Capital Markets Insights

Guide to P2P Lending Regulations in the UK: Starting Your Own P2P Platform


Are you interested in starting your own P2P lending platform in the UK? We sat down with Matt Williamson, Head of Fintech at Thistle Compliance and one of the leading crowdfunding and P2P lending legal experts in the UK and Sophie Long, Head of Sales at Thistle Compliance, responsible for leading customers along the FCA compliance journey to address some common questions people have on this topic. We also provide actionable tips for launching your own P2P lending platform online in the UK, navigating the legal regulations and the FCA process. 

Some of the topics discussed include: 

  • What do you need to start a P2P crowdfunding platform in the UK
  • Everything about the legal process starting a P2P platform
  • Raising capital and investing requirements on a P2P lending platform
  • Typical mistakes people make with P2P platform launching and how to avoid it
  • ISA regulations and how it affects your P2P lending platform


Read the full interview transcript here:

Katipult: Let’s jump into it. I’ve got a good question to start off with. Pretty broad question I would say, what do I need to start a P2P crowdfunding platform? If you could come up with some good advice on some items or some document, whatever it is, who do I need to talk to, to actually start a P2P crowdfunding platform in the UK?

Thistle: If we were to go through some of the obvious ones, if you want to setup any sort of regulated entity in the UK, you are going to need the company registered at Companies House. You are going to need enough initial capital to get you guys established, to do a number of things including building a model using all sorts of providers, whatever it might be, having a team based locally in the UK to do some of the operational elements. There is quite a lot in terms of capital that’s required. Obviously individuals, appropriately qualified or experienced. You are going to need, and I am going to go in detail later on, an underwriter, directors with experience, preferably in some sort of regulatory capacity or some sort of investment capacity. There is a number of different alternatives to those individual elements. Some might be tech- oriented etc. it really depends on a collective mix of everything. Individuals are certainly important. I think that a P2P platform sort of learns itself to having a natural platform and the platform should be capable of looking both at the lender and the borrower side. We can onboard a lender and a borrower and effectively match any sort of loan potential between the two of them. There are a couple of ways of doing that: through a potentially cherry picked version where you advertise a particular offering, which the investor then picks. Or, alternatively, you can have some sort of an allocation system, where a lender gives you some sort of criteria and then you match accordingly. That’s a very important step obviously. I think that it is also very important, an agreement between the lenders and the borrowers themselves. The importance there is that it complies with local and regulation legislation which governs P2P landing which is an article 36H agreement. I can go in a little bit of more detail what an article 36H is, and what some of its key components are.

Then, quite important is the customer money. In the UK, with any sort of processing, customer money, which is derived from some sort of investment or other products, insurance etc, that money has to be protected by the original firm. That money doesn’t belong to the firm, so it can’t be added to the balance sheet. What has to happen is, that money needs to be transferred through a segregated account. Now that can be operated by the firms themselves, but they have to comply with the regulation that applies to organizations based in the UK. Another way of doing it is to use some sort of e-money provider potentially. So an e-money provider, I’m sure everybody knows, is able to offer an alternative solution to you guys having to hold capital on a segregated account, which quite an ominous process to comply, and there are a lot of things that can potentially go wrong with reconciliation etc. It’s a viable solution for a lot of startup businesses. Lastly, although not an absolute requirement, I wouldn’t say it is completely necessary but I’d say it certainly helps, is having an external KYC provider, some sort of plug-in which essentially will assess any investor. You can look at it on the borrower side as well, before they actually make it to the platform. Those are your core components of any building or development of P2P platform. On top of that you obviously need to have a really strong legal support, access compliance consultants are in a great position to help. Having an actual lawyer as well drafting legally binding contracts is a very important factor as well. Then we could go into some accountancy etc, but I’d say these are the core components we need to look at before launching a P2P platform.

Katipult: So there’s quite a lot of homework to do, or you can hire someone to do it for you of course. Many early stage prospects, that are really just looking to create a P2P platform, whether it’s an established company or a startup, they ask how long does it take to go through this whole process? I know a lot of it actually has to do with how much homework you have actually done before, but let’s say general time. For example are we talking about month or two if you have all of your papers in order and you have the legal advice to actually guide you through?

