ASIC signals big shift in approach to P2Ps

  Recent comments made by Greg Medcraft regarding the future of lending markets signal a dramatic shift in the way government is looking at Australia’s financial system.

Medcraft, chair of the Australia Securities and Investments Commission (ASIC), called on Australian banks to get real about their lending and deposit practices, provide better returns for depositors and lower the cost of borrowing for small business. The ASIC chairman said changes to capital and liquidity rules meant capital markets will play a much larger role in funding that segment.

He cited the role of e-commerce giant, Alibaba, in funding small businesses through securitisation and stressed the speed with which the tech giants are introducing new products.

Medcraft suggested Aussie banks get cracking and rethink their future in a digital world.

ASIC joining a growing chorus

According to Daniel Foggo, chief executive of RateSetter Australia, Medcraft’s shift in view is very revealing since as little as twelve months ago 12 months ago – at the preliminary submission to the financial services inquiry – ASIC only lightly touched on the effects of digital disruption on the financial system.

“Now Medcraft is suggesting that traditional banking needs to change and the that future lies in more efficient systems like marketplace lending,” he said.

That government and regulators have seen the positive impact made by peer-to-peer lending overseas and they want Australia to catch up has enthused Foggo and his ilk.

“ASIC is essentially saying that banks shouldn’t hold a lot of debt on their balance sheets, there are better models out there, tax payers should not be bearing the risk and the consumer should be getting a better deal,” he argued.

As he sees it, the Aussie corporate regulator is joining a growing chorus of regulators globally including the Bank of England, The US Federal Reserve and the European Banking Authority in recognising the importance of promoting diversity in the financial  system.

“I think there’s growing recognition from regulators globally that putting all your eggs in the banking basket does not make sense,” he said. “We need diversity.

“There are other more efficient ways for loans to be facilitated and funded which removes some liquidity risk banks impose through having mismatched terms for assets and liabilities, all of which creates significant liquidity risk requiring regulatory oversight.”

More resilient financial system

The argument he would make is that peer-to-peer platforms directly match lenders and borrowers, the amount of funds invested equals the amount borrowed, and lenders are not able to withdraw their funds at will.

Therefore, peer-to-peer lending platforms do not suffer any liquidity risks, making for a more resilient financial system.

His thinking is that  Aussie regulators will follow the UK’s lead and be more encouraging of new and innovative businesses.

“When you have political support of  fintech and more efficient alternatives, it opens up all sort of things that can improve the financial system.”Stuart Stoyan, the chief executive of  MoneyPlace, agreed a definite change is in the wind as ASIC recognises the need to keep up with the pace of change.

In reference to what he sees as ASIC taking a cautious approach to marketplace lending, he pointed out that involved a brand new asset class.

“Innovation in risk-based pricing for borrowers is one thing,” he recently told an AB+F conference.

“But for investors, this innovation provides an asset class that was previously unavailable; unless you were a bank, you weren’t able to invest in consumer loans, mortgages or small business loans.”

MoneyPlace splits loans into smaller portions to enable investors to diversify further. Stoyan added that the regulator is most concerned that marketplace lending that doesn’t fit the existing regime as it sits on both sides of the balance sheet.

In his view, while ASIC understands most local peer-to-peer lenders have a great deal of  financial services experience, once up-and-running the worry is that they will attract a  fringe element – outfits that setup and then disappear overnight.

“Regulation is fine,” he said. “What is not fine is regulation that protects an outdated business model and doesn’t keep up with the pace of innovation.”

CategoriesBANKINGCAPITAL MARKETSTECHNOLOGY

Tags:ASICpeer-to-peerP2PlendingregulationGreg MedcraftRateSetterMoneyPlace

Author:Elizabeth Fry, efry@financialpublications.com.au

Article Posted:June 05, 2015