO. Similarly, a secured structure can avoid the need for a BO licence.

Depending on the P2P lending structure, there is a chance that:

• the investors and/or the platform operator will be considered as carrying on a money lending business and
• the platform operator will be considered to be taking deposits from the investors.

It is commonly not understood that, in legal terms, a deposit is just a loan by another name.  Even if it is only the investors, not also the platform operator, that require a licence, the platform operator could break the law by helping the investors to do so.

Collective investment schemes

As for whether the platform would amount to a collective investment scheme (CIS), as defined in the Securities and Futures Ordinance (SFO), the full definition is rather long and complex, but for the purpose of this article, we set out below the SFC’s description (from a 2013 press release) of the four elements of a CIS:

• it involves an arrangement in respect of property;
• participants do not have day-to-day control over the management of the property even if they have the right to be consulted or to give directions about the management of the property;
• the property is managed as a whole by or on behalf of the person operating the arrangements and/or the contributions of the participants and the profits or income from which payments are made to them are pooled; and
• the purpose of the arrangement is for participants to participate in or receive profits, income or other returns from the acquisition or management of the property. 

Our experience indicates that the SFC will investigate any arrangement that looks anything like a CIS, if the SFC believes that investors’ interests may be prejudiced if the CIS is not authorised by the SFC.

An online platform operator should therefore examine whether its platform may amount to a CIS.

Regulation of CISs

So why does it matter if a P2P lending platform is a CIS?  There are two reasons.

Public offer restrictions

First, because of the SFO, an interest in a CIS cannot be offered to the investing public unless either the SFC authorises the platform, which it is not currently likely to do, or the platform can be structured so that an exemption applies, eg by restricting investment to high net-worth investors.

Business licensing

Second, also because of the SFO, any person promoting or operating a P2P lending platform may need a licence from the SFC to:

• carry on business in HK in a regulated activity (“RA”) or
• carry on business outside HK in a RA which is marketed to the public in HK, unless an exemption applies or that person is licensed by the SFC to carry on business in that RA.

Assuming that the platform is a CIS (and investments through the platform are therefore securities), the potentially relevant RAs in this case are:

• type 1 RA - dealing in securities;
• type 4 RA - advising on securities;
• type 6 RA - advising on corporate finance;
• type 7 RA - providing automated trading services; and
• type 9 RA - discretionary asset management. 

The platform therefore needs to be structured so that either no-one is carrying on an RA without a licence or the services of a business licensed for the relevant RA(s) are engaged to the extent necessary.

Conclusion

Anyone who is interested in setting up P2P lending platform should consider the above issues and seek legal advice before planning the setup. We have advised many clients on these issues and will be happy to discuss our experience with you.