Thistle: Is this from the development side or is this the application side of the FCA?

Katipult: Application side. When they have all the documents in order and it’s just applying and waiting for answers.

Thistle: Once all of that is in place and all the application documents like business plan etc are all complete, an application to the FCA generally takes somewhere between six to eight months at the moment, and that’s based on 1) the ability for them to allocate a case officer. Now they try their best to do it, and a rough outline is that it can’t be later than three months for them to have a case officer. He will then start to review all the documentation. At the moment, there is actually an element where a lot of applications are being submitted and getting their case officer quite quickly, but again, it’s completely based on their timings. As you get a case handler, they start to review the application, review the complexities, each one is slightly different, different formats, different ways. Then there is a series of questions by the FCA that have to be addressed. You have to satisfy them before they can approve you. So that is why it takes six to eight months once you have submitted an application.

Katipult: I know getting all the documents in order before you start the application is important so you don’t have to go back and forth with legal to get all these documents, and that could take anything from a week to several months, to actually get that in order, depending on how prepared you are. So, you could say, it would take generally about a year for someone to actually get the idea of starting all this to getting approved by the FCA?

Thistle: Yes, I think that’s fair, absolutely.

Katipult: Let’s talk about the raising capital on a P2P platform. Are there any specific requirements and what are they, for someone actually applying to raise capital on a P2P platform? It could be a borrower for example, who is looking to raise capital for whatever it might be.

Thistle: The first and foremost is that each P2P platform, whether it is crowd equity,  crowdfunding, whatever it might be, must have a threshold internally, which is your original element where you are going to make an assessment whether this is viable or not viable. If we take this on two different levels, we’ve got borrowers which might be businesses, borrowers which might be consumers, one is P2B and one is obviously a classic P2P. On the P2B side of things there is a lot more of assessment that needs to be taken. That’s because of the complexities and the amount of money that is being lent. Likely there is going to be some security involved wherever possible, except it’s straight up business lending against virtually nothing, and that doesn’t normally happen. Usually what w see is a P2B model, traditionally some sort of property with some sort of an asset that they are trying to securitize to a certain extent. Obviously, we are talking about loans and we are not talking about SPVs with equity shares. So, there are considerations on that side and there is going to be a lot of assessment where I expect to see someone experienced assessing property and understanding whether those properties might be viable for a particular platform and obviously, to meet the investor’s needs. That’s certainly something that every single borrower will need to comply with in order to start to get the ball rolling in that perspective.

On the consumer side of things, I think the underwriting is a different assessment, you are generally looking at unsecured loans. Anyone looking to raise capital or to loan money in any respect is going to go through this process of underwriting, which is an absolute requirement. Second to that is an assessment of KYC and AML. It does fall in as a part of underwriting policy but it is slightly different in terms of your outlook, so you are looking more at is there an element of fraud here, which is probably the top sort of element that we look at. So, is this a business, are we lending to someone who's actually, physically there. Usually that would mean face-to-face engagements etc. It is slightly different again on the P2P side of things where you don’t normally meet them face-to-face, but you do need to make assessments against potential outsource providers and that sort of thing is the KYC and AML provider that we spoke about earlier. Those are the core elements. There are other elements, particularly if you are lending P2P. Because it’s a P2P it becomes a consumer loan, which means that there are requirements in consumer credit, which need to be complied with before a loan can be established. A lot of that might be in the customer journey. Then, on the business side it is seen as unregulated lending. Obviously it is regulated by the lenders that are applying or trying to lend to a particular deal. So there are different requirements there again. But those are the two most important ones, the underwriting and the KYC and AML assessment.

Katipult: That was the raising capital side. Let’s move on to the investor side. Any specific requirements investor should be aware of before signing on to a platform, for example, and when I invest in something?

