Getting to the root of chaotic P2P lending

Peer-to-peer (P2P) platforms have encountered drastic setbacks in development since the beginning of the year. Some platforms have violated regulatory rules in their operations, deviating from their original intention.

The status quo of these P2P platforms can be summarized as either discontinuation, shut-down, runaway, or loss of connection.

The fundamental causes include: in terms of platform management, some managers deem the platforms as tools for personal profit and illegally utilize platform resources; and in terms of regulation, existing regulatory policies lag behind and are insufficient.

The Interim Measures for Administration of Business Activities of Peer-to-peer Lending Information Intermediaries were issued in August 2016. Before the interim measures, the lack of unified P2P platform regulatory standards was one of the reasons for their chaotic development.

The authors believe that platform operations are irregular at two levels. First, their business qualification is defective, which means platforms have not obtained qualifications for their services, and as a result the carriers that operate these services become defective.

Second, there are irregularities in platform operation and management, which means that the platform fails to fulfil its duty according to the regulatory requirements during business operation, or operates businesses by ways prohibited by the regulator.

In terms of defective business qualification: some platforms fail to include “peer-to-peer lending information intermediary” in the scope of business of the platform operator; the platform is not registered with the local financial regulatory authority; and the platform operator does not obtain the licence for telecommunication service.

The interim measures provide that “organizations engaged in peer-to-peer lending information intermediary services shall specify peer-to-peer lending information intermediary services in their scope of business”.

The platforms shall be registered with the local financial regulatory authority of the place of incorporation within 10 days after obtaining business licences.

They shall apply to the relevant communication administration authority for the licence for telecoms services after registration. Platforms can only operate P2P lending information intermediary services when they complete the registration and obtain the business qualification.

In practice, some platforms are slack in execution of the fund depository system. Funds flow into personal accounts, and the regulatory authority requires that the P2P lending information intermediary shall isolate their own funds from the funds of lenders and borrowers, and choose a qualified fund depository organization for fund depository.

In terms of irregular operation and management, platforms violate the prohibitive provisions of the interim measures in business operation under the following circumstances:

(1) In some platforms, the shareholders or actual controllers are borrowers, constituting a substantial violation of the provision that a P2P lending information intermediary shall not raise funds for itself directly, or in disguise;

(2) Some platforms transfer lenders’ funds to accounts actually controlled by the platforms by means of VIP and privilege products before investment by the platforms. It may be considered that platforms directly or indirectly accept and collect lenders’ funds;

(3) Some platforms advertise or imply the promise of break-even yield on the website or by other means, but fail to disclose investment risks. They violate the provision on break-even and yield promises; and

(4) Some platforms use the long-term lending of the borrower for multiple short-term lending or combine multiple short-term lending into long-term lending. They violate the provision on non-split of fund-raising projects.

In addition, the Notice on Compliance Inspection on Peer-to-peer Lending Information Intermediary (108 Rules on Peer-to-peer Lending), issued in August 2018, clarifies that P2P platforms should return to their position of P2P lending information intermediary, and rectification should be made to reduce risks involved in existing non-performing assets. The regulatory authority now handles the irregularities mainly by guiding the platforms to discover and solve problems.

Rectification of platforms

With consideration to regulatory policies, and the attitude of the regulator toward irregularities, we can get to the root of chaotic P2P platform development, both at the defective business qualification level, and the operation and management irregularities level.

At the business qualification level, first, it should be ensured that a P2P platform, as an intermediary offering P2P lending information services, should include “peer-to-peer lending information intermediary” in its business licence, approved by the administration for industry and commerce.

Second, the platform should actively communicate with the local financial regulator to complete registration formalities, and obtain the licence for telecoms services and other qualification certificates and licences required for business operation.

At the compliance level, services that have been offered by the platform should be rectified according to the standard that substance outweighs form, and in combination with the requirements of the regulator. Products with irregular operations can be terminated early, or redeemed, and new services can be provided when their types and models are approved by the regulator.

P2P platforms are now at the stage where external purification and self-purification should be combined. From these setbacks and changes, the living rules of the industry come into being. Considering the strong vitality of P2P, the authors have reason to believe that the industry will recover and corporate champions will emerge after some major reshuffling. It will give play to its value and function as an important supplement to the social finance system.

Yang Guang is a partner and Li Yunshi is an associate at Lantai Partners