Treasury clarifies whether P2P lending constitutes deposit-taking

A prominent sector lawyer says the clarification is very much linked to last March’s “Dear CEO” letter.

A prominent sector lawyer says the clarification is very much linked to last March’s “Dear CEO” letter.

HMT Treasury has passed an order confirming that straight-forward peer-to-peer lending does not constitute deposit-taking. At first glance, this may seem like a moot point, but until now the rules have not been clear.

The order relates to the now-infamous “Dear CEO” letter, sent in March 2017, in which the FCA effectively ordered P2P platforms to cease and desist with all wholesale lending activities. The rationale was that a business borrowing money in order to lend that money on constitutes a form of deposit-taking. This was deemed illegal, per article 5, paragraph 1 of the regulated activities order.

But as Jonathan Segal, a partner at law firm Fox Williams, explained, the next part of that legislation is (or at least was) extremely unclear.

Translating, Segal said it essentially meant that “whatever else you [peer-to-peer borrowers] do with the money, you might fall within this part of the regulated activities order”. In other words, if the money comes from a peer-to-peer platform, anything from buying a property to funding a business might be considered deposit-taking.

Segal describes the situation as a nonsense. “If you’re just a business borrowing money on a platform, then you’re not really holding yourself out as accepting deposits in the first instance, and even if you are, you’re only doing it on one occasion – once every couple of years,” he said.

It is hoped that the order passed by the Treasury yesterday will remove the confusion, making it crystal clear that straight-forward peer-to-peer lending does not constitute deposit-taking.

“This piece of legislation adds to that order, and what it fundamentally says is: if you’re a business and you’re borrowing from a platform, you’re not deposit-taking,” explained Segal. “The borrower in this instance is not a credit institution or an authorised person, nor is it holding itself out as a deposit-taking institution day-to-day.”

Fox Williams is a specialist within the fintech sector, covering everything from cryptocurrencies to crowdfunding. Segal welcomes the Treasury’s order as “a good piece of legislation”, because it clarifies a technicality.

“If you’re a borrower and you’re going on a Funding Circle or a ThinCats, you’re clearly not deposit-taking,” he said. “If you’re doing it every week, maybe that’s different.”