Thistle: There is an important distinction to make here from peer-to-peer and other sorts of crowdfunding. In the UK it’s seen as a loan, as opposed to any form of specified security, and what I mean by that is it’s not something which is quoted in the directive and it’s not considered a security type or some sort of element like a venture, an equity or a share. There is an important distinction to make there straight away. There are a number of requirements which need to be met in terms of security type, which is the venture and the share etc. On the other side we are looking more into the loan side, there are not the same requirements, although you should be aware that there are a number of elements that apply. Those largely come out of the customer journey. Any sort of an investor that wants to come to the platform should be aware that the capital is at risk, that this is not some sort of product that has any sort of compensation cover, like the FSCS. There are other elements as well. Liquidity if you are lending to business and quite often on a consumer platform as well. There might be a secondary market, but, but again, this is a liquid product, we can’t guarantee that someone is going to take you up on you posting anything on the secondary market. So, there are a number of considerations there. Customer journey needs to be very compliant, it needs to consider all the factors that are outlined by regulation, which is all about financial preparations, assessments etc. Then there is also KYC and AML. Again, you have to make sure that no one is nobody laundering through the platform, that there is no potential ABC concerns against any participants or anybody on the sanctions list. Then, quite similar to the above KYC, we’ve got customer journey assessments before anybody should be able to either invest or borrow through the platform.

Katipult: If, for example, you do not want to use external provider to do KYC and AML, how would you go about that?

Thistle: In an online platform my advice would always be to use a third party provider. But if it’s not possible, then the process would be “Look, can you provides us with details on yourself, background, that sort of thing, as well as ID documents and proof address documents”. Then an assessment can be made in the background as to are there any sorts of concerns or elements. Again, you’ll use systems, sanctions list, patch lists, you may use some sort of elements from the treasury. All of that collectively will build a picture of your customer and outcome. Then you can say “Look, based on all of this we can either lend to them or we can’t lend to them. “. Obviously if there are concerns in everything moving forward then you need to take relevant action for reporting, which is in the UK to the NCA.

Katipult: In these states there a lot of different providers for the KYC and AML. Of course, if you want to do it yourself then feel free to do it, but it is a lot easier if you can find someone pretty quickly. Whether it is an integration to a platform or simply exporting information out and then running it through one of these systems, there are even e-payment providers or payment integrations that are also providing KYC and AML, so basically full services there. So, with all these requirements and all these needs that are there for actually setting up a P2P platform in the UK, how can Thistle help someone?

Thistle: As I’m sure you guys are aware, we focus specifically on a number of elements in the regulatory space and also actually outside the regulatory space, things like cryptocurrencies etc. Most of our engagement are startups or existing businesses which are looking to go into a particular regulated sector. If we take P2P for example, there are a number of requirements that need to be met in order to make a successful application to the FCA or go for another alternative, which we will speak about in a minute. If you are trying to make an application to FCA, everything needs to be compliant and be considered. When something is not done with full strength, not covering all the main points, what happens is an application goes through and FCA may deem it not applicable or actually not appropriate for authorization. You get rejected or withdrawn. What we do is to help you with all of that, we make sure everything is in order, that the structure is there and it is indeed P2P lending and I am not falling into some sort of consumer credit lending, not falling into some sort of equity or debt base. Also, so it is not a collective investment scheme, which is very important. We’ll help you with structuring that along with lawyers making sure that we’ve got everything in line. So that would be element number one: building all that out. Another way of getting to market is by using an appointed representative or by becoming an appointed representative with the principal firm. This is something our sister company offers. What our sister company does which is resolution compliance is, they have a list of regulatory permissions already, and underneath that is the permission that is required for P2P lending when she is operating in the electronic system in relation to lending. What happens then is, we would almost delegate that permission to you guys, who want to be onboard and have gone through our own KYC and AML etc. We delegate the permission out to you, so you can operate under our umbrella license, after which we would charge fees. Essentially, it would take a lot of compliance burden away from you and it would fall onto us. You also get to market a lot quicker, but again, as with any compliance element, there are things that you would need to do and requirements for you to meet, in order to become an appointed representative. Most firms would like the idea of going down that route, but also there are elements and there are benefits to getting authorized as well. Those are the services we offer; building out everything you need in order to get to the market as quickly as possible and to make a subsequent application to FCA to allow you to start to trade. It’s more of an operational element and a sort of handholding, when needed.

Katipult: You have been dealing with a lot of these applicants, whether for a license or somebody looking for your help to apply for FCA. What are some of the typical mistakes you see people are making?

Thistle: There are two great examples. Time frames, having the idea but not considering application timings when trying to get yourself authorized and registered. The other one is funding. If you come to model development or the project without the necessary capital, which is quite substantial when you consider the capital resource requirements etc. You are going to fall by the wayside and may actually not even get the product to market. So those are two very important ones. One I see quite commonly is a firm will come nearly having built all the technology out… understand still that there is quite a bit of time to get the application approved by the FCA. What they’ve done is already build a model the way they think it should be built, without considering consultancy, either legal or compliance or otherwise, to sort of come in the key stages of the build and say: “Here we need to consider what this would look like if we need to do some sort of KYC or AML assessment but that hasn’t been built in, or there needed to be clear risk warnings here, here and here. Or we needed to ask a few more questions here”, So that’s one I really see has been quite detrimental to firms because templates have been built and then rebuilding which cost time and obviously money. That’s a major concern that does pop up quite a bit. I think another one is credit underwriting, not having someone who has the ability or the knowledge to underwrite a deal effectively. Particularly you will see that on borrowing for property or some sort of asset where you’d expect to see someone with experience in property or. Those are all elements there to consider when you are building or trying to get to market with a bit of P2P tech.

Katipult: A bit of a side question to all of this. How important does a platform or technology actually play into getting this approval here, because I heard it is not actually a requirement to have a platform to actually apply for FCA license, for example. That might be wrong, you mind educating me a bit on that? Does it play a big part or is it just the legal side of it that is the most important?

Thistle: If we separate peer-to-peer lending from investment crowdfunding, investment crowdfunding doesn’t need a platform. You can do it with a website, it would just be very clunky and hard to process. So it is possible to a certain extent, but I would never advise someone who wanted to do a similar sort of model to some sort of investment element to not use a platform in that sense. You would just look to do some sort of brokering service where you try to connect two parties. On peer-to-peer lending sites specifically, as I mentioned, the permission name was operating electronic system in relation to lending, so the requirement is to have an electronic system. That has a number of requirements but predominantly it connects borrowers and lenders, so the system is capable of matching a borrower and lender and it’s not done by someone manually. That is an important element. Also, the platform should be able to consider the lender’s wants and risk appetite and preferences. Something like an allocation system would say: “What is your preferred interest rate as a lender?”. You may have a higher bracket, you may have a lower bracket. Someone who chooses a lower bracket may only lend to those who are within that lower bracket and then vice versa. If you look at a charity picking option, potentially they’d say “What are you looking at again, high risk or lower risk?” and then you have a fill to option where you would show someone no risk options. Again, all determined in building the platform. I think it is important to have a platform, an electronic system, if we are talking crowdfunding specifically.

Katipult: That is what I usually suggest as well. One thing is showing it on paper or on a PowerPoint presentation, this is what we wanted it to look, another thing is to actually open up the system and show this is how it looks and this is how it works. While we are at it, I have a question from one of the attendees here. Since it takes around a year to actually comply with all of these requirements here, from start to finish, can you give some ballpark of the expenses a business launching a platform will incur? This is just like paperwork and applications.

Thistle: If we take the most raw element which is your capital resource requirement, what is essentially what the FCA say is the minimum amount of capital you must hold in order to operate, it varies. If you look at a simple brokerage who doesn’t really do much in the way of business apart from broker from shares etc, their resource requirements are usually very low, £5000, maybe even less in some cases. Of you look at the upper end, you are looking at a regulated exchange which is minimum 730 000, which is a substantial amount of initial capital. I think a peer-to-peer lender sort of sits not in between those figures but as sort of a moderate complex, which is somewhere £50 000 and then upwards depending on the amount of loans that you have on the platform. So, if we take £50 000 immediately for the FCA, then you are looking at all the consultancy support, provided that you need consultancy support if you haven’t got any house team, then we charge anywhere between £10 000- £25 000, depending on the complexities of the application. That’s just for a UK P2P lender. If you want to do cross-border lending, then again, there are additional complexities and that would factor in the cost. You are looking then at something like £70 000.